December 10, 2012 / 7:13 PM / 5 years ago

TEXT-Fitch affirms Dublin San Ramon Service District, Calif. revs

Dec 10 - 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
2013 Water and Sewer Medians

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