Fitch Rates Fresno, CA's $159.9MM Water System Revenue Bonds 'A+'; Outlook Stable
Source: Business Wire
--$55.5 million 2010 series A-1;
--$104.4 million taxable 2010 series A-2 (Build America Bonds).
The bonds are expected to sell via negotiation on Jan. 20, 2010. The bonds are being issued for a residential meter retrofit program, various other capital improvements and refunding purposes.
Fitch also assigns an 'AA-' rating on Fresno's $11.4 million in outstanding closed senior lien water system revenue refunding bonds series 2003.
The Rating Outlook is Stable.
RATING RATIONALE:
-- Fresno has a reliable and flexible water supply which can accommodate future growth and is very affordable. Rates should remain affordable despite additional future rate increases fueled by a large debt financed capital plan.
-- Water system management has been strong with implementation of rate increases in preparation for its large capital plan and transition to metered residential accounts.
-- The essentiality of the water system serving a large service area of over 500,000 residents provides good revenue stability.
-- Financial performance is adequate with coverage and liquidity measures in the lower end of 'A' category medians.
-- The five-year capital plan is large totaling close to $600 million which will be largely debt financed.
-- Fresno has a stable economic base which has diversified but still largely centered around agricultural and food processing with below average incomes levels and above average unemployment.
KEY RATING DRIVER:
-- Continued implementation of necessary rate increases to maintain solid debt service coverage levels of at least 1.3 times (x) and improved liquidity levels as the water system implements its large capital plan and transition to fully metered residential accounts is a key rating driver.
SECURITY:
The bonds are secured by net revenues of the water system, including net transfers from a rate stabilization fund, but excluding connection fees.
CREDIT SUMMARY:
Fresno has historically relied on groundwater for its water supply, which was its sole source of potable water until 2004. The groundwater basin which Fresno draws from is un-adjudicated and over-drafted. With the overdraft condition of the basin as well as some chemical contamination issues, groundwater usage has become increasingly difficult and has created operational challenges. However, Fresno also has two surface water sources: 1) San Joaquin River water from the Federal Central Valley Project (CVP) and 2) Kings River water through an agreement with Fresno Irrigation District. These two sources provide Fresno with an overall very reliable and flexible water supply, also at a very affordable cost. Fresno currently charges single family residential customers a flat monthly rate of $22.87 for a 6,000 sq.ft lot. Effective Jan. 1, 2010, the approved metered/volumetric rates will be implemented as the city starts the three-year process converting residential customers to meters. For an average 2500 cu-ft of water (18,700 gal), the monthly bill will be $25.28.
With little historic debt, financial performance on a coverage basis will be on the projections going forward in light of a large, debt financed capital plan over the next five years. With an additional $78 million of debt expected in 2011 and $290 million in 2014, debt service coverage when all the proposed new debt is loaded will be about 1.3x by 2015 (all-in for working lien) before increasing slightly in the 2016-2020 years to 1.4x-1.5x with additional 3% annual rate increases. Coverage levels through 2015 assume four 11% annual rate increases starting in FY 2012 through 2015. Liquidity measures are good but on the lower end of all median metrics at 215 days cash and 133 days working capital at the end of fiscal 2009 (unaudited). While the water system's financial metrics are more solidly aligned with an 'A' level rating, the city's very low cost water resources are a significant strength. The low cost of water supply will allow the city to maintain very affordable rate even in light of a very large, debt financed capital plan.
The Fresno area economy has been hit hard by the economic downturn like much of California. Unemployment rates are 14.8% (October 2009) compared to 15.8% for the county; 12.3% for California and 9.5% nationally. Fresno's unemployment levels have always tracked higher than state and national levels given the area's agriculturally influenced economic base. Fresno is the center of government, trade and commerce for Central California (San Joaquin Valley) and is the economic hub for the area. While it has diversified, the economic base is still centered around agriculture and related businesses, including food processing, warehousing and distribution. Also reflecting an agriculturally centered economic base, median household income levels are 85% of national and 73% of state medians.
These rating actions reflect the application of Fitch's current criteria which are available at 'www.fitchratings.com' and specifically include the following report:
--Water & Sewer Revenue Bond Rating Guidelines, dated Aug. 6, 2008.
Considerations for Taxable/Build America Bonds Investors
The following sector credit profile is provided as background for investors new to the municipal market.
Water and Sewer Utility Revenue Bonds:
Municipal water and sewer utilities in the U.S. are enduring natural monopolies that typically have autonomous rate setting ability and provide highly essential services. The bonds are secured by a pledge of net revenues generated by the water and/or sewer system; and typically include structural legal protections such as rate covenants, debt service reserve requirements, and anti-dilution tests. As such, the sector exhibits extremely strong credit characteristics with minimal defaults. Reflective of this strong performance, the average water and sewer revenue bond rating is 'A+' with 53% at or above 'AA-' and approximately 6% rated 'BBB+' or below. Those with low investment-grade or below-investment-grade ratings generally have substantial capital programs, a high degree of leverage or weak financial flexibility as reflected in low cash levels, narrow debt service coverage and/or limited rate-raising flexibility.
Additional information is available at 'www.fitchratings.com'.
Contact:
Fitch Ratings
Cindy Stoller, +1-212-908-0526 (Media Relations, New York)
cindy.stoller@fitchratings.com
Robert Sakai, +1-415-732-5628 (San Francisco)
Karen Ribble +1-415-732-5611 (San Francisco)
