Fitch Ratings assigns an 'AA+' rating to approximately $35 million City of Beverly Hills Public Financing Authority, California's 2007 water revenue bonds. Fitch also assigns an 'AA+' rating to approximately $11.3 million of outstanding parity water revenue bonds. Bond proceeds will be used to reconstruct and improve an existing reservoir and to supplement the water meter replacement program. The Rating Outlook is Stable.
The water revenue bonds are expected to sell via negotiation sale the week of Jan. 15, 2007. The underwriters have yet to be determined.
The 'AA+' rating on the Beverly Hills (the city) water enterprise system's (the enterprise, or the system) bonds is based on the essentiality of the service provided to a stable and wealthy customer base as well as the enterprise's healthy financial position including high debt service coverage levels, strong cash reserves, and manageable capital needs. Credit risks are minimal but include the projected high debt levels per customer and the system's almost complete dependence on a single water source.
Located in southwest Los Angeles County, Beverly Hills benefits from its status as a niche market for high-end hotel, retail and commercial real estate. The water enterprise serves about 44,000 people encompassing the entire city of Beverly Hills and about 20% of neighboring West Hollywood. While the city does have a strong hotel and commercial office space element, over 80% of the water enterprise customers are residential, providing a diverse customer base. Water supply is obtained primarily from the Metropolitan Water District of Southern California (MWD, rated 'AA+', with a Stable Outlook by Fitch), a regional wholesale water provider. Starting in 2003, the enterprise obtains about 10% of its water needs from groundwater pumped from four wells. The city is largely built out and the current level of water supply appears to be adequate; however, like most entities in Southern California, the system would be vulnerable to an interruption in supply from MWD.
Bonds are secured by a standard net revenue pledge and debt service reserve fund. Legal requirements include a rate covenant sufficient to yield net revenues of at least 1.25 times (x) annual debt service and an additional bonds test of historical revenues at least 1.25x maximum annual debt service. Actual debt service coverage levels have been much higher, averaging 2.7x for the last three fiscal years, resulting in strong liquidity levels. The city recently adopted a new rate structure to better match revenues and costs; overall, rates were increased by about 8% in fiscal 2006 and 12% in fiscal 2007. Projected future rate increases are affordable and incorporate planned pay-as-you-go spending for capital, an additional $1 million for current capital spending, and planned debt issuance. The resulting debt service coverage levels remain over 2.0x through fiscal 2011. The enterprise will need to implement regular rate increases to maintain these solid coverage levels.
The system's five-year capital plan is moderate at about $84 million, including projects funded by the bonds. The city expects to issue an additional $22 million in parity bonds in fiscal 2008 to finance the acquisition of the water treatment plant as originally planned when the city entered into the design/build/operate with purchase option contract in 2003.
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