Fitch Affirms Silicon Valley Clean Water, California's Wastewater Revs. at 'A+'; Outlook Stable

AUSTIN, Texas--()--Fitch Ratings affirms its 'A+' rating on the following obligations issued by the Silicon Valley Clean Water, California (SVCW or the authority):

--Approximately $59 million wastewater revenue bonds, series 2008 and 2009A & B.

The Rating Outlook is Stable.

SECURITY

The bonds are secured by a pledge on revenues provided under the participating member financing agreements. Payments due under the agreements are payable from a senior lien of net revenues of the respective members' wastewater systems.

KEY RATING DRIVERS

SVCW RATING TIED TO MEMBERS: The rating on the authority's bonds reflects the credit quality of the three participating members. Each member is responsible for its proportional share of SVCW's debt service and operational expenses. As there is no step-up provision between members, Fitch's analysis is a 'weakest link' approach. That said, Fitch has assessed the credit profiles of the underlying members and judges all to be of similar quality.

ABSOLUTE AND UNCONDITIONAL OBLIGATION: Bondholders are secured by an absolute and unconditional obligation of the three participating members to pay their proportional share of project costs from their wastewater system net revenues, as outlined in the member financing agreements.

IMPROVED MEMBER FINANCES: Each member has enacted, to varying degrees, significant rate increases to service new debt and to pay for capital spending associated with SVCW's capital improvement plan (CIP). As a result, member financial profiles have shown strong improvement in both debt service coverage (DSC) and liquidity.

SIGNIFICANT CAPITAL NEEDS: SVCW's CIP is extensive, as the authority is in the process of upgrading its facilities. Many of the upgrades are expected to be financed by debt, which is expected to result in worsened debt profiles for each of the underlying members. However, recent CIP-related spending has been lower than estimated and some major projects have been delayed, allowing the building of unrestricted cash, which should help to offset some of the growing debt.

SOUND LEGAL PROVISIONS: Legal provisions are adequate, with member payments consisting of a senior lien of net revenues of their respective systems. There is also a common debt service reserve fund.

RATING SENSITIVITIES

CHANGES IN MEMBER CREDIT PROFILES: Deterioration of the credit quality of one of the three participating members would result in negative rating pressure for SVCW's revenue bonds. Conversely, sustained improvements in each member's financial profile could mitigate some of Fitch's concerns relating to the growing debt and thereby lead to positive rating action.

CREDIT PROFILE

The authority operates as a joint exercise of powers authority, providing wastewater collection, treatment, and discharge service to around 250,000 people in San Mateo County through its four member agencies - the cities of Redwood City, San Carlos, Belmont, and West Bay Sanitary District (WBSD). The city of Redwood is the authority's largest contributing member, responsible for approximately 49% of operational costs and 54% of bond debt service. Belmont is not a party to repayment of SVCW's bonds, having elected to fund the initial portion of the authority's CIP on its own.

TERMS OF MEMBER FINANCING AGREEMENT

Pursuant to the participating member financing agreements, SVCW bond payments are paid from a senior pledge of net revenues of the respective member wastewater systems for the proportional amount of SVCW debt service attributable to each member. Participating members have covenanted to generate net revenues on their senior lien obligations in an amount equal to at least 1.2x annual debt service (ADS) requirements, including the use of unencumbered fund balances; the rate covenant in the financing agreements also requires net revenues of at least 1.0x ADS excluding unencumbered balances.

There is a common debt service reserve for the authority's bonds funded at maximum ADS, which is held by the trustee and which is wholly available to make up any participating member SVCW bond payment deficiency. Any draw on the debt service reserve would be replenished from receipt of subsequent monies from the delinquent member(s) which led to the draw.

