Fitch Ratings assigns the following rating to the East Bay Municipal Utility District, CA (the district) revenue bonds:
--Approximately $66 million wastewater system revenue refunding bonds, series 2011A - 'F1+'.
The district expects to sell the series 2011A bonds in a negotiated sale on Jan. 11, 2011. Proceeds of the 2011A bonds will be used to refund the series 2008B variable-rate bonds. The bonds will not have a debt service reserve fund. Proceeds from the 2008B debt service reserve fund will be rolled into the refunding transaction.
In addition, Fitch affirms the following ratings:
--$330.8 million in outstanding wastewater revenue bonds at 'AA+';
--$15 million in outstanding extendable municipal commercial paper notes at 'F1+'.
The district has an additional $58 million outstanding in parity long-term bonds that are not rated by Fitch.
The Rating Outlook is Stable.
RATING RATIONALE:
--East Bay Municipal Utility District (EBMUD, or the district) has a solid and stable financial operating history. While debt service coverage levels are projected to fall below the district's target of 1.6 times (x) in the next few years, recovery is expected in fiscal 2015.
--The district provides wholesale collection and treatment of wastewater to a service area that is broad and diverse and includes high wealth levels overall.
--Revenue diversity exists from the district's resource recovery program that makes use of excess capacity at the treatment facility by trucking in restaurant waste from surrounding communities.
--Rates are competitive in the region and are billed through a combination of bimonthly volumetric charges and annual assessments on the property tax bill.
--EBMUD engages in extensive planning efforts and has developed comprehensive policies.
--Debt levels are high and are expected to grow over the capital improvement plan (CIP) period, but major capital needs are nearing completion, allowing for more reasonable annual outlays.
--The 'F1+' ratings on the SIFMA Index Bonds and the extendable commercial paper program reflect the structure of each debt security and the credit quality and market access implied by the long-term rating.
KEY RATING DRIVERS:
--Maintenance of healthy liquidity levels and modest debt service coverage for the next few years. While these coverage levels are low for the rating, rating maintenance is based on the expectation that debt service coverage will return to at least 1.6x, the district's minimum policy, in fiscal 2015.
--Progress toward compliance with the Cease and Desist Order and Stipulated Order requiring that no flows from the wet weather facilities be discharged into the San Francisco Bay by 2019. Although modest costs will be incurred by the district, the solution requires the district to work with the communities that send flows to the wet weather facilities to implement the needed capital improvements.
--Limitation on growth in future leverage will be important given the high existing and projected debt ratios.
SECURITY/STRUCTURE:
The bonds are payable from net system revenues after payment of operations and maintenance (O&M). The 2011A bonds are on parity with the district's other outstanding wastewater revenue bonds. The commercial paper program is subordinate to the bonds.
CREDIT SUMMARY:
The district provides wholesale wastewater treatment service to approximately 650,000 people. Average daily flows have declined slightly over the last decade. The customer base is very stable with limited growth pressure. Treatment is provided at the district's Main wastewater treatment plant. The treatment plant has a permitted capacity of 120 million gallons per day (MGD) in dry weather and a maximum of 168 MGD during wet weather storm events. The district's average daily flow from its member communities has ranged between 66 and 82 MGD in the last 10 years. In order to maximize the value of the plant's excess capacity, the district accepts liquid and solid waste streams delivered by truck from outside the service area. These flows are primarily food waste delivered from restaurants. The program, which began in 2001, provides substantial additional revenues to the district of around $7.5 million, or 10% of operating revenues.
The district also operates three wet weather facilities and five overflow structures that discharge primary treated effluent during periodic wet weather events. A new discharge permit was issued to the wet weather facilities in 2009 that no longer allows untreated discharges into the San Francisco Bay. A Cease and Desist Order requires the district to develop a plan to eliminate these discharges as soon as possible. A related Stipulated Order requires the district to work with the member communities on a variety of programs designed to ultimately reduce the wet weather flows to the district's facilities. The contemplated program is the outcome of a few years of negotiations and discussions among the interested parties and the regulatory bodies. The positive credit development is that the scope of the improvements is now known and the district's direct spending responsibilities are limited - around $5 million per year. However, significant spending is expected to occur by member communities to re-invest in their aging collection system in order to reduce wet weather inflows to the sanitary sewer system.
Although rates have continued to increase annually, debt service coverage has declined in the past three years, which was anticipated to occur with the scale of recent additional capital spending and debt issuance. Debt service coverage was 1.8x in fiscal 2010, including connection fees. This exceeds the district's policy of 1.6x coverage which is used to establish rates. However, debt service coverage is expected to decline further than previously anticipated in fiscal years 2012-2014 to around 1.5x. The further decline relates to the district's decision to refund two state loans with parity debt that were previously paid junior to the subordinate lien. By fiscal 2015, the district expects to return to a minimum of 1.6x debt service coverage on a budgeted basis, which it often exceeds in actual performance. Liquidity remains strong. The decline shown at the end of fiscal 2010 was related to the district's use of cash to fund ongoing capital.
SIFMA INDEX BONDS:
The 'F1+' rating on the series 2011A bonds is based on the district's market access implied by the long-term credit rating of the district. The series 2011A bonds will initially bear interest at a SIFMA-based interest rate plus a spread determined at the initial pricing and will be subject to mandatory tender on or around Jan. 19, 2012. While the bonds are secured by net revenues of the system and have a nominal maturity schedule extending to 2038, the district does not intend to pay the purchase price of the bonds from net system revenues upon mandatory tender on the purchase date. Instead, the district has covenanted to use commercially reasonable efforts to provide for the purchase price of the bonds by accomplishing one of the following: issuing refunding bonds prior to the mandatory tender date; providing either a liquidity facility or self-liquidity arrangement to provide for the mandatory tender of the bonds; or converting the bonds to another SIFMA-based term interest rate period or to another interest rate period to provide sufficient remarketing proceeds. Apart from the procurement of a liquidity facility, in which case the short-term rating would be based on the liquidity provider, the ability of the district to refinance or remarket the bonds under a new interest rate period is dependent on the district's ability to gain market access. If a new SIFMA-based interest rate period is established or the bonds are converted to another interest rate period, the district is required to notify the trustee, the tender agent and the remarketing agent of such establishment or conversion no later than 90 days preceding the last day of the initial SIFMA-based interest rate period. Fitch believes the notice period provides the district sufficient flexibility in gaining market access. A failure by the district to provide sufficient proceeds to pay the purchase price of the bonds on the mandatory tender date constitutes an event of default under the bond indenture.
For more information of the long-term rating, see Fitch's report, 'East Bay Municipal Utility District - Wastewater System', dated Sept. 30, 2010.
Additional information is available at 'www.fitchratings.com'
Applicable Criteria and Related Research:
'Revenue-Supported Rating Criteria', Oct. 8, 2010;
'Water and Sewer Revenue Bond Rating Guidelines', Aug. 6, 2008;
'Rating U.S. Municipal Short-Term Debt', Dec. 23, 2010;
'East Bay Municipal Utility District - Wastewater System', Sept. 30, 2010.
For information on Build America Bonds, visit www.fitchratings.com/BABs.
Applicable Criteria and Related Research:
Rating U.S. Municipal Short-Term Debt
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=592885
Water and Sewer Revenue Bond Rating Guidelines
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=395918
Revenue-Supported Rating Criteria
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=564565
East Bay Municipal Utility District, California (Wastewater System)
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=562065
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