Fitch Rates East Bay Municipal Utility District, California Water Revs 'AA'
Source: Business Wire
--$191.4 million water system subordinated revenue refunding bonds, series 2010A, rated 'AA';
--$400.0 million water system subordinated revenue bonds, series 2010B (Taxable Build America Bonds), rated 'AA'.
The 2010A bonds are scheduled to sell via negotiation the week of Jan. 25, while the 2010B bonds are schedule to sell via negotiation the week of Feb. 8. Proceeds from the 2010A bonds will be used to refund a portion of the district's outstanding variable rate bonds, retire a portion of the district's outstanding extendable municipal commercial paper notes, fund a debt service reserve, and pay costs of issuance. Proceeds from the 2010B bonds will be used to fund improvements to the water system, fund capitalized interest, and pay costs of issuance.
At this time, Fitch also affirms the following ratings:
--$1.09 billion of outstanding water system subordinated revenue bonds (pre-refunding), at 'AA';
--$326.1 million water system subordinated revenue refunding bonds, series 2009A (SIFMA-Based Term Interest Rate Period), comprised of the following subseries:
--$163 million, series 2009A-1, at 'F1+';
--$163 million, series 2009A-2, at 'F1+';
--$390 million extendable municipal commercial paper notes (water series) (pre-refunding), at 'F1+'.
The Rating Outlook is Stable.
RATING RATIONALE:
--The district has a stable and solid financial operating history, although some weakening occurred in the most recent fiscal year.
--Water supply risk will be mitigated as a result of completion of the Freeport Regional Water Project (FRWP) this year.
--The district engages in extensive planning efforts and has developed comprehensive policies.
--The service area is broad and diverse and includes high wealth levels overall.
--While debt levels will remain high over the long term, rates are relatively low, limiting the direct pressure on the rate base.
--Credit risks relating to the short-term ratings are minimal given the district's demonstrated market access and strong balance sheet, which can cover the purchase price on tendered 2009A bonds.
KEY RATING DRIVERS:
--An expected return to historical financial metrics over the medium term is key to the current rating level.
--Limitation on growth in future leverage will be important given the district's high debt load.
SECURITY:
The bonds are payable from net system revenues after payment of operations and maintenance expenses and senior lien debt service costs; the district has no senior lien debt outstanding and does not contemplate the issuance of any.
CREDIT SUMMARY:
The district provides retail water service to around 1.4 million people in all or part of 20 cities and 11 unincorporated communities in Alameda and Contra Costa Counties along the eastern portion of San Francisco Bay. Water supplies are derived primarily from the Mokelumne River watershed that originates in the Sierra Nevada Mountains, although a minor portion also comes from streams within the district. These supplies traditionally have well-exceeded customer demands and are expected to continue to be adequate in normal hydrological years. Supplies could face some disruptions in dry years, as has occurred recently, and under seismic events. To mitigate these concerns, the district has invested substantial capital resources over the last decade in infrastructure development and supply resources, culminating with the construction of FRWP, which is expected to be fully operational this spring.
As major projects like FRWP are coming to a close, the capital improvement plan (CIP) has experienced significant decreases. While the fiscal 2010-2014 CIP remains a large $861 million, major capital spending increasingly is focusing on renewal of assets, offering increased flexibility in project prioritization. Also, capital funding has transitioned to increased equity contributions and decreased reliance on debt. Nevertheless, the district's debt portfolio remains elevated as a result of the recent capital programs and will be an ongoing credit consideration due to the slow amortization.
The impact of the high debt levels to end users has been minimized while financial operations have been sound, reflecting extensive policies and planning practices. Historically, total annual debt service (ADS) has been strong, averaging 1.7 times (x) in recent years; reserve balances also have been well above comparably-rated credits. However, for fiscal 2009 drought conditions, weak economic conditions, and rising debt costs led to some softening in financial results, dropping total ADS coverage to 1.4x. Consistent with past practices, the board continued with annual rate increases for fiscals 2010 and 2011. However, it is expected that ADS coverage will take a few years to fully recover to historical levels given the board's decision to have measured rate hikes in the near term that would not unduly pressure the rate base in the current economic environment. While the district maintains a good deal of balance sheet flexibility, maintenance of the rating will depend on consistent ongoing improvement in the district's financial metrics commensurate with projections through fiscal 2014.
The district serves approximately 55% of the combined population of Alameda and Contra Costa Counties, with around two-thirds of district customers residing in Alameda, Berkeley, Oakland, San Leandro, Richmond, and Walnut Creek. The regional economy includes a sizeable industrial base, which benefits from the area's extensive port, rail, trucking, and airport facilities. However, economic conditions currently are weak as evidenced by unemployment rates in both counties that exceeded that national rate by nearly 2% in November 2009. Wealth levels within the counties are notably higher than the state and U.S. averages both in terms of per capita income and median household income but are expected to lose some ground over the short term.
These rating actions reflect the application of Fitch's current criteria which are available at 'www.fitchratings.com' and specifically include the following reports:
--'Revenue-Supported Rating Criteria', (Dec. 29, 2009);
--'Water and Sewer Revenue Bond Rating Guidelines', (Aug. 6, 2008).
Considerations for Taxable/Build America Bonds Investors
The following sector credit profile is provided as background for investors new to the municipal market.
Water and Sewer Utility Revenue Bonds:
Municipal water and sewer utilities in the U.S. are enduring natural monopolies that typically have autonomous rate setting ability and provide highly essential services. The bonds are secured by a pledge of net revenues generated by the water and/or sewer system; and typically include structural legal protections such as rate covenants, debt service reserve requirements, and anti-dilution tests. As such, the sector exhibits extremely strong credit characteristics with minimal defaults. Reflective of this strong performance, the average water and sewer revenue bond rating is 'A+' with 53% at or above 'AA-' and approximately 6% rated 'BBB+' or below. Those with low investment-grade or below-investment-grade ratings generally have substantial capital programs, a high degree of leverage or weak financial flexibility as reflected in low cash levels, narrow debt service coverage and/or limited rate-raising flexibility.
Additional information is available at 'www.fitchratings.com'.
Contact:
Fitch Ratings
Doug Scott, 512-215-3725, Austin
Kathy Masterson, 415-732-5622, San Francisco
or
Media Relations:
Brian Bertsch, 212-908-0549, New York
Email: brian.bertsch@fitchratings.com