IMPROVED MEMBER FINANCIAL PROFILES

While the underlying members' finances have generally been sound, recent rate increases have further elevated performance. These improvements should better position each member for the expected rising cost of capital and associated new debt. However, as the authority implements its CIP, the rising cost of debt service is expected to at least partially erode each member's DSC. At the same time, unrestricted cash is expected to be spent down to fund portions of capital costs and to fund reserves. Fitch will continue to monitor member performance and their ability to maintain stable financial profiles while facing the rising cost of debt service.

LARGE CAPITAL PLAN FUNDED LARGELY BY DEBT

SVCW's 10-year CIP spending through fiscal 2018 is expected to be approximately $317 million. The authority is in process of updating its infrastructure as much of it is reaching the end of its useful life. Major projects include the substantial rehabilitation and replacement of facilities infrastructure, improvements to the treatment plant and conveyance system, technological upgrades, and additional electricity co-generation facilities. As the CIP is expected to be largely debt funded, the authority's debt burden is expected to weaken.

With the 2014 revenue bond issue, member debt profiles doubled, resulting in fiscal 2014 debt-per-customer levels above Fitch's 'A' median. While further increases are expected, actual capital spending to date has been less than anticipated in previous CIPs as at least one of the larger projects (the conveyance system improvements) has been delayed and projects associated with potential nutrient removal project may now fall outside the 10-year CIP window and therefore are not included. Additionally, the delays of the conveyance project have and will continue to allow the members to build up cash reserves. As such, sustained strength in the members' financial profiles may help to mitigate some of the risk associated with high debt.

STRONG AUTHORITY-LEVEL FINANCIAL METRICS

As a joint-action agency, SVCW budgets for slim financial margins, as payments from members are kept at the minimal level needed to cover project costs. However, recent delays in capital spending have resulted in stronger DSC of over 2.0x in fiscals 2013 and 2014 and a build-up in cash reserves at the authority. As capital spending progresses, DSC is expected to return to levels closer to 1.1x (in line with state revolving fund requirements).

SOUND MANAGEMENT

The authority is governed by a four-member commission with each member appointing a commissioner and each commissioner's vote weighted proportional to that member's ownership interest in the authority's system. SVCW bills members monthly for operations and maintenance costs and semi-annually for capital and debt service payments, including the SVCW bond payments. While the authority maintains certain reserves which are allocable to its members, these funds are not pledged to bondholders.

Additional information is available at 'www.fitchratings.com'.

Applicable Criteria and Related Research:

--'Revenue-Supported Rating Criteria' (June 2014);

--'U.S. Water and Sewer Revenue Bond Rating Criteria' (July 2013);

--'2015 Water and Sewer Medians' (December 2014);

--'2015 Outlook: Water and Sewer Sector' (December 2014).

Applicable Criteria and Related Research:

2015 Outlook: Water and Sewer Sector

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=818410

2015 Water and Sewer Medians

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=818409

U.S. Water and Sewer Revenue Bond Rating Criteria

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=715275

Revenue-Supported Rating Criteria

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=750012

Additional Disclosure

Solicitation Status

http://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=984269

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Contacts

Fitch Ratings
Primary Analyst
Major Parkhurst
Director
+1 512-215-3724
Fitch Ratings, Inc.
111 Congress Avenue
Austin, TX 78701
or
Secondary Analyst
Andrew Ward
Director
+1 415-732-5617
or
Committee Chairperson
Kathy Masterson
Senior Director
+1 512-215-3730
or
Media Relations:
Elizabeth Fogerty, +1 212-908-0526
elizabeth.fogerty@fitchratings.com

Contacts

Fitch Ratings
Primary Analyst
Major Parkhurst
Director
+1 512-215-3724
Fitch Ratings, Inc.
111 Congress Avenue
Austin, TX 78701
or
Secondary Analyst
Andrew Ward
Director
+1 415-732-5617
or
Committee Chairperson
Kathy Masterson
Senior Director
+1 512-215-3730
or
Media Relations:
Elizabeth Fogerty, +1 212-908-0526
elizabeth.fogerty@fitchratings.com