AUSTIN, Texas--(BUSINESS WIRE)--Fitch Ratings assigns a 'AA+' rating to the following wastewater system revenue refunding bonds issued by the East Bay Municipal Utility District, CA (EBMUD or the district):
--Approximately $72 million series 2014A;
--Approximately $2 million series 2014B (taxable).
Proceeds of the series 2014A&B bonds will refund variable rate bonds, pay swap termination fees, and pay costs of issuance. Bonds are expected to price on July 29, 2014. The bonds will not have a debt service reserve fund.
Fitch also affirms the following outstanding EBMUD ratings:
--$311.7 million wastewater system revenue bonds, series 2007A, 2007B, 2010A, 2010B, and 2012A at 'AA+';
--$59.1 million wastewater system SIFMA bonds, series 2011A at 'AA+/F1+';
--$15.0 million outstanding wastewater system subordinate lien extendible commercial paper (CP) notes at 'F1+'.
The Rating Outlook is Stable.
Bonds are payable from net revenues of the wastewater system. Tax receipts are not pledged to bondholders.
KEY RATING DRIVERS
STRONG SERVICE AREA: EBMUD provides wholesale wastewater treatment services to seven customers with a combined population of approximately 650,000 in Alameda and Contra Costa counties. Growth pressure is modest although regulatory requirements have increased.
HEALTHY FINANCIAL MARGINS: Margins are healthy with Fitch-calculated debt service coverage of revenue bonds of 1.85x in fiscal 2013. Liquidity is strong. Management's financial forecast projects continued compliance with the district's 1.6x target threshold and forecast assumptions appear reasonable.
REVENUE DIVERSITY; RATE FLEXIBILITY: Revenue diversity and a high degree of fixed charges (45% of revenues) provide revenue stability. Rate flexibility is demonstrated by the Board's recent approved rate increases and combined wastewater bills that are competitive in the region.
TREATMENT CAPACITY EXCESS: Excess treatment capacity is managed by sales to regional waste suppliers through the resource recovery program. Additional revenue provided by this program provides some rate relief to customers and offsets the costs associated with excess capacity.
REGULATORY COMPLIANCE REQUIRED: Despite the excess capacity during dry weather, the treatment plant is undersized to treat infrequent, unusually large wet weather flows. Negotiations on a consent decree are ongoing.
LONG-TERM MARKET ACCESS: The 'F1+' rating assigned to the extendible commercial paper notes and series 2011 index bonds corresponds to the long-term rating on EBMUD's wastewater revenue bonds and to the terms of the CP program that allow repayment to be extended in the event of a failed remarketing.
STABLE OUTLOOK: The rating is sensitive to shifts in fundamental credit characteristics including EBMUD's expected limited capital spending as a result of the expected consent decree. The Stable Outlook reflects Fitch's expectation that such shifts are unlikely.
The district provides wholesale wastewater treatment service to approximately 650,000 people within an area of the district designated as Special District No. 1. Special District No. 1 is a separate district within EBMUD but is governed by the same Board of Directors and management team. The majority of the wastewater service area (94%) is located in Alameda County. Alameda county participates in the broad San Francisco Bay Area regional economy and benefits from its diverse labor market, high income levels, and strong tax base. Unemployment rates have improved, dropping from 11.7% in mid-2010 to 5.6% in May 2014, and exceeding the national average at both peak and trough.
Seven wholesale customers provide collected wastewater to the district for treatment and disposal. Customers include the cities of Alameda, Albany, Berkeley, Emeryville, Oakland and San Leandro, and the Stege Sanitary District (which includes El Cerrito, part of Richmond, and unincorporated areas of Contra Costa County).
