Fitch Affirms Anaheim Pub Fin Auth, CA's Sewer Rev Bonds at 'AA+'

Fitch Ratings affirms its 'AA+' rating on the following Anaheim Public Financing Authority, CA (the authority) sewer revenue bonds, issued on behalf of the city of Anaheim's sewer system):

--$45.5 million sewer revenue bonds, series 2007.

The Rating Outlook is Stable.

SECURITY

The bonds were issued by the authority and are secured by purchase payments made by the city in accordance with an installment purchase agreement (IPA), which is a common structure in California. Payments from the city under the IPA are absolute and unconditional. Payments are only required to be made from net revenues of the system, although the city is not precluded from making payments from any available funds.

KEY RATING DRIVERS

STRONG FINANCIAL PERFORMANCE: The system maintains strong financial performance. Debt service coverage remains above 2.0x after transfers to the general fund and liquidity levels are high. Fitch anticipates financial metrics to remain at this level.

LIMITED RISK PROFILE: The system has a large, stable customer base with limited operating risk. System assets consist solely of gravity-fed collection lines. Treatment and pumping is provided by the Orange County Sanitation District (OCSD; rated 'AAA' by Fitch) that bills retail customers directly for its services.

AVERAGE DEBT; MODEST CAPITAL: Existing bond proceeds and state grants are expected to fund the five-year capital plan. Direct debt is average for the system size.

REVENUE STABILITY; RATE FLEXIBILITY: Revenues from fixed monthly fees for each customer class provide 100% of revenues, resulting in no revenue variability as a result of flow conditions. Rates are competitive in the region.

STABLE SERVICE AREA: The service area is mature and stable with less than 1% growth in customers per year. There is modest revenue concentration with Disney but it is not viewed as a credit concern.

RATING SENSITIVITIES

The rating is sensitive to shifts in fundamental credit characteristics including the strong financial performance. The Stable Outlook reflects Fitch's expectation that such shifts are highly unlikely.

CREDIT PROFILE

The city operates a sanitary sewer collection system which collects and transfers wastewater to OCSD. The city's system consists entirely of gravity-fed collection pipes; there are no pump stations or force mains. OCSD bills customers directly for its treatment services on the county property tax bill.

The city provides service to a population of 350,000 in Anaheim. The city has benefited from consistent population growth and tourism is one of the city's leading industries. Disney is the largest employer in the city and the largest sewer customer but provides only 5% of revenues.

LIMITED RISK PROFILE

Anaheim's operational risk is limited to the collection system pipelines. The customer base consists of 146,825 connections. Customer growth is modest at less than 1% annually. Revenues are a mix of residential and commercial customers. Customer concentration is not a concern; the largest 10 customers account for 10% of system revenues.

CAPITAL IMPROVEMENTS ONGOING; FUNDED FROM EXISTING PROCEEDS

In 2007, the regional water quality board required the city to resize a portion of the system's sewer lines that had originally been built in anticipation of a lower density than ultimately developed within the city. In 2010, the city completed the replacement or refurbishment of 58,000 linear feet of sewer collection pipes. The city continues to replace other lines and at the end of 2013, had completed 82,000 linear feet. The city still has $17 million in unspent 2007 bond proceeds to fund much of its five-year capital needs and expects to receive $8.5 million in state water board grant funding for certain sewer pipe replacement projects. Debt on the system is average with debt to net assets of 48%.

RATES ARE LOW; CONTINUED RATE FLEXIBILITY

The city's sewer rates were raised 50% in 2007 to support payment of the 2007 bonds, but rates were very low to begin with and the large percentage increase did not result in a material change to most customers combined bills from the city. Rate increases since have averaged 3% annually with no rate adjustment in fiscal 2012. Rates are low with the typical residential customer paying just over $5 per month. The city's fees are all based on a flat monthly fee, which provides strong revenue stability. The city's rates (at around 0.1% of median household income) are also comparatively low, since they do not reflect treatment, which is billed separately. OCSD's rates are also low on a comparative basis.

FINANCIAL PERFORMANCE IS STRONG

Financial operations are strong, with debt service coverage after transfers to the city over 2.0x since the issuance of the only outstanding debt, the series 2007 bonds. The annual debt service of around $3 million per year is projected to continue to enjoy this level of coverage, as the city's revenues and expenditures are very stable. The system generates around $3.5 million to $4 million in cash flow annually after the payment of debt service and the transfer to the city's general fund (4% of revenues) that is used to support ongoing maintenance and reinvestment in the system.

Reserve levels have grown over the past two years to $20 million at the end of fiscal 2013, or 1,337 days of operating cash. This cash is all unrestricted although the city may opt to use some of it for capital spending, if needed, in addition to the remaining $17 million in restricted unspent bond proceeds.

For financial reporting purposes, the city consolidates the sanitary sewer system (pledged revenues) with its trash collection and street cleaning enterprise into the Sanitation Fund. However, according to its continuing disclosure agreement, the city provides investors with segment information on the system in the notes to its consolidated annual financial report. Continuing disclosure filings offer additional system information on an ongoing basis.

Additional information is available at 'www.fitchratings.com'.

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

Applicable Criteria and Related Research:

--'Revenue-Supported Rating Criteria', June 3, 2013;

--'U.S. Water and Sewer Revenue Bond Rating Criteria', Aug. 3, 2013;

--'2014 Water and Sewer Medians', Dec. 12, 2013;

--'2014 Outlook: Water and Sewer Sector', Dec. 12, 2013.

Applicable Criteria and Related Research:

Revenue-Supported Rating Criteria

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=709499

2014 Outlook: Water and Sewer Sector

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=724357

2014 Water and Sewer Medians

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=724358

U.S. Water and Sewer Revenue Bond Rating Criteria

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=715275

Additional Disclosure

Solicitation Status

http://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=818140

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