SAN FRANCISCO--(BUSINESS WIRE)--Fitch Ratings affirms the 'AAA' rating on the following Beverly Hills Public Financing Authority, CA bonds:
--$22.2 senior lien water revenue bonds series 2008A;
--$37.3 subordinate lien water revenue bonds series 2012A.
The Rating Outlook is Stable.
The 2008A bonds are secured by a first lien on net water revenues after payment of operation and maintenance expenses.
The 2012A bonds are secured by a subordinate lien on net water revenues.
KEY RATING DRIVERS
STRONG SERVICE AREA: The utility provides an essential service to a wealthy residential area that also includes significant commercial, retail and lodging customers. The city of Beverly Hills is centrally located in the Los Angeles metropolitan area, providing residents with job opportunities in a diverse and dynamic regional economy.
DISCIPLINED RATE-SETTING: The Beverly Hills City Council has raised rates aggressively in recent years to adapt to changes in usage patterns and increasing costs of imported water, adjusting rates as needed to provide solid financial results.
STRONG FINANCIAL PERFORMANCE: All-in debt service coverage (DSC) has been strong and improving in recent years. Liquidity has improved to very healthy levels. Performance is expected to remain strong over the next five years with little sign of immediate pressure due to the current California drought.
HIGH DEBT BURDEN: Debt levels are high because the city has invested heavily to maintain and improve its aging water distribution and storage system. This concern is largely offset by the utility's strong financial performance and ratepayers' extraordinary ability to pay.
SUBORDINATE WORKING LIEN: The subordinate bonds are rated on par with the outstanding senior lien bonds because the senior lien is closed and amortizes rapidly, leaving the subordinate lien as the city's working lien.
FINANCIAL PERFORMANCE: The rating is sensitive to changes in fundamental credit characteristics, particularly weakening of financial performance. The Stable Outlook reflects Fitch's expectation that such shifts are unlikely.
The water enterprise provides retail water service to a stable population of about 41,000 in an area that includes the city of Beverly Hills (Fitch implied unlimited tax general obligation [ULTGO] rating of 'AAA') and about 20% of neighboring West Hollywood (implied ULTGO rating of 'AAA'). The service area is very strong with Beverly Hills' median household income at about 160% of the U.S. average and a significant commercial base that includes major luxury retail and lodging sectors.
The customer base is reasonably diverse with the top 10 customers providing about 10.9% of revenue over the past three years. Large hotels make up the majority of the top customer list. Residential users account for about 85% of connections and 80% of revenues, providing diversification and stability to the customer base. The city is fully developed and not subject to growth pressures.
STRONG FINANCIAL PERFORMANCE
Overall financial performance is strong, though it varies with business and weather cycles. All-in DSC (senior and subordinate debt) averaged a robust 2.7x in the past three fiscal years ended June 30, 2013. Senior DSC averaged a very strong 3.8x over the period. Coverage remained strong in 2013 with senior DSC at 4.5x and all-in DSC at 2.5x. All-in coverage is forecast to remain solidly above 2x in a reasonably conservative forecast that assumes revenue growth remains significantly below expected 5% rate increases.
The utility is likely to beat its forecast in the near term because it has adequate supplies available to sell in a particularly dry period. The utility depends on local wells and the Metropolitan Water District of Southern California (Met) for supplies. The current drought has not curtailed supplies thus far because of adequate stored supplies. However, sales are likely to come under pressure in the out years of the forecast if the drought continues, forcing supply curtailments in later years.
Fitch believes the utility's financial margins are strong enough to allow for reasonable weather-related supply variation and sales reductions without pressuring the 'AAA' rating. The utility could, however, be forced to raise rates more than planned if the drought is prolonged or Met imposes significant drought rates. Beverly Hills has a strong record of passing along Met rate increases to end users, and Fitch expects the city to continue to do so.
Liquidity has improved in recent years. Unrestricted cash and investments jumped to a strong 378 days on hand in 2013 from an adequate 247 days in 2012. Cash has been building up as the utility increased rates to support an increased level of pay-go capital spending, and the utility's forecast shows cash levels remaining robust across the forecast horizon. Management policy is to retain reserves equal to at least 50% of operating expenses.
HIGH DEBT LEVEL
Debt levels are high due to the recent completion of two major capital projects: a meter replacement program and the replacement of the Coldwater Reservoir, the city's second largest local reservoir. Debt per customer of $5,526 is more than three times the average for rated systems. Debt to net plant assets - which better captures both the area's high cost of living and the utility's significant resource base - is only slightly elevated at 52%, but quite high for an 'AAA' rated utility.
The city does not anticipate any further borrowing for the foreseeable future and does not expect to undertake another major reservoir replacement project for two decades or more. Debt levels are expected to fall gradually as the city amortizes 53% of its debt over the next 10 years and 84% over the next two decades.
HEALTHY PAY-GO CAPITAL SPENDING
The city's capital needs relate primarily to investments in its pipe infrastructure. The current 2014-18 CIP totals a significant but manageable $27.9 million. Projected capital spending per customer is about twice the median for Fitch's 'AAA' rated water and sewer utilities, suggesting strong investment in the system without additional debt. The utility's ability to fund the capital program entirely from ongoing revenues is a significant strength with free cash-to-depreciation at 196% in 2013.
Additional information is available at 'www.fitchratings.com'
In addition to the sources of information identified in the Revenue-Supported Rating Criteria, this action was 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);
--' 2014 Water and Sewer Medians', dated Dec. 12, 2013;
--'2014 Outlook: Water and Sewer Sector', dated Dec. 12, 2013.
Applicable Criteria and Related Research:
2014 Outlook: Water and Sewer Sector
2014 Water and Sewer Medians
U.S. Water and Sewer Revenue Bond Rating Criteria
Revenue-Supported Rating Criteria