Nov 9 - Fitch Ratings has affirmed the following city of Fresno, California,
sewer revenue bond ratings:
--$67.5 million senior lien bonds at 'AA';
--$159.8 million subordinate lien bonds at 'AA-'.
The Rating Outlook revised to Negative.
The bonds are secured by net revenues of the sewer system, including transfers
from the rate stabilization fund and connection fees.
KEY RATING DRIVERS
GENERAL GOVERNMENT PRESSURES: The Negative Outlook reflects potential for
liquidity pressures associated with supporting the city's struggling general
fund (Fresno implied general obligation bond rating 'BBB+', Outlook Negative)
should borrowing needs increase. Economic pressures on the service area are also
a factor in the change in Outlook.
SIGNIFICANT, STRESSED SERVICE AREA: The system provides an essential service to
an area with over 500,000 residents. The city is the economic hub of the San
Joaquin Valley, one of the nation's most productive agricultural regions, but
the city's economy remains quite stressed following a very deep economic
STRONG FINANCIAL PERFORMANCE: Financial performance has been very strong with
debt service coverage and liquidity levels above 'AAA' medians despite a sharp
downturn in the local economy and drop in development-related revenues. The
utility appears fundamentally sound, absent pressures from the weak general
AFFORDABLE RATES: The City Council implemented the significant rate increases
planned at the time of the last bond issue and maintains some rate flexibility
due to relatively low sewer rates.
MODERATE DEBT BURDEN: Debt levels are currently moderate, and the utility has no
further borrowing plans over the next five years.
MANAGEABLE CAPITAL NEEDS: The sewer system has significant long-term capital
needs, including construction of a recycled water distribution system and
expansion of treatment plants. There is considerable flexibility as to the
timing of capital plans and has shown a willingness to delay projects as
necessary to maintain financial performance.
WHAT COULD TRIGGER A RATING ACTION
INCREASED GENERAL FUND STRESS: While the current rating assumes a modest amount
of interfund borrowing from the sewer fund, the rating could come under pressure
if the general fund borrows from the fund repeatedly or more than expected.
OUTLOOK NEGATIVE ON GENERAL GOVERNMENT EXPOSURE
The outlook reflects pressures on both the service area economy and concerns
that the city's weak general government finances could pressure the sewer
utility. Fresno has depleted general fund reserves since the recession due to a
sharp decline in revenues that could not be fully offset by expenditure
reductions given long-term labor contracts and a rising debt service burden.
The general fund is likely to have a slight deficit in the current budget year,
which will be financed by a five-year loan from the city's sewer utility. The
general fund also requires significant intra-year liquidity support from its
utility funds. These liquidity pressures are currently quite manageable for the
utility funds. Fitch is concerned that the general fund liquidity need could
pose a more significant burden on the utility funds if the city experiences
another tax revenue shock or spending reduction plans in the medium term are not
implemented as planned.
STRONG FINANCIAL PERFORMANCE
The sewer system's financial performance is expected to remain very healthy.
Senior lien debt service coverage averaged 4.3 times (x) over the three fiscal
years ended June 30, 2012, while all-in coverage averaged a strong 2.4x.
Unaudited results for 2012 show 4.4x senior coverage and 2.5x all-in coverage.
Liquidity has risen rapidly in recent years, as the utility prepared for the
upcoming major capital projects. Days cash was more than twice the 'AAA' median
at 1,116 days at the end of fiscal 2011 and is projected to rise significantly
when the 2012 audit is finalized.
The City Council has raised rates as needed to support the utility's large
capital improvement program. Rates rose an average of 12% a year over the past
five years and are expected to hold at the current level for the next five
years. Current rates are affordable at $25.75, or 0.7% of median household
income. Rates are also sufficient to provide solid coverage of existing debt and
significant excess cash flow to support the utility's capital improvement
MANAGEABLE DEBT BURDEN, CAPITAL PLAN
The sewer utility's $205.1 million 2013 - 2017 capital improvement plan is
driven by ongoing repair and renewal of the system and the need to expand its
recycled water distribution system, which will help the city reduce
over-reliance on ground water. The city has delayed issuing significant
additional debt to expand the recycled water system and wastewater treatment
capacity due to a slowdown in the economy and development. Instead the city
plans to phase its expansion of the recycled water program in steps that can be
funded on a pay-as-you-go basis.
Expansion of treatment capacity is likely to be delayed until a later capital
plan but likely to be a considerable expense in the longer term. Debt is
currently moderate at $447 per capita and likely to decline to a low $361 per
capita over the next five years.
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.
In addition to the sources of information identified in the Revenue-Supported
Rating Criteria, this action was informed by information from CreditScope and
IHS Global Insights.
Applicable Criteria and Related Research:
--'Revenue-Supported Rating Criteria' (June 12, 2012);
--'U.S. Water and Sewer Revenue Bond Rating Criteria' (Aug. 3, 2012);
--'2012 Water and Sewer Medians' (Dec. 8, 2011);
--'2012 Outlook: Water and Sewer Sector'(Dec. 8, 2011).
Applicable Criteria and Related Research:
Revenue-Supported Rating Criteria
U.S. Water and Sewer Revenue Bond Rating Criteria
2012 Water and Sewer Medians
2012 Outlook: Water and Sewer Sector