Fitch Ratings affirms its 'A' rating on the following bonds issued by Lynwood Utility Authority, California (the authority) on behalf of the City of Lynwood, California (the city) as obligor:
--Approximately $5.3 million outstanding enterprise revenue bonds, series 2003.
The Rating Outlook is Stable.
The 2003 bonds are secured by a pledge of and first lien on the net revenues of the city's combined water and sewer system (the system). There are also parity series 2008 and 2009 bonds outstanding which are not rated by Fitch.
KEY RATING DRIVERS
SOUND FINANCIAL PROFILE: Financial metrics are healthy and above the current rating category medians. The system's liquidity position is particularly strong at 836 days cash on hand.
ENTERPRISE FUND DRAWS: Historical inter-fund loans made to other city funds from the system and the possibility that additional system resources may be utilized for general city purposes in the future given the city's strained financial position present potential challenges to the system.
MANAGABLE DEBT BURDEN: Debt ratios are mixed with favorable long-term debt per customer but slow principal amortization. With no near-term borrowing plans, these ratios should improve over time.
SERVICE AREA VULNERABILITY: The city is largely residential and is located in an area near Los Angeles which has very low socio-economic indicators, low income, high unemployment, and a history of elevated foreclosure rates.
RELIANCE ON INTERFUND LOANS: A planned spend-down of liquidity for capital projects combined with any unforeseen fund transfers to other city funds may weaken the city's otherwise sound financial position. The Stable Outlook reflects limited fund transfers over the past five years and Fitch's expectation that future transfers are unlikely.
The authority, established by the city in 2003, provides lease, operation, management and maintenance for any utility system or service, and the financing of capital projects for the city. Under an agreement with the authority, the city is responsible for operations and management of the system.
The city, with a population of approximately 70,000 residents, is located in an economically challenged portion of Los Angeles County, approximately 11 miles south of downtown Los Angeles.
SYSTEM FINANCIAL PROFILE IS SOLID
The system's financial performance has been mostly solid over the past five fiscal years. All-in annual debt service (ADS) coverage has ranged from a very strong 2.6x-4.0x over this period. However, the city uses operating revenue transfers to pay for capital improvement projects. Net of these transfers, ADS coverage ended at a still adequate five-year low of 1.5x in fiscal 2012. The system's liquidity, measured by Fitch as the number of days of operating cash on hand, is very strong, ranging from a low of 591 days in fiscal 2009 to a high of 891 days in fiscal 2011.
Management's financial projections show total ADS coverage dropping to a sufficient 1.8x in fiscal 2014 and then improving in the subsequent five years to a high of nearly 2.7x by 2018. Forecast assumptions include year-over-year revenue growth ranging from 5%-9% driven by continued rate increases and marginal growth in operating revenue. Fitch views these projections as somewhat optimistic, although possible given available rate flexibility (Fitch calculates combined water and sewer rates to be 1.6% of median household income, comfortably below Fitch's 2% threshold). Management notes that a recent rate study was completed and its findings, which are expected to include moderate rate increases, are scheduled to be presented to the city council soon. To some extent, rate increase will be necessary to offset climbing debt service costs.
CITY'S PAST RELIANCE ON ENTERPRISE FUND STRAINS OTHERWISE SOUND FINANCIAL POSITION
Inter-fund loans made to other city funds from the system, and the possibility that additional system resources may be utilized for general city purposes in the future given the city's financial challenges, could pressure the system's otherwise sound financial position. Management has indicated to Fitch that the city's general fund liquidity profile is ample due to large borrowable resources in other funds, such as the water enterprise, suggesting further enterprise fund draws are possible. However, management has also stated that there are no near-term plans for such draws. Fitch's implied rating of the city's unlimited tax general obligations is 'BBB+'.
WATER SUPPLY APPEARS ADEQUATE
Lynwood has an advantageous local groundwater supply that provides the majority of its water needs. Historically, groundwater provided around 80%-85% of total water needs, although with the recent consumption declines experienced in fiscals 2010 through 2012 the local supply provided more than 95% of total needs. Lynwood is required to provide minimal treatment of the groundwater supply given the high quality of the water, and as such does not operate a water treatment plant. The sewer system consists of collection responsibilities only, with wastewater flows conveyed to the Los Angeles County Sanitation District No. 1 for treatment. This limits the operation risk and capital cost implications of operating treatment facilities.
MANAGEABLE CAPITAL NEEDS AND DEBT
The city is projecting capital needs of $19.5 million over the next five years split evenly between water and sewer system projects. Projects for the water system include supply-related projects and rehabilitation projects. The majority of the capital projects identified for the sewer system are related to the city's collection system. Funding for projects is expected to be provided by unspent revenue bonds from previous issues, cash reserves, and operating revenue (pay-go) spending.
Debt ratios are mixed, with favorable long-term debt per customer and per capita levels of 1,053 and 283, respectively, but slow principal amortization at 27% in 10 years. With no near-term borrowing plans, these ratios should improve over time. However, due to the age of the system, more borrowing may be necessary for ongoing system upgrades and maintenance.
SERVICE AREA VULNERABILITY
The 4.9-square-mile city is largely built out, so population figures have been flat, contributing to stable but low revenue growth excluding rate changes. The local economy is strained as exhibited by a 14.8% February 2013 unemployment rate. However, this high rate is much improved from a year prior (16.7%). The city's median household income levels are extremely low at 71% and 83% of state and national levels, respectively.
Additional information is available at 'www.fitchratings.com'.
In addition to the sources of information identified in Fitch's Revenue-Supported Rating Criteria, this action was informed by information from CreditScope and IHS Global Insights.
Applicable Criteria and Related Research:
--'Revenue-Supported Rating Criteria', dated June 3, 2013;
--'U.S. Water and Sewer Revenue Bond Rating Criteria', dated Aug. 3, 2012;
--'2013 Water and Sewer Medians', dated Dec. 5, 2012;
--'2013 Outlook: Water and Sewer Sector', dated Dec. 5, 2012.
Applicable Criteria and Related Research:
Revenue-Supported Rating Criteria
U.S. Water and Sewer Revenue Bond Rating Criteria
2013 Water and Sewer Medians
2013 Outlook: Water and Sewer Sector
Major Parkhurst, +1-512-215-3724
Fitch Ratings, Inc.
111 Congress Avenue
Austin, TX 78701
Kathy Masterson, +1-415-732-5622
Doug Scott, +1-512-215-3725
Elizabeth Fogerty, +1-212-908-0526 (New York)
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