Fitch Affirms Beverly Hills, CA's Sewer Revs at 'AAA'; Outlook Stable
OREANDA-NEWS. Fitch Ratings affirms its 'AAA' rating on the following Beverly Hills Public Financing Authority, CA bonds:
--$9.9 million wastewater revenue refunding bonds, series 2008A.
The Rating Outlook is Stable.
The 2008A bonds are secured by net revenues of the city of Beverly Hills, CA's (the city) wastewater utility.
KEY RATING DRIVERS
STRONG SERVICE AREA: The utility provides an essential service to a wealthy residential area that also includes significant commercial, retail and lodging customers. The city is centrally located in the massive and economically diverse Los Angeles metropolitan area.
LIMITED SEWER OPERATIONS: The utility is a collection-only system with a small staff and limited operational complexity. Treatment is provided through a long-term agreement with the City of Los Angeles.
EXCELLENT FINANCIAL PERFORMANCE: The utility benefits from very stable revenues with all-in debt service coverage (DSC) averaging 4.5x over the past three years. Liquidity was exceptionally strong with 1,817 days cash on hand at the end of fiscal year (FY) 2015.
GOOD RATE FLEXIBILITY: Rates remain low as a percentage of the city's elevated household incomes, and the city has experienced little resistance to price increases passed through from wholesale providers.
BELOW-AVERAGE DEBT BURDEN: The utility's debt burden is low at $983 per customer and $282 per capita. Debt is amortizing very rapidly with full repayment in less than a decade. The city has no plans to issue more sewer bonds.
FINANCIAL PERFORMANCE: The rating is sensitive to shifts in fundamental credit characteristics, but a downgrade would require a significant deterioration in financial performance that Fitch believes is very unlikely.
The enterprise provides wastewater services to about 10,000 customers and 35,000 residents in a wealthy and stable service area. Median household income is strong at 163% of the national level. The unemployment rate was in-line with the national average at 5.2% in February 2016. Commercial accounts provide about 40% of the wastewater system's revenues. The utility no longer reports the amount of revenues provided by top users, but historical data showed a degree of concentration with the top 10 customers (mostly large luxury hotels) providing more than 10% of revenues.
The city operates a collection-only sewer system, and wastewater flow is conveyed to the Hyperion Wastewater Treatment Plant, which is owned and operated by the City of Los Angeles. An agreement with the City of Los Angeles provides unlimited treatment capacity and expires in 2029. The agreement is expected to be renegotiated at that time. The Hyperion treatment plant has a 450 million gallon per day treatment capacity and treats a large portion of the Los Angeles Basin. The cost of capital improvements at the plant are passed through to users, including Beverly Hills.
EXTRAORDINARILY STRONG FINANCIAL PERFORMANCE
Financial performance is very strong, albeit with narrowing margins in recent years. All-in DSC was 5.0x in FY 2014 and 4.5x in FY 2015, well in excess of the 2.5x median for 'A' to 'AAA' rated systems. Free cash to depreciation was very strong at 361%, providing ample resources to invest in the system. Liquidity remains strong with $32.7 million in unrestricted cash and investments, or 1,817 days operating cash on hand at the end of fiscal 2015. Management policy is to retain reserves equal to at least 50% of expenditures, a target it has beaten for many years.
Debt is below average and declining rapidly with no future borrowing plans. The city had just $9.9 million of bonds outstanding at the end of FY 2015. Debt per customer is about half the median for 'A' to 'AAA' rated systems at $983 and projected to fall to $427 over the next five years. The city's $33.8 million sewer capital improvement program will be funded entirely from ongoing revenues with no new debt planned. Capital projects relate primarily to infrastructure replacement, and the system has a solid track record of investing in its aging pipe system with investments fully offsetting depreciation over the past five years. Debt amortization is rapid with 100% of bonds maturing in the next 10 years.