SAN FRANCISCO--(BUSINESS WIRE)--Fitch Ratings has affirmed the following ratings for Millbrae, CA at 'AA-':
--$5.6 million wastewater revenue certificates of participation (COPs) series 2009A (federally taxable Build America Bonds);
--$6.87 million wastewater revenue COPs series 2009B.
The Rating Outlook is Stable.
The COPs are secured by the city's absolute and unconditional obligation to make payments pursuant to an installment sale agreement between the city and the Millbrae Public Financing Authority (the authority). The payments are secured by a pledge of net revenues of the wastewater enterprise fund including credits expected to be received form the federal government in association with the issuance of Build America Bonds.
KEY RATING DRIVERS
ADEQUATE COVERAGE: Debt service coverage is adequate and expected to remain so over the forecast period.
GOOD LIQUIDITY: The system has very good liquidity levels for the rating category which may decline in the near term to still healthy levels due to increased pay-go for capital projects related to a consent decree.
HIGH DEBT LEVELS: Debt levels are high and borrowing for the recently completed wastewater treatment plant (WWTP) improvements. Debt levels are expected to increase moderately to fund collection system improvements required under the consent decree.
RATE INCREASES EXPECTED: The WWTP improvements were funded through a series of substantial rate increases through fiscal 2011. Rates were held flat in fiscals 2012 and 2013, but city expects to increase rates in 2014 to fund the collection system improvements. Rates are currently high compared to median household income, but comparable to surrounding areas.
STABLE CUSTOMER BASE: The city provides wastewater service to approximately 6,400 customers in a built-out service territory with minimal growth and a strong local economy as an affluent suburb of San Francisco.
LARGE CIP/PRESSURED RATES: Fitch expects the system will use a combination of pay-go and debt to fund about $36 million in capital needs through fiscal 2018, the majority to comply with the consent decree. Given that rates are already above Fitch's affordability threshold, the rate base may be pressured. However, this concern is somewhat mitigated by the comparability of rates to surrounding areas.
The system, which is owned and operated by the city, includes a WWTP built in 1952 providing secondary treatment which was recently upgraded to comply with a consent decree. The system averages 1.8 million gallons per day (mgd) with permitted capacity of 3 mgd in dry weather and 9 mgd in wet weather. It also has a secondary system built in 1967 that provides biological treatment and disinfection. A cogeneration project added in 2006 provides 80% of the energy used by the WWTP and is self-supporting.
ADEQUATE COVERAGE, GOOD LIQUIDITY
Debt service coverage declined as expected in fiscals 2011 and 2012 to 1.7x and 1.5x, respectively, from 4x - 8x in the prior three years, as full payments for the 2009 bonds rolled on. Over the next five years, coverage is projected at 1.4x assuming no additional rate increases or expenditure growth. However, the city expects to increase rates in early 2014 following completion of a feasibility study related to improvements required for the consent decree. Fitch assumes expenditures will increase commensurately.
Liquidity is healthy with $10 million, or 825 days cash on hand, in fiscal 2012 and a five-year average of 564 days. Given that the CIP will be at least partially funded with pay-go, Fitch expects cash to decline to still healthy levels during the intermediate term.
PROGRESS TOWARDS CONSENT DECREE COMPLIANCE
In 2010, the city entered into a consent decree after a lawsuit was filed by the San Francisco Baykeeper Corporation alleging the city was in violation of its National Pollutant Discharge Elimination System (NPDES) permit due to sanitary sewer overflows. The decree has a deadline of Nov. 15, 2016. While the total cost of compliance is unknown, the city expects to spend up to $15 million through 2017 on collection system improvements to reduce inflow and infiltration, and an additional $1 million per year on pipeline maintenance and replacement. The WWTP upgrade, which cost about $29 million, was completed in February 2013. The upgrade does not provide additional treatment capacity or increase treatment standards. The system's current NPDES permit expires Sept. 30, 2013. Management indicated the city is in the process of renewing the permit and does not expect any issues. In addition, management notes a reduction in sewer overflows by more than half to 26 in 2012. Thus far in 2013, there have been 8 overflows and the consent decree specifies a goal of no more than 3 per year, which the city expects to reach by the 2016 deadline.
RATE INCREASES TO CONTINUE
The city implemented a series of double-digit rate increases through fiscal 2011 to support the cost of renovations. After holding rates flat in fiscals 2012 and 2013, management expects to resume hikes in early 2014 following completion of a feasibility study to determine the cost of the required consent decree projects related to I&I, currently estimated at $15 million. The city retains some rate flexibility given that its rates are midrange compared to surrounding communities. However, rates are already above Fitch's affordability threshold at $90.80 per month for 10 ccf of usage, equal to 1.3% of median household income.
Debt is high at over $6,000 per customer and is expected to increase as additional borrowing will likely be necessary to comply with the consent decree. The capital improvement plan through fiscal 2018 totals $21 million, including about $1 million per year in sewer main repair and replacement costs, which it plans to fund with pay-go. In addition, the city may require either a state loan or issuance of additional bonds to finance the improvements required by the consent decree.
AFFLUENT, STABLE CUSTOMER BASE
Millbrae is located in northern California approximately 15 miles south of San Francisco and directly adjacent to the San Francisco International Airport. With a population of about 21,000, the city serves about 6,400 wastewater accounts, of which 92% are residential. The wealthy suburban community boasts low unemployment and very high incomes compared with state and national averages.
Additional information is available at 'www.fitchratings.com'.
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 3, 2013);
--'U.S. Water and Sewer Revenue Bond Rating Criteria' (July 31, 2013);
--'2013 Water and Sewer Medians' (Dec. 5, 2012);
--'2013 Outlook: Water and Sewer' (Dec. 5, 2012).
Applicable Criteria and Related Research:
Revenue-Supported Rating Criteria
U.S. Water and Sewer Revenue Bond Rating Criteria
2013 Water and Sewer Medians
2013 Outlook: Water and Sewer Sector