Fitch Affirms Manteca Finance Authority, CA Sewer Revs at 'AA-'; Outlook Stable

Fri Jun 7, 2013 10:36am EDT

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Fitch Affirms Manteca Finance Authority, CA Sewer Revs at 'AA-'; Outlook Stable

Fitch Ratings affirms the following Manteca Finance Authority, CA (the authority) outstanding sewer revenue bonds at 'AA-':

--$19 million sewer revenue bonds, series 2009.

The Rating Outlook is Stable.

SECURITY:

The bonds are special, limited revenue obligations of the corporation, payable solely from installment payments made by the City of Manteca (the city), California to the authority. The installment payments made by the city are payable solely from and secured by a senior lien pledge of the net revenues of the city's sewer system (the system) and are not subject to annual appropriation. Pledged revenues include connection fees.

KEY RATING DRIVERS

STRONG FINANCIAL PROFILE: The system's financial metrics are strong with robust liquidity and good coverage.

DECLINING DEBT BURDEN: System debt levels are slightly elevated for the rating category; however, a refunding in 2012 restructured the system's debt, improving a previously slow amortization.

AMPLE SYSTEM CAPACITY: The system has undergone an extensive upgrade and expansion in the last 10 years, providing advanced treatment and adequate capacity for at least the next 15 years.

AFFORDABLE RATES: System rates are considered affordable compared to Fitch's threshold, and the fixed residential rate structure provides stability to the revenue stream.

ECONOMIC CONDITIONS IMPROVING: The city continues to face challenges as a result of the housing crisis, but certain economic components are showing positive signs, with a notable increase in area housing prices. The service area remains limited, with unemployment significantly higher than the state and national averages.

RATING SENSITIVITY

MAINTENANCE OF SOUND FINANCIAL METRICS: Maintenance of sound financial metrics will be critical to maintaining the rating given the area's weak economic profile.

CREDIT PROFILE

The city of Manteca is located 76 miles east of San Francisco in the northern San Joaquin Valley. The system provides wastewater treatment service to around 68,000 city residents and also serves approximately 18,600 people in the City of Lathrop through a wholesale contract.

AMPLE SYSTEM CAPACITY

Wastewater is treated at the city-owned and operated Wastewater Quality Control Facility (WCQF). Since 2003 the WCQF has been expanded and upgraded to treat effluent to tertiary standards with capacity of 10 million gallons a day (mgd). Current average demand (6 mgd) represents 60% of capacity. The expanded capacity is expected to be sufficient for at least the next 10-15 years, or potentially longer due to slowed growth. Treated wastewater is either applied to city-owned or leased agricultural land or discharged to the San Joaquin River.

STRONG FINANICAL METRICS

System financial performance has been very good over the last five fiscal years. Annual debt service (ADS) coverage saw some decline in 2012 but still remains a strong 3.4x including connection fees and 2.7x excluding connection fees. System liquidity remains robust for the rating category, registering at over 1,000 days cash on hand. The sewer fund as reported in the annual financial report includes three separate funds, one fund, which accounts for growth related impact fees, has a negative position due to an inter-fund loan. This position contributes to an overall negative sewer fund balance, and management anticipates the inter-fund loan will be repaid with impact fees over a 15-year period.

Management forecasts, which appear reasonable, indicate a decline in coverage levels to a still strong 2.0x to 2.1x through the 2017 forecast period. This projection is a change from prior forecasts, which indicated higher coverage levels of 3.8x to 2.6x. The decline can be partly attributed to council's decision in 2011 to freeze rates as a result of strong financial performance and budgetary tightening.

Since 2003 the city has adopted a series of five-year rate packages, the most recent adopted for the calendar years 2009-2013. Those rate increases helped generate the system's strong financial performance. System charges register at 0.8% of median household income (MHI), comfortably under Fitch's affordability threshold of 1% of MHI.

DEBT BURDEN ON THE DECLINE

In 2012 the system refunded the remaining series 2003 A and B bonds and restructured the debt to provide for more level debt service repayment. Amortization, which had previously been noted as slow, improved somewhat following the refunding. Debt per customer and debt per capita levels are slightly elevated for the rating category at $2,203 and $604 respectively, compared to 'AA' median levels of $1,828 and $492, respectively. The system CIP for fiscals 2013-2017 appears manageable at roughly $27 million or $1,145 per customer. The focus of the capital plan is on system maintenance and is anticipated to be entirely cash funded. Given the lack of planned borrowings, Fitch expects debt levels to continue to decline.

SERVICE AREA SEEING GRADUAL RECOVERY

Manteca has experienced rapid urbanization in recent years, although the service area was hit particularly hard by the housing collapse. Per Zillow, median home prices reached a peak in November of 2005 at more than $400,000 and then bottomed out at $161,000 in May 2011. While the area has seen some improvement with median home prices increasing by nearly 25% over the previous year, they remain 50% below their peak.

While income levels in the city have increased to over 116% of the U.S. as a result of this growth, the area continues to have a large agricultural presence and attendant high unemployment. For the most recently available month (April 2013), the unemployment rate in the city was a high 11.2%, above the 8.5% and 7.1% for the state and nation, respectively.

Additional information is available at 'www.fitchratings.com'

In addition to the sources of information identified in Fitch's U.S. Municipal 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);

--'2013 Water and Sewer Medians' (Dec. 5, 2012);

--'2013 Sector Outlook: Water and Sewer' (Dec. 5, 2012).

Applicable Criteria and Related Research:

Revenue-Supported Rating Criteria

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=709499

U.S. Water and Sewer Revenue Bond Rating Criteria

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=684901

2013 Water and Sewer Medians

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=695756

2013 Outlook: Water and Sewer Sector

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=695755

Additional Disclosure

Solicitation Status

http://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=793138

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Fitch Ratings
Primary Analyst
Teri Wenck, CPA
Associate Director
+1-512-215-3742
Fitch Ratings, Inc.
111 Congress Avenue,
Austin, TX 78701
or
Secondary Analyst
Shannon Groff
Director
+1-415-732-5628
or
Committee Chairperson
Steve Murray
Senior Director
+1-512-215-3729
or
Media Relations:
Elizabeth Fogerty, +1-212-908-0526 (New York)
elizabeth.fogerty@fitchratings.com

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