SAN FRANCISCO - (Business Wire) Fitch Ratings assigns a 'BBB' rating to $20,875,000 Atwater Public Financing Authority, California wastewater revenue bonds, series 2008. In addition, Fitch affirms the rating on $8.8 million in outstanding parity bonds, which are expected to be refunded by the current offering, at 'BBB'. The bonds are scheduled to sell competitively on or about April 1. The Rating Outlook is Stable.
Bond proceeds will be used to refinance the sewer portion of the outstanding revenue refunding bonds, 2003 series A (sewer and water projects) under a new indenture. The remaining water portion of approximately $290,000 will remain outstanding. In addition, proceeds will be used to provide about $10 million for planning and design for a new wastewater treatment plant (WWTP). Security for the bonds is a gross pledge of system revenue as well as a debt service reserve fund. The legal structure includes a covenant to set rates and charges to result in net revenues equal to at least 1.20 times (x) debt service. The issuance of additional bonds requires historical revenues are at least equal to 1.20x maximum annual debt service on all parity bonds.
The 'BBB' rating reflects Atwater's (the city) sewer system's very high debt levels, below average debt service coverage levels and small customer base. These risks are balanced by the system's good financial operations and strong liquidity bolstered by significant rate increases, as well as the essential nature of the service. Additional credit risks are the system's already above average customer rates which are projected to increase substantially, and the somewhat limited underlying economy. While Fitch acknowledges that management has demonstrated good planning and a willingness and ability to increase rates to finance the project, a major credit driver will be maintenance of public support as the sewer rate increases outstrip income growth.
Located in northeast Merced County, which lies within the central portion of California's San Joaquin Valley, Atwater is a small community characterized by its roots in agriculture and the former presence of the Castle Air Force Base. Typical of central valley agriculture communities, unemployment levels are well above state and national averages while income levels are below average. The base was closed in 1995 and since that time, a federal prison opened on the former site and other base reuse projects are in the works. The city's proximity to the new University of California, Merced campus, may support the city's long term economic diversity and growth opportunities.
The city provides retail sewer services to its 27,618 residents through 6,821 connections, wholesale service to about 11,000 residents in the Winton Sanitation District and 1,200 inmates at the Atwater federal prison. The existing WWTP meets the current discharge permit requirement of secondary treatment and has about 2.5 million gallons per day (mgd) (41%) remaining capacity. However, current waste discharge standards will require the city to provide tertiary treatment by June 2012. In order to meet these standards and allow redevelopment of the current five-acre WWTP site near Highway 99 for commercial uses, the new WWTP to this standard will be built on a city-owned site about five miles south of the current site. The new plant will be constructed modularly to permit expansion of up to 8 mgd at a future date, if necessary. Planning and design will be financed with this issuance and the city plans to sell approximately $56 million in additional parity bonds in fiscal 2010 for construction. Construction is scheduled to be completed in fiscal 2012.
Sewer charges are billed and collected by the city monthly along with water and garbage fees; nonpayment of any one fee results in the shutoff of all three services. Delinquency rates are low, but appear to have increased modestly in fiscal 2007. Sewer rates are now above the regional average, the result of a 49% rate increase effective January 2008. An additional 49% rate increase will go into effect on July 1, 2008 and increases of 12% on July 1, 2009, 9% on July 1, 2010 and 10% on July 1, 2011 will be followed by annual increases according to cost of living adjustments. This is in contrast to several years ago when the city had demonstrated an unwillingness to raise rates, resulting in a rate covenant violation in fiscal years 2000 and 2001. Fitch notes that the city has a new city manager and finance director and following a 30% rate increase in fiscal 2002, has maintained debt service coverage over 1.7x. Furthermore, the city includes a debt service coverage analysis in its annual audit, enhancing its ability to comply with its rate covenant. The system's financial position for the fiscal year ended June 30, 2007 was very strong, with about $3.3 million in cash, equal to about 521 days of operating expenditures. Net revenues covered debt service of $790,000 by 2.7x. Projected parity debt service is substantially level.
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Fitch Ratings
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