Fitch Upgrades Stockton Public Financing Authority, CA's Water Revenue Bonds; Outlook Stable
AUSTIN, Texas--(BUSINESS WIRE)--Fitch Ratings has upgraded the following bonds issued by the Stockton Public Financing Authority, CA (the authority):
--$54.1 million variable rate demand water revenue bonds, series 2010A (Delta Water Supply Project) to 'A-' from 'BBB';
--$24.2 million 2005 water revenue bonds, series A (Water System Capital Improvement Projects) to 'A-' from 'BBB';
--$15.6 million water revenue bonds, series 2009A (Delta Water Supply Project) to 'BBB+' from 'BBB-';
--$154.6 million water revenue bonds, series 2009B (taxable Build America Bonds) (Delta Water Supply Project) to 'BBB+' from 'BBB-'.
The Rating Outlook is Stable.
The 2005 series A and series 2010A bonds are secured by installment payments from the City of Stockton (the city) to the authority, payable from a now closed senior lien pledge of net revenues of the city's water system (the system). The series 2009A and 2009B bonds are secured by net system revenues after payment of senior lien obligations. The authority has assigned its rights to receive installment payments from the city to the trustee for the benefit of bondholders.
KEY RATING DRIVERS
ADEQUATE FINANCIAL PERFORMANCE: The upgrade is based on the system's adequate financial performance while the city has been in bankruptcy. Concerns about the impact of the bankruptcy on system performance and pledged revenues have abated over time. Fiscal 2013 finished with a below average but sufficient all-in debt service coverage (DSC) of 1.5x.
STRONG CASH BALANCES: System liquidity has been very good over the past five years. Unrestricted cash finished fiscal 2013 with the cash equivalent of 710 days of operational costs (days cash on hand).
ELEVATED LEVERAGE BUT MANAGEABLE CAPITAL: The system maintains a high debt burden coupled with an extended amortization schedule. However, given the recent completion of the Delta Water Supply Project (DWSP), capital needs are more limited going forward.
SUFFICIENT SUPPLY: Completion of the DSWP provides a new resource for the city which is expected to provide sufficient supply through 2025.
WEAK SERVICE AREA: Although improving, the agricultural-based service area has been significantly affected by weak economic and housing conditions. Additionally, the condition of the State of California's severe drought could have ramifications if water restrictions begin to affect system revenue.
MAINTENANCE OF FINANCIAL PROFILE: A decline in all-in DSC significantly beyond levels currently forecast by management without other mitigating factors such as strong cash balances could lead to negative rating action.
The city is located in the San Joaquin Valley, about 78 miles east of the San Francisco Bay area and about 45 miles south of Sacramento. The system provides water service to 55% of the water accounts within Stockton through approximately 47,700 connections, while California Water Service Company services the majority of the remainder of the city's connections.
ADEQUATE FINANCIAL PEFORMANCE
The system finished fiscal 2013 with adequate all-in DSC of 1.5x, which ranks just below Fitch's median for the rating category. DSC has been mostly good yet volatile over the past five years, ranging from 1.5x to 2.7x on an all-in basis and 2.7x to above 6.0x on a senior-lien basis. The observed volatility is largely attributable to the quickly increasing operational and debt services costs associated with bringing the DWSP online.
Management's forecasts project all-in DSC declining to a below average but adequate 1.3x in fiscal 2014 and then 1.2x in 2015. Somewhat mitigating the decrease in coverage is the authority's strong cash balance, which has averaged a very robust 690 days of cash on hand since 2009. Fitch expects liquidity to remain strong over the intermediate term.
The system implemented significant rate increases in 2010 to 2012 to pay for increases in debt service costs associated with the DWSP. Going forward, rates should stabilize as the authority expects to make only inflationary-based changes. Considering Fitch's average monthly usage assumption of 7,500 gallons, rates are affordable at about 0.9% of median household income (MHI). However, actual usage is higher resulting in somewhat elevated monthly customer bills.
ELEVATED DEBT PROFILE BUT MANAGEABLE CAPITAL NEEDS
The system's weak debt profile is primarily due to financing of the DWSP. Overall, debt per customer and debt per capita are around 3x the national median. While improvement in the system's capital structure is expected over time, debt levels will continue to be a long-term concern as only 53% of principal amortizes within 20 years. However, the utility's capital needs are manageable with approximately $36 million budgeted over the next five years. Future capital projects are expected to be funded by cash and should therefore keep debt metrics from worsening.
WATER SUPPLY ENHANCED WITH DELTA PROJECT
The DWSP allows the district to pump and treat 33,600 acre-feet (af) of water from the San Joaquin River. With the completion of the DWSP, the district has been able to reduce its treated water purchases from the Stockton East Water District to 17,500 af from 27,000 af under a take-or-pay contract. The DWSP's capacity of 30 million gallons per day (mgd) is sufficient through about 2025. Further, the utility can double the capacity of the DWSP to 60 mgd relatively easily and ultimately to 160 mgd with major investment.
WEAK SERVICE AREA
The Stockton area was among the hardest hit in the recent recession, as evidenced by high unemployment rates and severe declines in housing prices. Located in the most productive agricultural region of the country, the city has historically posted elevated unemployment. However, May 2014 unemployment of 12.5% was down by two percentage points year-over-year and much improved from the high of 20.7% in 2011 due to strong employment growth. MHI remains below state and national averages. Large employers include government, food production and medical centers.
BANKRUPTCY NOT RATING DRIVER
The rating assigned by Fitch is based purely on the credit profile of the system given the general legal protection and special revenue status of pledged utility revenues.
Additional information is available at 'www.fitchratings.com'.
In addition to the sources of information identified in Fitch's U.S. Municipal Revenue-Supported Rating Criteria, this action was additionally informed by information from Creditscope.
Applicable Criteria and Related Research:
--'Revenue-Supported Rating Criteria' (June 2014);
--'U.S. Water and Sewer Revenue Bond Rating Criteria' (July 2013);
--'2014 Water and Sewer Medians' (December 2013);
--'2014 Outlook: Water and Sewer' (December 2013).
Applicable Criteria and Related Research:
Revenue-Supported Rating Criteria
U.S. Water and Sewer Revenue Bond Rating Criteria
2014 Water and Sewer Medians
2014 Outlook: Water and Sewer Sector