OREANDA-NEWS. March 28, 2016. Fitch Ratings has assigned the following rating to Upper Santa Clara Valley Joint Powers Authority, CA revenue bonds issued for the benefit of the obligor, Castaic Lake Water Agency, CA (CLWA, or the agency):

--Approximately \\$57.1 million revenue bonds, series 2016A, 'AA-'.

The bonds will be sold via negotiation the week of April 11. Approximately \\$26.2 million of the proceeds will be used to refund the agency's parity lien 2006A certificates of participation (COPs) for debt service savings and \\$30.9 million will be used to fund capital improvement projects (CIP).

In addition, Fitch affirms the following ratings of the Castaic Lake Water Agency:

--\\$56.5 million in outstanding senior lien COPs at 'AA';
--\\$146.4 million in outstanding parity lien COPs at 'AA-' (pre-refunding);
--\\$64 million in outstanding parity Upper Santa Clara Valley Joint Powers Authority, CA revenue bonds at 'AA-';
--\\$45.9 million of bank notes corresponding to the agency's commercial paper notes at 'AA-'.

The Rating Outlook is Stable.

SECURITY

The bonds are payable from revenues pursuant to an installment purchase agreement (IPA) between the Santa Clara Valley JPA and the agency. The agency's payments under the IPA are absolute and unconditional and are on parity with the agency's own outstanding COPs and bonds payable subordinate to the agency's senior lien debt (series 1999). The senior lien is closed. Net revenues include facility capacity fees and the agency's share of the county's 1% ad valorem taxes but excluding property taxes levied for payment of State Water Project (SWP) obligations.

The agency owns the two largest retail water purveyors to which it sells water, which were acquired in 1999 and 2012. However, the revenues from the retail operations are not pledged to bondholders and have separately secured debt outstanding.
The bank notes are on parity with the agency's parity lien COPs (subordinate to the senior lien); there currently are no bank notes outstanding.

KEY RATING DRIVERS

SOUND FINANCIAL PERFORMANCE: CLWA's financial position is strong with adequate debt service coverage and robust liquidity metrics. The agency's rate structure, which includes a large fixed rate component, has mitigated revenue losses associated with steep, drought-related declines in water demand. Planned rate changes and increases are projected to yield similar results over the five year forecast period.

ABOVE-AVERAGE DEBT PROFILE: Leverage ratios are above average. Principal payout is average and capital needs appear manageable.

DIVERSE AND STABLE REVENUE BASE: CLWA's rate structure intends to fully recover fixed costs with additional planned rate increases to maintain sound financial margins. Moreover, the agency receives a portion of the county's 1% property tax, which comprises about 45% of total revenues.

SLOW RETURN OF DEVELOPMENT: New area development has been modest resulting in lower than previously expected development-related facility capacity fees, but appears to be picking up pace with nearly 1,800 residential units near completion and more under construction.

WATER SUPPLIES SUFFICIENT: Water supplies are sufficient to meet demands in the near and long term. The agency has ample water reserves in storage to buffer the impacts of California's ongoing multi-year drought.

RATING SENSITIVITIES

PRESSURE FROM STATEWIDE DROUGHT: The current drought could apply some pressure on Castaic Lake Water Agency if financial margins or liquidity levels fall significantly below expectations due to severe, multi-year water rationing. However, Fitch believes that the agency's rate structure should insulate revenues from reduced water sales.

CONTINUED HEALTHY FINANCIAL METRICS: Maintenance of adequate all-in debt service coverage (DSC) that is less dependent on connection fees along with solid liquidity could bode positively for the rating.

CREDIT PROFILE

Located predominantly in Los Angeles County, approximately 35 miles northwest of downtown Los Angeles, CLWA provides supplemental wholesale water service to a population of approximately 287,000 through four retail purveyors. The agency provides around 50% of the region's water supplies (27,920 acre-feet [AF] in 2015) with the remainder derived from the four retail purveyors' own local groundwater sources. Although retail water purveyors are not contractually required to buy minimum amounts from the agency in any given year, alternate water supply options are limited and producing additional water sources would be very costly to the retailers.

USING STORED WATER TO BUFFER DROUGHT IMPACTS

The agency's water supplies come mostly from Northern California's San Francisco Bay/Sacramento-San Joaquin River Delta via the SWP contract (expiration in 2038). SWP supplies have been significantly affected by the statewide drought in California in recent years but the agency has acquired other supplies and maintains sizable reserves of stored water.

The SWP contract provides the agency with rights to 95,200 AF but actual deliveries are often less than this amount. In addition to its SWP contract, the agency has made investments in additional water supplies and storage agreements to buffer the highly variable nature of the SWP water allocation. The agency has five groundwater banking and exchange accounts in three separate programs and has accumulated 140,089 AF of banked and exchanged water as of February 2016. This is more than four years' worth of the projected 29,500 AF supplemental water demand projected for 2016 from the four retail purveyors in aggregate. To meet this demand, the agency expects to receive approximately 28,560 AF from the SWP contract (30% allocation). The agency also has secured acquisition of up to 11,000 AF annually for 30 years, through 2037, from the Buena Vista and Rosedale-Rio Bravo Water Storage District. Excess water available during the year will be banked for future use.

