TEXT-Fitch rates East Bay Municipal Utility District revs 'AA+'
Dec 19 - Fitch Ratings assigns a 'AA+' rating to the following wastewater system revenue refunding bonds issued by the East Bay Municipal Utility District, CA (EBMUD or the district): --Approximately $20 million, series 2012A. Proceeds of the Series 2012A bonds refunded certain outstanding series 2007A bonds for purposes of extending the call date, as agreed upon with the holders of the bonds. The maturity dates did not change. In addition, Fitch assigns the following new rating: --$62.5 million wastewater system SIFMA bonds, series 2011A rated 'AA+/F1+'. The bonds previously only carried a short-term 'F1+' rating, which is affirmed. Fitch also affirms the following outstanding EBMUD ratings: --$303.4 million wastewater system revenue bonds, series 2007A, 2007B, 2010A, and 2010B at 'AA+'; --$15.0 million outstanding wastewater system subordinate lien extendible commercial paper (CP) notes. The Rating Outlook is Stable. SECURITY Bonds are payable from net revenues of the wastewater system. Tax receipts are not pledged to bondholders but must be used to pay operation expenditures. The commercial paper notes have a subordinate lien on net wastewater revenues. KEY RATING DRIVERS LARGE SERVICE AREA: EBMUD provides wholesale wastewater treatment services to seven wholesale customers with a combined population of approximately 650,000 in Alameda and Contra Costa counties. Growth pressure is modest although discharge requirements have increased. FINANCIAL PRESSURE: Debt service coverage has declined while liquidity levels have remained healthy. The rating reflects management's expectation that anticipated rate increases will enable debt service coverage levels to return to the district's 1.6x target threshold by fiscal 2015. ANNUAL RATE INCREASES NEEDED: Revenue increases are needed to maintain financial margins at the district's minimum targets. Fitch expects rate flexibility to continue to support needed rate increases over the five year forecast. TREATMENT CAPACITY EXCESS: Excess treatment capacity is managed through sales to regional waste suppliers through the resource recovery program. Additional revenue provided by this program provides some rate relief to customers to manage the uneven flows of EBMUD's seven wholesale customers. REGULATORY COMPLIANCE REQUIRED: Treatment facilities are undersized to treat wet weather flows. Wet weather discharges are required to stop, as outlined in a Cease and Desist Order issued in 2009. Negotiations on a Consent Decree are expected to begin in 2013 but EBMUD anticipates that much of the direct capital spending will be done by EBMUD's customers. SIFMA NOTE RATING: The 'AA+/F1+' rating on the Series 2011A index bonds reflects the market access implied by the system's long-term credit quality. EXTENDABLE CP RATING: The rating reflects the long-term rating and the terms of the program that allow repayment of outstanding CP notes to be delayed by up to 150 days from the maturity in the event of a failed remarketing, providing time for a fixed-rate debt refinancing in the event of a short-term market disruption. WHAT COULD TRIGGER A RATING ACTION LACK OF RATE ACTION: Revenue increases are needed to offset increasing fixed costs and maintain financial ratios consistent with the rating. Given EBMUD's competitive rates and history of rate flexibility, Fitch believes that management's assumptions regarding assumed rate increases appear reasonable. The lack of meaningful rate action could result in a rating action. CREDIT PROFILE The district provides wholesale wastewater treatment service to approximately 650,000 people within an area of the district designated as Special District No. 1. Special District No. 1 is a separate district within EBMUD but is governed by the same Board of Directors and management team. Seven wholesale customers provide collected wastewater to the district for treatment and disposal. Customers include Alameda, Albany, Berkeley, Emeryville, Oakland and Piedmont, and for the Stege Sanitary District, which includes El Cerrito, Kensington, and part of Richmond. EXCESS TREATMENT CAPACITY DURING DRY WEATHER 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 62 and 82 MGD in the last ten years. The plant provides secondary treatment and discharges through a mile-long, deepwater outfall into the San Francisco Bay. The system maintains excess capacity due to a departure of food processing industry in the 1980's from the service area following the construction of the plant. In order to maximize the value of