Fitch Affirms Dublin San Ramon Service District, CA Water Rev Rfdg Bonds at 'AA'; Outlook Stable

SAN FRANCISCO--()--Fitch Ratings affirms the following rating on Dublin San Ramon Services District, CA (DSRSD, or the district):

--$35.62 million water revenue refunding bonds, series 2011 at 'AA'.

The Rating Outlook is Stable.

SECURITY

The bonds are secured by net water system revenues. The district's debt related to DSRSD/East Bay Municipal Utility District Recycled Water Authority (DERWA) is paid as part of operations and maintenance before debt service.

KEY RATING DRIVERS

ADEQUATE, FLUCTUATING FINANCES: While coverage and liquidity have fluctuated over the last five years, financial performance has been adequate since 2010 and is expected to remain so through the forecast period.

FAVORABLE RATE STRUCTURE: The district's rate structure has several components that allow it to pass through cost increases directly to its customer. In addition, management prudently implemented a temporary infrastructure charge several years ago to replace the loss of revenues due to lower connection fees.

MANAGEABLE CAPITAL PLAN: The district's five-year capital plan, all of which it expects to fund on a pay-as-you-go basis, is manageable. Longer-term projects focus on development of additional water resources to meet future demand and system upgrades.

AFFLUENT CUSTOMER BASE: The district's stable and affluent customer base of 145,000 located in the eastern portion of the San Francisco bay area provides a high degree of revenue stability.

UNCERTAIN SUPPLY, AMPLE STORAGE: The district's ample water storage serves as a hedge against potential uncertainties in future water supply.

CREDIT PROFILE

The Dublin San Ramon Service District provides both water distribution and wastewater collection and treatment services to a population of about 145,000 in the city of Dublin and portions of the city of San Ramon, and wastewater services to the city of Pleasanton.

The water system supplies potable and recycled water to about 17,700 accounts. Average daily water consumption for potable water is 7.93 million gallons per day (mgd) and for recycled water is 1.66 mgd. Concentration is moderate, with the top 10 customers, the majority of which are government entities, accounting for 18% of operating revenues.

SUPPLY UNCERTAINTIES SOMEWHAT TEMPERED BY STORAGE CAPACITY

The district's potable water is supplied primarily by the Alameda County Flood Control & Water Conservation District Zone 7 (Zone 7) and district groundwater sources. Zone 7 estimates that its water supply is adequate for the next five years without additional water conservation. Despite potential supply issues, the district estimates that it could meet demand for six years in drought conditions as it has abundant water storage. Zone 7 has storage of 125,000 acre-feet (af) in its groundwater basin and will have 100,000 af when the Chain of Lakes storage project is completed over the next 20 years. Zone 7 also participates in two groundwater banking programs providing a combined 198,000 af in groundwater banking storage during drought conditions.

FAVORABLE RATE STRUCTURE

The district's rate structure consists of a fixed-rate charge and tiered consumption charge. In addition, the rate has several other components that allow the district to pass through any increases directly to its customers, including a Zone 7 consumption charge and a power charge. Each contains an automatic CPI escalator to allow the district to adjust rates between rate studies, which are conducted every four years. The next study will be completed in 2013.

The average bi-monthly water bill is $115.41, which is comparable to surrounding communities. In addition, the district established a temporary infrastructure charge based on meter size at a minimum of $18 in fiscal 2010 in order to provide a revenue source dedicated to debt service and balance the declines in connection fees it had experienced. The charge does not have a sunset date, thus board action would be required to discontinue it. The charge provides $2.3 million annually in comparison to $3 million in average annual debt service, including the DERWA state loan. The district lowered the charge to $9 in fiscal 2012 and expects to discontinue it effective fiscal 2015 as rate and connection fee revenues increase.

FINANCES ADEQUATE

The system's financial performance has exhibited a good deal of volatility in recent years. All-in annual debt service coverage in fiscal 2012 is solid at 3.1x, or 1.8x excluding connection fees, but was below 1.0x in fiscal year 2009 due to a significant decline in connection fee revenue.

The district's imposition of the temporary infrastructure charge played a pivotal role in its improved margins. Connection fees have also rebounded, but are expected to remain unstable. Liquidity levels are high for the rating category, with $36.9 million in cash, or 589 days cash on hand, at the end of fiscal 2012.

District projections through 2018 show coverage dipping to a low of 2.4x in fiscal 2014, or 1.07x in fiscal 2015 excluding connection fees. The projections include a decline in operating revenues due to elimination of the temporary infrastructure charge in fiscal 2015 and decrease in miscellaneous revenue, which included a one-time grant in fiscal 2013.

Of some concern is the rate of connection fee growth assumed in the district's five-year forecast. Connection fee revenues are estimated to more than quadruple from 2012 levels by 2015. The connection fee estimates are based on plans submitted to the city by developers; however, Fitch views the estimates with caution. With level connection fees as of fiscal 2012, all-in debt service coverage would fall to 2.3x in fiscal 2015.

MANAGEABLE CAPITAL PLAN

The district's five-year capital plan (2013-2018) has an estimated cost of $37.5 million for water replacement and expansion projects, all of which the district intends to fund on a pay-as-you-go basis. Debt per capita is projected to remain relatively low at about $300 for the next five years, though per customer debt is higher than 'AA' category medians.

AFFLUENT CUSTOMER BASE

The district's service area in the East Bay of the San Francisco bay area is affluent and has experienced rapid growth over the past five years. The populations of San Ramon and Dublin have increased 22%, and 16%, respectively. However, they have experienced a significant drop off in development due to the financial crisis and housing slowdown.

The area has above-average median household incomes that are over two times the national average. In addition, unemployment levels have historically been very low for Dublin and San Ramon at 5.2% and 3.5%, respectively, as of October 2012, compared to the state average of 9.8%.

Additional information is available at 'www.fitchratings.com'. The ratings above were solicited by, or on behalf of, the issuer, and therefore, Fitch has been compensated for the provision of the ratings.

In addition to the sources of information identified in Fitch's Revenue-Supported Rating Criteria, this action was additionally informed by information from Creditscope.

Applicable Criteria and Related Research:

--'Revenue-Supported Rating Criteria' (June 12, 2012);

--'U.S. Water and Sewer Revenue Bond Rating Criteria' (Aug. 3, 2012);

--'2012 Water and Sewer Medians' (Dec. 5, 2012);

--'2012 Sector Outlook: Water and Sewer' (Dec. 5, 2012).

Applicable Criteria and Related Research:

2013 Outlook: Water and Sewer Sector

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=695755

2013 Water and Sewer Medians

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=695756

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