Fitch Rates Lodi, CA's Wastewater Rev Rfdg Revs 'AA-'; Outlook Stable
OREANDA-NEWS. Fitch Ratings has assigned an 'AA-' to the following obligations issued by the Lodi Public Financing Authority, CA (the authority) on behalf of Lodi, California (the city):
--$18.7 million 2016 refunding wastewater revenue bonds, series A.
The bonds are expected to sell via negotiation the week of February 22. Proceeds will be used to partially refund wastewater system certificates of participation (COPs), series 2007A for level savings.
In addition, Fitch affirms the 'AA-' ratings on the following outstanding obligations:
--$29.5 million (1991 Wastewater Treatment Plant Expansion Refunding Project) wastewater system revenue COPs, series 2007A issued by the city;
--$2.1 million wastewater system revenue COPs series 2004A issued by the city;
--$14.5 million refunding wastewater revenue bonds series 2012A issued by the authority.
The Rating Outlook is Stable.
The revenue bonds are payable from sewer installment payments made by the city to the authority, which assigns the right to receive payment to the trustee. The COPs are payable from sewer installment payments made by the city to the Lodi Public Improvement Corporation, which assigns the right to receive payment to the trustee. The city's obligation to pay installment payments is unconditional and is payable from a first lien on wastewater enterprise net revenues. It is not subject to appropriation. The series 2004A and series 2007A COPs are required to maintain debt service reserve funds (DSRFs) sized to the IRS maximum, while the series 2012A and series 2016 bonds have no such requirement.
KEY RATING DRIVERS
SOUND FINANCIAL OPERATIONS: The system continues to demonstrate sound debt service coverage (DSC), strong liquidity, and reasonable multi-year projections.
MANAGEABLE DEBT PROFILE: Debt levels are slightly above average but expected to decline over the next several years given moderate debt amortization and plans to fully fund the system's five-year capital improvement plan (CIP) with pay-as-you-go financing.
RATE INCREASES MODERATING: The system's recent and planned rate increases are moderate following substantial hikes in fiscals 2010 and 2011 to support capital spending for regulatory compliance and to stabilize the system's financial position. Rates are currently above average regionally but about even with Fitch's affordability threshold.
STABLE POPULATION; BELOW-AVERAGE ECONOMY: The city's customer base is stable with population growth of less than 1% annually. Its economic indicators including income levels are below average and unemployment levels are higher than state and national averages as is typical of agricultural communities.
FINANCIAL MARGINS; REDUCED DEBT: Continued strong financial performance, including above-average debt service coverage and liquidity metrics compared to Fitch medians, coupled with a decline in the system's debt burden over time could lead to positive rating action.
The city has a population of 63,700 in the San Joaquin Valley, about 34 miles south of Sacramento and 14 miles north of Stockton. The city's wastewater system serves nearly 24,000 customer accounts in the city of Lodi and Flag City, around 92% of which are residential. Customer growth is limited and concentration is moderate with the top 10 customers accounting for 7.6% of revenues. The wastewater system is operated as an enterprise fund of the city, with much of the management of the system linked to the city's overall financial operations (Implied ULTGO rating of 'AA').
STRONG FINANCIAL PERFORMANCE AND PROJECTIONS
The system continues to experience good financial performance. Fiscal 2015 DSC was 2.1x after a cost of service transfer out to the general fund. Fiscal 2014 DSC equaled 2.0x after the transfer and excluding the optional prepayment of 2003 revenue bonds. Liquidity remained strong at $13.9 million of unrestricted cash, or nearly 800 days cash. While management intends to spend down a portion of its cash cushion on capital, Fitch expects cash levels to remain at levels appropriate for the 'AA-' rating level.
DSC has been consistently good over the last five years after dipping in fiscals 2009 and 2010 to just 0.8x and 1.1x, respectively, net of transfers. The low financial margins were the result of declines in connections fees and increased costs related to capital requirements. In response, the city implemented a series of large rate increases, refunded a portion of its debt for interest rate savings, and lowered certain expenditures. Recent and planned rates increases have been more modest.
Forecasted DSC levels, net of transfers out, do not fall below 2.2x through fiscal 2020. Financial projections include reasonable revenue and expenditure assumptions.
RATE FLEXIBILITY LIMITED
The system's flat wastewater monthly rate for fiscal 2016 is $45.44, or 1.1% of median household income, and is expected to rise to 1.3% by fiscal 2020. Although Fitch regards this rate as high, and as somewhat higher than other regional systems, the city expects rates to be more comparable to other systems over time as the surrounding systems raise rates to upgrade treatment standards given San Joaquin Delta-related environmental pressures. The city is in the process of transitioning to installing water meters for each residential customer, which will impact wastewater billings as well. Once metered, customers will move to a flow-based rate structure instead of a flat fee per household. This may introduce some revenue variability in the future, depending on water consumption.
The city's five-year discharge permit through 2018 contains no significant capital requirements. The system's former permit had been remanded back to the Regional Water Quality Control Board over nitrogen level concerns, an issue that affected the broader region. The city invested to reduce its nitrogen output, and the permit renewal did not include any increased regulatory restrictions beyond the city's current treatment process.
Subject to certain customer expansion opportunities, management may also have the opportunity to sell more of its treated effluent, which could reduce discharges from the environmentally sensitive San Joaquin Delta (the delta) to various above-ground usages. If enacted, this change may significantly mitigate environmental and related capital concerns stemming from the system's historical dependence on delta discharges.
ADEQUATE DEBT PROFILE
The system's debt levels are higher than average at $2,007 per customer ($748 per capita) and debt-to-net plant of 53%, but are expected to decline as debt amortizes and further capital improvements are financed on a pay-as-you-go basis. Principal amortizes moderately, and the system's five-year CIP (fiscal 2016-2020) is manageable at $27 million. It consists of various maintenance projects, recycled water storage, and electrical upgrades.
STABLE, BELOW-AVERAGE SERVICE AREA ECONOMY
The local economy is moderately concentrated in agriculture and food processing, although it also has large employers in the packaging, plastics manufacturing, and service industries. Key economic data is below average. Unemployment registered a high 8.8% in April 2014, which compares poorly to the state and national averages of 7.4% and 5.9%, respectively. Income levels also lag the state and nation.