News Column

Fitch Affirms Belmont Joint Powers Authority, CA's Sewer Rev Bonds at 'AA-'; Outlook Stable

August 18, 2014

AUSTIN, Texas--(BUSINESS WIRE)-- Fitch Ratings has affirmed its 'AA-' rating on the following bonds issued by the Belmont Joint Powers Authority (the authority):

--Approximately $12 million sewer revenue bonds, series 2001 and 2006.

The Rating Outlook is Stable.

SECURITY

The bonds are secured by installment payments from the city of Belmont (the city) to the authority. Payments from the city are secured by the sewer system's (the system) net revenues and do not include connection fees or interest income. A 2009 series of revenue bonds issued by the authority is secured by sewer treatment facility charges; these are not parity obligations and are not rated by Fitch.

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 $1,500 the system's debt-per-customer is somewhat low in comparison to the rating category median. However, forthcoming capital spending expected to be funded by the issuance of new bonds will likely push debt levels to above-average levels.

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.

RATING SENSITIVITIES

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.

CREDIT PROFILE

The city is a mature community located approximately 30 miles south of San Francisco in San Mateo County. The city provides effluent collection services to approximately 26,700 residents via 8,400 connections. Treatment is provided by Silicon Valley Clean Water (SVCW, formerly South Bayside System Authority, revenue bonds rated 'A+' by Fitch), a regional provider.

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 $1,500. The authority's five-year capital improvement plan (CIP) includes $6.1 million in budgeted pay-as-you-go spending intended to address mostly rehabilitation and repair projects. Not included in the last CIP is an additional estimated $45 million outlined in the city's 2014 sewer system rate study needed to address deferred system maintenance. The $45 million in capital spending is expected to be funded by a series of new bonds issued over a 15-year period. Upon issuance of such new debt, the system's debt metrics are expected to be elevated.

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 $2,500. Future system upgrades related to SVCW will likely increase non-parity debt to higher levels. For more information on SVCW see Fitch's Press release, 'Fitch Downgrades South Bayside System Authority, California's Wastewater to 'A+'; Outlook Stable,' dated May 30, 2013.

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.

At approximately $55 per month, rates are competitive and affordable compared to other regional wastewater treatment providers. Rates are expected to increase but should still remain at or below Fitch's affordability threshold of 1% of median household income (MHI).

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 April 2014, an improvement over the year prior and well below state and national averages.

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 2014);

--'U.S. Water and Sewer Revenue Bond Rating Criteria' (July 2013);

--'2014 Water and Sewer Medians' (December 2013);

--'2014 Outlook: Water and Sewer' (December 2013).

Applicable Criteria and Related Research:

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

Revenue-Supported Rating Criteria

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=750012

Additional Disclosure

Solicitation Status

http://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=853034

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. FITCH MAY HAVE PROVIDED ANOTHER PERMISSIBLE SERVICE TO THE RATED ENTITY OR ITS RELATED THIRD PARTIES. DETAILS OF THIS SERVICE FOR RATINGS FOR WHICH THE LEAD ANALYST IS BASED IN AN EU-REGISTERED ENTITY CAN BE FOUND ON THE ENTITY SUMMARY PAGE FOR THIS ISSUER ON THE FITCH WEBSITE.



Fitch Ratings

Primary Analyst

Major Parkhurst, +1 512-215-3724

Director

Fitch Ratings, Inc.

111 Congress Avenue, Suite 2010

Austin, TX 78701

or

Secondary Analyst

Kathy Masterson, +1 512-215-3730

Senior Director

or

Committee Chairperson

Michael Rinaldi, +1 212-908-0833

Senior Director

or

Media Relations:

Elizabeth Fogerty, +1 212-908-0526

elizabeth.fogerty@fitchratings.com

Source: Fitch Ratings


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