the plant's excess capacity, the district operates its Resource Recovery program. The program accepts liquid and solid waste streams delivered by truck from both inside and outside the service area for treatment. The program, which began in 2001, provides substantial additional revenues to the district of around $9.1 million, or around 11% of operating revenues. REGULATORY REQUIREMENTS RELATED TO WET WEATHER Despite the excess capacity during dry weather, treatment capacity is not sufficient to meet flow during peak storm events because of the inflow and infiltration (I&I) of rainwater and storm run-off into collection pipes. The district spent over $300 million to build additional wet weather treatment and discharge facilities in the 1980's to provide primary treatment of wet weather overflows for discharge into the San Francisco Bay. However, momentum in the regulatory oversight bodies moved towards zero tolerance for overflows into the San Francisco Bay. To this end, the district and the regulatory agencies worked to establish an interim regulatory framework in 2009. The requirements of this program were outlined in the new discharge permit that was issued to the wet weather facilities in 2009. A Cease and Desist Order issued at the same time requires the district to develop a plan to eliminate these wet weather 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 wet weather flows to the district's facilities. The district's direct spending responsibilities are expected to be fairly limited - around $5 million per year. Although significant spending is expected to occur at the member communities to re-invest in their aging collection system in order to reduce wet weather inflows to the sanitary sewer system. FINANCIAL PERFORMANCE TO IMPROVE WITH RATE INCREASES; NO DEBT The district has a degree of revenue diversity that is unique for a wholesale wastewater utility. The district receives tax revenues, which are provided by the district's share of the county's 1% sales tax and tax revenues levied to support the district's outstanding general obligation bonds. The resource recovery program, as discussed, provides some additional diversity. Furthermore, the district bills for its wet weather program through a fee collected on the property tax bill. The revenue diversity and stability partially mitigates concern over the slimmer financial margins of the utility compared with other entities in the rating category. Debt service coverage declined in fiscal 2012 due to an anticipated increase in debt service related to the 2010 refunding of subordinate lien state loans onto the same lien with revenue bonds. Fitch calculated debt service coverage declined to 1.66x in fiscal 2012 on revenue bonds, including tax receipts and connection fees. Debt service coverage on an all-in basis, which includes G.O. debt service, was 1.42x. Debt service coverage levels should improve with anticipated annual rate increases. Debt service payments are flat over the next five years and no additional debt is anticipated. The district's five-year capital improvement plan is moderate at $159.1 million. Major projects are related to replacement and rehabilitation of older facilities, such as the digester upgrade project, the concrete rehabilitation project, treatment plan projects, and the interceptor rehabilitation project. The district's debt burden is above average for the rating category but will lesson with the lack of debt issuance over the next five years. Debt per capita is $743 as compared to the rating category median of $433. Debt amortization is slow with only 28% and 61% maturing in the next 10 and 20 years, respectively. The $476.7 million in total system debt is almost entirely fixed-rate debt, at 72% of the portfolio. Additional information is available at 'www.fitchratings.com'. The ratings above were solicited by, or on behalf of, the issuer, and therefore, Fitch has been compensated for the provision of the ratings. Additional information is available at 'www.fitchratings.com'. In addition to the sources of information identified in Fitch's Revenue-Supported Rating Criteria, this action was additionally informed by information from Creditscope. Applicable Criteria and Related Research: --'Revenue Supported Rating Criteria' (June 12, 2012); --'U.S. Water and Sewer Revenue Bond Rating Criteria' (Aug. 3, 2012); --'Rating U.S. Municipal Short-Term Debt' (Dec. 8, 2011). Applicable Criteria and Related Research: Revenue-Supported Rating Criteria U.S. Water and Sewer Revenue Bond Rating Criteria Rating U.S. Municipal Short-Term Debt