California is experiencing a multi-year severe drought. Water utilities across the state, such as EBMUD, have asked customers to conserve water and may implement greater restrictions in the coming year if the drought continues. Lower water usage that will result from water use restrictions are not expected to be as disruptive to EBMUD's wastewater revenues as they are to water revenues, given the higher percentage of fixed charges. EBMUD is projecting that revenues from dry weather user charges could be $1 million below the fiscal 2014 budgeted amount of $63.4 million as a result of lower water usage from the drought. More severe restrictions in fiscal 2015 could deepen the revenue pressure.
EXCESS TREATMENT CAPACITY DURING DRY WEATHER
EBMUD's main wastewater treatment plant has a permitted capacity of 120 million gallons per day (MGD) in dry weather and a maximum of 168 MGD during wet weather storm events. The district's average daily flow from its member communities has ranged between 61 and 82 MGD in the last ten years. The plant provides secondary treatment and discharges through a mile-long, deepwater outfall into the San Francisco Bay.
In order to maximize the value of the plant's excess capacity, the district operates its resource recovery program. The program accepts liquid and solid waste streams delivered by truck from both inside and outside the service area for treatment. The program, which began in 2001, provides substantial additional revenues to the district of around $9.2 million, or around 9% of revenues. The district expects the revenues from its resource recovery program to decline in future years as competition from other regional treatment plants with capacity increases.
REGULATORY REQUIREMENTS RELATED TO WET WEATHER
Despite the excess capacity during dry weather, treatment capacity is not sufficient to meet flow during peak storm events because of the inflow and infiltration (I&I) of rainwater and storm run-off into collection pipes.
The district's wet weather treatment and discharge facilities provide primary treatment of wet weather overflows for direct discharge into the San Francisco Bay. However, stricter regulatory guidelines resulted in a Cease and Desist Order issued in 2009 to EBMUD to end all primary treatment discharges into the San Francisco Bay.
EBMUD and its members have been in negotiations with the U.S. Environmental Protection Agency, the SWRCB and the Department of Justice since January 2013. The goal is to agree upon terms of a long-term consent decree that would settle ongoing litigation related to overflows into the San Francisco Bay. No details have been released yet. EBMUD's own capital plan assumes around $2 million annually beginning in fiscal 2014 related to regulatory projects.
MODEST CAPITAL NEEDS DESPITE EXPECTED CONSENT DECREE
The district's five-year capital improvement plan is moderate at $155.1 million. Major projects are related to replacement and rehabilitation of older facilities, such as the digester upgrade project, the concrete rehabilitation project, treatment plan projects, and the interceptor rehabilitation project.
The district's debt burden is above average for the rating category but will lessen with the lack of debt issuance over the next five years. Debt per capita is $722 as compared to the rating category median of $514. Debt amortization is slow with only 28% and 61% maturing in the next 10 and 20 years, respectively. Of the $476.7 million in total system debt, 72% is currently fixed-rate, which will increase with the issuance of the 2014 bonds that will refund all or a portion of EBMUD's outstanding variable rate revenue bonds with fixed rate debt, depending on market conditions.
HEALTHY FINANCIAL PERFORMANCE
Fitch calculated debt service coverage in fiscal 2013 was 1.85x and all-in debt service coverage was 1.65x, including payment of commercial paper and GO bonds. Tax revenues are included in Fitch's coverage calculation although they are not pledged to revenue bondholders. Fitch's all-in debt service includes payment of the G.O. bonds.
Fiscal 2014 year to date performance is generally in line with fiscal 2013 financial performance and slightly ahead of budget due to strong resource recovery revenues. Debt service coverage levels are projected to remain at or above this level in management's five year forecast. Debt service payments are flat over the next five years.
Liquidity has improved in recent years to $73.6 million in unrestricted cash at the end of fiscal 2013 or 523 days operating cash.
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:
--'U.S. Water and Sewer Revenue Bond Rating Criteria' (July 2013);
--'Rating U.S. Public Finance Short-Term Debt' (Dec. 2013).
Applicable Criteria and Related Research:
U.S. Water and Sewer Revenue Bond Rating Criteria
Rating U.S. Public Finance Short-Term Debt