SAN FRANCISCO--()--Fitch Ratings affirms the Belmont Joint Powers Authority, CA's (the authority) obligations as follows:
--$13 million sewer revenue bonds, series 2001 and 2006.
The Rating Outlook is Stable.
The bonds are secured by installment payments from the city of Belmont (the city) to the authority. Payments from the city are unconditional and are made from sewer system (the system) net revenues, which do not include connection fees or interest income. A 2009 series of revenue bonds issued by the authority are secured by sewer treatment facility charges; these are not parity obligations and are not rated by Fitch.
KEY RATING DRIVERS
IMPROVED FINANCIAL PERFORMANCE: Debt service coverage improved to over 2.0 times (x) in fiscals 2010 and 2011. Liquidity, while not at historical levels, improved significantly in fiscal 2011. Despite the favorable debt service coverage, coverage of all payments by the system, including transfers out, is weak and has been below 1.0x in recent years.
INCREASED RATES ALLOW REINVESTMENT: Frequent rate increases, including 9% fixed and 10% volumetric in fiscals 2013 and 2014, address increasing treatment costs and the need for investment in infrastructure. Rates are still affordable given the city's high wealth levels.
MODERATELY HIGH DEBT BURDEN: The city expects to address collection projects primarily through rate and fee increases in the near term. It will most likely need to undertake additional borrowing for its portion of capital improvements for the regional treatment plant; however, this will be financed through a separate charge.
STABLE, AFFLUENT CUSTOMER BASE: The local service area is a built out community with robust economic indicators.
STABLE, AFFLUENT CUSTOMER BASE
Belmont is a mature community located in northern California, approximately 30 miles south of San Francisco with a population of 26,000. The city provides collection services to approximately 8,400 connections and treatment is provided by the South Bayside System Authority (SBSA, revenue bonds rated 'AA-' by Fitch), a regional provider. Customers are primarily residential, with single and multi-family residences accounting for 87% of revenues. Wealth levels are quite high and unemployment is low. The regional economy is vibrant and counts Oracle and Nikon as major employers.
INCREASED RATES ALLOW REINVESTMENT
The city has increased rates frequently, most recently in order to fund rising SBSA treatment costs and reinvest in infrastructure. The city implemented a 6.75% (fixed and volumetric) increase in fiscal 2011 followed by a 9% fixed charge increase and 10.6% volumetric increase for each of fiscals 2013 and 2014. The city expects to implement 6% annual rate increases through 2017. Management anticipates the increases will generate additional annual revenues reaching about $1 million within a few years for capital needs.
Rates are billed on the annual property tax rolls. The county participates in the Teeter Plan and as such provides full payment from the county to the city of 100% of sewer charges. Rates are competitive and affordable compared to wealth levels at $48.51 per month for an average household. An additional and separate $250 per year sewer treatment facility charge was included on the tax bill beginning in fiscal 2012 to secure certain sewer treatment facility revenue bonds, the first series of which was issued ($8.5 million) in December 2009.
IMPROVED FINANCIAL PERFORMANCE
System financial performance improved in fiscal 2011 after two years of lower levels during which cash reserves were spent to support operations and the payment of debt service. Cash levels increased to $3.3 million in fiscal 2011, or 270 days cash, compared to adequate levels of $1.4 million (114 days) and $1.3 million (112 days) in fiscals 2009 and 2010, respectively. Robust cash levels are important given the concentrated timing of revenue receipts which are paid twice annually.
Debt service coverage increased to 2.4x in fiscal 2011 - a level more consistent with the rating - from a low of 1.9x in fiscal 2009. Given the rate increases over the next two years and planned 6% increases in subsequent years, Fitch expects the system to continue to operate at these levels. However, coverage after transfers is typically below 1.0x after annual transfers out for storm drain improvements to mitigate infiltration and intrusion into the sewage system. Fitch views continued low coverage levels as a result of outflow of system revenues as a credit concern.
MODERATELY HIGH DEBT BURDEN LIKELY TO INCREASE
Debt levels are currently above average, reflecting borrowings for the collection and treatment systems in recent years. With approved and planned rate increases, management intends to fund system needs primarily through pay-as-you go financing. The city's collection system is aging and capital investment in its infrastructure is focused on rehabilitation and reducing inflow and infiltration levels.
The city also provides capital funds for the SBSA system infrastructure. With an ownership share of 11%, Belmont is the smallest of four SBSA members. SBSA operates a treatment facility in Redwood City, CA. The plant is undergoing an extensive renovation to replace aging infrastructure and comply with regulatory standards. The capital improvement project at the facility will not result in additional capacity as an expansion is not needed.
Belmont's total share of the project is approximately $40 million and is expected to continue to be financed through Sewer Treatment Facility revenue bonds. These bonds are secured by the Sewer Treatment Facility Charges, which are accounted for separately and are not considered net revenues for the purposes of securing the series 2001 and 2006 bonds.
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. 8, 2011);
--'2012 Outlook: Water and Sewer Sector' (Dec. 8, 2011).
Applicable Criteria and Related Research:
Revenue-Supported Rating Criteria
U.S. Water and Sewer Revenue Bond Rating Criteria
2012 Water and Sewer Medians
2012 Outlook: Water and Sewer Sector