The Rating Outlook is Stable.
The bonds are secured by installment payments from the city of
KEY RATING DRIVERS
ROBUST FINANCIALS EXPECTED TO DECLINE: All-in debt service coverage (DSC) has been solid the past five years, averaging approximately 2.1x, but is expected to decline to a still adequate range of 1.5x-1.9x in the intermediate term given expected new debt funding of capital.
STRONG CASH BALANCES: Liquidity, which was below average in fiscal 2009 and 2010, rebounded to a very robust 680 days cash on hand in fiscal 2013.
INCREASING DEBT BURDEN: At
SUFFICIENT RATE FLEXIBILITY: Rates are currently affordable but are expected to increase to meet new debt service and capital funding requirements.
STABLE, AFFLUENT CUSTOMER BASE: The local service area is a built-out and predominantly residential community with robust economic indicators.
MAINTENANCE OF FINANCIAL PROFILE: Projected weakening in the system's debt profile is a concern and will need to be balanced with continued solid financials including DSC and liquidity margins at or above the current rating category medians. Failure to maintain a strong financial profile with worsening debt metrics could eventually lead to negative rating pressure.
The city is a mature community located approximately 30 miles south of
STRONG FINANCIAL PERFORMANCE EXPECTED TO WORSEN
The system's all-in DSC has been very good for most of the past five years, averaging approximately 2.1x. However, coverage was slightly below average for the rating category in fiscal 2012 due to a 7% decline in water consumption combined with an increase in expenses related to SVCW costs. Fiscal 2013 coverage bounced back to a strong 2.5x driven by a rate increase. However, projections from a 2014 rate study show coverage declining to a range of about 1.5x to 1.9x over the next five years. While these levels are considered slightly low for the rating category, they should still remain adequate.
The system's available liquidity was very strong in fiscal 2013, equating to the cash equivalent of 680 days of operational costs (days cash on hand). Liquidity margins, which were below average at just 112 days cash on hand in 2010, have climbed four years straight. Fitch views robust cash levels as important for the system given the concentrated timing of revenue payments, which are received twice annually. Of some concern to Fitch, the authority annually transfers surplus amounts from the sewer fund to the storm drainage fund. The transfers are not prescribed by policy and are discretionary in nature.
DEBT BURDEN LIKELY TO INCREASE
Fiscal 2013 ended with a solid debt-per-customer level of
The city also provides capital funding for its allocable portion of SVCW system infrastructure expenses (the authority's ownership share in SVCW is approximately 11%). Debt associated with the authority's share of SVCW is separately secured by Sewer Treatment Facility Charges. Taking into account such debt (sewer treatment facility revenue bonds, series 2009A, not rated by Fitch), fiscal 2013 debt-per-customer climbs to approximately
PRUDENT RATE INCREASES TO FUND CAPITAL
The city has increased rates consistently over the past few years to improve the system's financial profile and to fund capital needs. The city recently approved a five-year rate package expected to increase rates 8% in 2015 and then from 6.5% to 6% over the next four years. Management anticipates the increases will provide for additional capital funding for repair and rehabilitation and deferred maintenance projects, while at the same time providing sufficient DSC levels at the ranges mentioned previously.
STABLE, AFFLUENT CUSTOMER BASE
Customers are primarily residential, with single- and multi-family residences accounting for 88% of revenues in fiscal 2013. The regional economy is vibrant and counts Oracle and Nikon as major employers. City wealth levels are very high, measuring approximately 163% and 190% of state and national levels. Likewise, unemployment rates are very strong at 3.6% in
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.
--'Revenue-Supported Rating Criteria' (
--'U.S. Water and Sewer Revenue Bond Rating Criteria' (
--'2014 Water and Sewer Medians' (
--'2014 Outlook: Water and Sewer' (
2014 Outlook: Water and Sewer Sector
2014 Water and Sewer Medians
U.S. Water and Sewer Revenue Bond Rating Criteria
Revenue-Supported Rating Criteria
Source: Fitch Ratings
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