Fitch Affirms Lodi, California's Wastewater Revenue COPs at 'A-'
Source: Business Wire
--$30.2 million wastewater revenue COPs, series 2007A, affirmed at 'A-';
--$23.5 million wastewater revenue COPs, series 2004A, affirmed at 'A-'.
The Rating Outlook is Stable.
RATING RATIONALE:
--System capacity is sufficient and the city is in regulatory compliance following the recent completion of certain upgrades to its systems and processes.
--Service territory is challenged; customer growth had slowed.
--Financial performance has weakened beyond what was anticipated in the 2007 credit review.
--The recently approved package of four successive annual rate increases is designed to restore the system's financial health to levels in line with other similarly rated systems in the next two years.
KEY RATING DRIVERS:
--Successful implementation of sizable increases over the next years aimed at restoring the system's financial health remains an important credit consideration, although the revenues from the rate increases could be less than projected depending on the resulting changes in consumption patterns.
--An outstanding issue regarding the city's discharge permit could result in changes to permitted protocol regarding the discharge of its wastewater. Should regulatory changes to its permit occur, the city expects to be able to absorb the costs with the already approved rate increases.
SECURITY:
The certificates are payable from sewer installment payments made by the city to the trustee. The city's obligation to pay installment payments is secured by a first lien on wastewater enterprise net revenues.
CREDIT SUMMARY:
The system provides wastewater services to approximately 24,000 customers within the city, located about 25 miles south of Sacramento and 80 miles northeast of San Francisco in the central valley. The system operates under a seasonal discharge permit, discharging into the San Joaquin Delta from approximately September through May. During the summer months, the system's domestic and industrial discharge are mixed and applied to agricultural land. The system recently completed phase 3 of its capital plan, which restored the wastewater treatment plant capacity to 8.5 million gallons per day (mgd) and completed a rehabilitation of the main trunk line from the city to the treatment plant. The city's discharge permit (received in September 2007) requires it to meet certain standards before May 2010. Final completion of the phase 3 projects in 2009 places the city in compliance with the terms of its discharge permit.
A recent legal challenge to the city's discharge permit has resulted in a decision by the State Water Board to remand the permit back to the Regional Water Quality Control Board, who issued the permit. The State Water Board found that the city's wastewater operations should not be exempt from certain federal discharge requirements and has asked the Regional Board to reconsider the permit in light of that decision. The city has already taken certain steps to address the concerns regarding nitrogen levels in the water that it land applies, but depending the decision of the Regional Water Board, could be required to fund additional capital improvements. Other regional wastewater providers with similar issues have challenged the State Board's decision; a decision would affect all parties, including Lodi.
System financial performance declined and reached a low point in fiscal 2009. The decline in connection fees, coupled with increased expenditures and the full amortization of debt service related to the 2007A COPs resulted in debt service coverage of 1.14 times (x) in fiscal 2009 (which is in compliance with the city's 1.1x rate covenant). Debt service coverage after the system's transfer of $1.4 million to the city's general fund was 0.79x, resulting in negative cashflow. The City Council approved a series of four annual rate increases in July 2009, with a 25% rate increase effective as of July 19, 2009. The subsequent rate increases will be 20%, 10, and 5%. As a result of these sizable increases, financial performance is expected to improve over the next two years, returning to 1.9x debt service coverage projected in fiscal 2011, or 1.5x after the general fund transfer. The monthly bill for a three bedroom house increased from $27.74 in fiscal 2009 to $34.68 in fiscal 2010.
Unrestricted cash reserves have been adequate, due to the infusion of around $6 million in fiscal 2008 resulting from the system's acquisition of additional undeveloped service territory in the county. Unrestricted cash at the end of fiscal 2009 was $7.5 million, or 462 days cash.
With an economy dominated by agriculture, unemployment levels are above state and national averages but are well below the county level, reflecting the more diverse employment base compared to other central valley economies. Unemployment rates have increased to 12.9% in November 2009 compared to 9% in November 2008, below the county's 16.9% but above the state and national averages of 12.2% and 9.4%, respectively. The city's relative maturity and a 2% population growth restriction have limited actual growth to about 1.6% historically.
These rating actions reflect the application of Fitch's current criteria which are available at 'www.fitchratings.com' and specifically include the following reports:
--'Revenue-Supported Rating Criteria', Dec. 29, 2009;
--'Water and Sewer Revenue Bond Rating Guidelines,' Aug. 6, 2008.
Additional information is available at 'www.fitchratings.com'.
Contact:
Fitch Ratings
Kathy Masterson, +1-415-732-5622 (San Francisco)
Karen Ribble, +1-415-732-5611 (San Francisco)
Media Relations:
Cindy Stoller, +1-212-908-0526 (New York)
cindy.stoller@fitchratings.com
