Fitch Rates Castaic Lake Water Agency, California Rev COPs 'A+'; Outlook Stable

Fitch Ratings assigns the following rating to Castaic Lake Water Agency, California (CLWA):

--$68.1 million revenue refunding certificates of participation (COPs), series 2010A (2001 refunding project) at 'A+'.

The bonds are expected to sell via negotiation as early as the week of March 22. Proceeds will be used to current refund CLWA's outstanding 2001A COPs, which are senior lien obligations, fund a debt service reserve, and pay costs of issuance.

In addition, Fitch affirms the following ratings on CLWA's outstanding COPs:

--$136.0 million of outstanding senior lien COPs (prior to the refunding) at 'AA-';

--$169.9 million of outstanding parity lien COPs, which are subordinate to the senior lien COPs, at 'A+';

The Rating Outlook is Stable.

RATING RATIONALE:

--CLWA's financial position is solid, although there has been some fluctuation in operating performance from year to year.

--While existing debt ratios are somewhat high, capital needs are manageable, with only moderate additional debt issuances planned over the near term.

--Long-term water supplies are sufficient to meet member demands.

--The relatively narrow economic base is largely residential in nature.

KEY RATING DRIVERS:

--Maintenance of sound and stable fiscal operations will enhance the financial profile.

--Diversification in the service area economy would broaden the customer base.

SECURITY:

The bonds are payable solely from a pledge of net water revenues of the agency after payment of operations and maintenance (O&M) expenses and debt service costs associated with the outstanding senior lien certificates (the senior lien is closed). Net revenues also include facility capacity fees and ad valorem taxes not levied for payment of State Water Project (SWP) obligations. In addition, amounts on deposit in the rate stabilization fund are pledged to certificate holders.

CREDIT SUMMARY:

Financial operations of the agency are favorable, with the most recently audited fiscal year (2009) posting total annual debt service (ADS) coverage of 1.8 times (x). Liquidity and cash flows for the same period appear to be healthy, although analyses is limited by the use of governmental fund accounting (as opposed to proprietary fund accounting) and the $197 million in cash and investments recorded in fiscal 2009 includes restricted funds. Fiscal 2010 figures are projected to be slightly lower with total ADS at 1.2x. Nevertheless, performance is projected to quickly rebound to 1.4x by fiscal 2011 and averages 1.5x over the fiscal 2010 to 2014 period. For fiscal 2010 CLWA faces some pressure, predominantly on the revenue side as a result of drought conditions and reduced connection fees. CLWA also has budgeted for a reduction in ad valorem property taxes as a result of capture by the state. However, CLWA's board has taken appropriate measures to increase its rate base annually through fiscal 2012. This is expected to lead to continued solid operating performance in fiscal 2010 and out-year projections indicate further improvement.

Capital needs through fiscal 2012 total approximately $160 million and are designed to increase supplies and improve system reliability. The majority of capital costs are expected to be funded from proceeds of a previous issuance, although CLWA may issue around $60 million-$70 million in the fiscal 2012 timeframe to supplement available funding. While current debt levels are moderately high, the overall debt burden including the proposed offering is not expected to rise significantly.

Located predominantly in Los Angeles County approximately 35 miles northwest of downtown Los Angeles, CLWA provides wholesale water service to a population of approximately 260,000 persons through four retail agencies. The agency acts as a swing supplier, providing around 50% of the region's water supplies, with the remainder derived from members' own local sources. The agency's water supplies mostly come from Northern California's San Francisco Bay/Sacramento-San Joaquin River Delta via the SWP. While SWP supplies have been impacted by recent litigation, the agency projects that it has sufficient allocations from the SWP, combined with other water resources, to meet all retail demands through at least 2030.

Applicable criteria available on Fitch's website at www.fitchratings.com:

--'Revenue-Supported Rating Criteria, Dec. 29, 2009.

--'Water and Sewer Revenue Bond Rating Guidelines', Aug. 6, 2008.

Additional information is available at www.fitchratings.com.

ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: HTTP://FITCHRATINGS.COM/UNDERSTANDINGCREDITRATINGS. IN ADDITION, RATING DEFINITIONS AND THE TERMS OF USE OF SUCH RATINGS ARE AVAILABLE ON THE AGENCY'S PUBLIC WEBSITE WWW.FITCHRATINGS.COM. PUBLISHED RATINGS, CRITERIA AND METHODOLOGIES ARE AVAILABLE FROM THIS SITE AT ALL TIMES. FITCH'S CODE OF CONDUCT, CONFIDENTIALITY, CONFLICTS OF INTEREST, AFFILIATE FIREWALL, COMPLIANCE AND OTHER RELEVANT POLICIES AND PROCEDURES ARE ALSO AVAILABLE FROM THE 'CODE OF CONDUCT' SECTION OF THIS SITE.