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.
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
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.
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
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
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
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