Given the frequency of droughts and uncertainty with regards to SWP allocations in any year, the agency's water bank mitigates water supply risk in the short to medium term. The agency has also begun adding recycled water to its supply source. Although currently a minimal amount (about 400 AF annually), the agency projects that in could grow to 17,000 AF of recycled water annually in the future.

DIVERSE AND STABLE REVENUE BASE

Financial operations of the agency are stable, facilitated by diverse revenue sources comprised of wholesale water charges, a portion of the county's 1% property tax levy, and facility capacity fees (connection fees). Additional revenues that are not expected to be recurring include settlement agreements and sale of water in excess of storage capacity to non-member purveyors (fiscal years 2013 and 2014).

The agency's portion of the county's 1% property tax revenues comprised an average 45% of the agency's total revenues over the last five fiscal years. Although, generally these are considered a very stable revenue source, the state diverted a significant portion of these revenues in fiscal years 2005 and 2006. The agency absorbed the two-year loss with its ample cash and reserves to maintain DSC and to fund the capital budget. Future diversions by the state are now less likely and would require state repayment of the funds.

During fiscal years 2013 and 2014, the agency generated an aggregate \\$11.9 million in non-recurring revenue from sales of water it had acquired in excess of its storage capacity. Although all of the agency storage facilities and reservoirs are robust, the agency does not plan to sell excess water during the forecast period given the ongoing uncertainty of the statewide drought.

INCREASED FIXED CHARGE COMPONENT IN RATE STRUCTURE

The board adopted a new rate structure effective on April 1, 2016, that is comprised of fixed and variable components to effectively recover 80% of the general fixed costs of the agency as well as those fixed costs directly related to water supply and delivery. The total fixed costs are allocated to the retail purveyors and an additional variable rate charge per acre foot for treatment and distribution costs of imported water and 20% of agency fixed costs is collected based on actual water deliveries. The retail water purveyors are billed monthly and are required to pay within a 30-day term to remain eligible for future water deliveries. The new rates and allocation methodologies have been agreed to by the four retail purveyors. The agency settled with the retail purveyor that litigated the allocation methodology for fiscal years 2014 and 2015.

SOUND FINANCIAL METRICS

For fiscal 2015, Fitch-calculated all-in DSC was an adequate 1.4x (or 1.0x excluding capacity fees), only slightly below the previously forecasted 1.5x (or 1.1x excluding capacity fees). Although water sales to the four retailers declined 35% from fiscal 2014 due to conservation mandates, revenue from water sales only decreased 5% during the year. The agency's rate structure, designed to recover fixed costs, mitigated the impact of the substantial water sales decline to its financial profile. Liquidity remained robust. The agency reported \\$84.7 million, or 1,508 days of operating expenditures, in unrestricted cash and investments in fiscal 2015. This amount has declined in the past two years and further potential declines are possible for capital or water purchases, which would still allow liquidity levels to remain robust (at a minimum forecasted 1,200 days) and in compliance with the agency's reserve policy.

Management's projected operating results for fiscal years 2016 through 2021 show all-in DSC to range between a low 1.5x to a high 1.95x (1.1x to 1.4x net of facility capacity fees). The agency calculated debt service coverage takes into account additional bond repayment sources that are also pledged to bondholders including settlement receipts and proceeds from grants and reimbursements. These projections also assume steady increases in facility capacity fees and the agency's share of the 1% property tax resulting from gradual improvement in area development.

SENIOR LIEN DEBT

The agency has one remaining series of senior lien bonds (series 1999) outstanding. These bonds were issued as capital appreciation bonds with no maturities until fiscal 2022. Although, the agency currently has no debt service associated with this senior lien, annual \\$10.4 million debt service payments will be made between fiscal years 2022 through 2031. The 'AA' rating on the closed senior lien bonds reflects their priority in the flow of funds and limited debt service requirements.

MODERATE DEBT PROFILE; MANAGEABLE CAPITAL PLAN

The agency's five-year fiscal 2017 through 2021 capital improvement plan (CIP) totals approximately \\$119 million of which 85% will is projected to be debt funded and the remainder with pay-go and grants. The agency plans to return to market with a \\$37.5 million bond issuance in fiscal 2018 and another estimated \\$53.5 million in fiscal 2020. The projected debt amount could decline given the agency's strong cash levels.

Debt amortization accelerated and debt per capita declined due to lack of new money bond issuance over the last few years. Principal payout is average at 49% in 10 years. Debt per capita declined from \\$1,138 in fiscal 2011 to \\$979 in fiscal 2015; however, this level is projected to rebound to roughly \\$1,235 in five years, with issuance of the planned debt.