Fitch Rates Eugene, OR's Water Revs 'AA+'; Outlook Stable
OREANDA-NEWS. Fitch Ratings has assigned an 'AA+' rating to the following bonds issued by the City of Eugene, OR:
--Approximately $41.3 million water utility system revenue and refunding bonds, series 2016.
Bond proceeds will be used to fund approximately $16 million of the system's capital plan, refund outstanding debt for savings and pay costs of issuance. Bonds are expected to price on April 26, 2016.
In addition, Fitch affirms the following ratings:
--$45.6 million (pre-refunding amount) outstanding water utility system revenue bonds, series 2002, 2005, 2008 and 2011 at 'AA+'.
The Rating Outlook is Stable.
The bonds are payable from net revenues of the city's water system.
KEY RATING DRIVERS
STRONG FINANCIAL POSITION: Financial metrics have improved following a large rate increase and rate restructuring in fiscal 2013. Liquidity levels have improved and all-in debt service coverage (DSC) is high at over 3.0x, reflecting strong cash flow from operations to support debt service obligations and capital spending.
REVENUE STABILITY AND RATE FLEXIBILITY: Restructured rates provide around 60% of residential revenues from fixed charges, reducing the utility's financial exposure to cyclical usage and weather patterns. Rate flexibility remains with the utility's competitive regional water rates.
PRUDENT WATER SUPPLY INVESTMENT: Eugene Water and Electric Board (EWEB) has ample water rights on the McKenzie River and treatment capacity to meet long-term water demand. However, additional capital investment will develop a treatment and delivery system for a secondary water supply from the Willamette River to increase reliability and redundancy.
HEALTHY CAPITAL SPENDING: EWEB has made significant investments in its water supply reliability and delivery infrastructure. Future capital needs appear manageable and will be 41% funded from debt over the next five years, including from the series 2016 bonds. Debt levels are moderate and should remain so, even with planned additional debt.
EROSION OF STRONG FINANCIAL METRICS: A significant change in the expected scope or pace of Eugene Water and Electric Board's capital spending has the potential to erode financial margins for bondholders if rates are not adjusted accordingly. The Stable Outlook indicates that this scenario is not expected.
EWEB provides retail water service to 51,844 customers in and around the city of Eugene and also provides wholesale service to four providers that, in turn, serve another 8,600 retail customers. Eugene is located in western Oregon and is the second largest city in the state. The customer base is primarily residential with minimal customer concentration, following the plant closure of the system's largest customer (20% of sales) in 2011.
Water sales declined between 2007-2011 (averaging 4% decline annually) due to economic conditions, customer loss, wet weather conditions, and price signals. Water sales have since stabilized at around 24 million gallons per day (mgd). Management conservatively budgeted for 20.8 mgd in water sales in fiscal 2016 and only 1% growth is assumed in management's 10-year financial and rate model.
AMPLE WATER RIGHTS
EWEB has sufficient water supply through its rights on the McKenzie River to meet current and projected demand. EWEB's water treatment plant also has sufficient capacity of 88 mgd to meet EWEB's current and projected demand of around 24 mgd. Drought conditions in the region have not threatened adequacy of supply given EWEB's water rights in relation to its demand. There are not any material environmental concerns regarding the water supply or its delivery. However, since the McKenzie River is a sole-source supply, EWEB has been prudently working to develop a secondary source of supply to provide reliability and redundancy.
In 2014, EWEB obtained rights to divert 19 mgd of water from the Willamette River. EWEB is now working on the design of an intake and treatment plant to develop and access the water rights. The capital improvement plan (CIP) includes assumed spending in fiscals 2019-2021 towards the alternative water supply (AWS) project. While not needed to serve demand, the AWS project will mitigate against potential risks related to emergency disruption or contamination of the primary water supply.
RATE STRUCTURE PROVIDES REVENUE STABILITY
In order to rebuild reserves and to continue funding ongoing infrastructure investment, EWEB implemented a 20% water rate increase in February 2013. The increase followed a formal rate study, evaluation of capital needs, and discussion with the Board of Directors regarding financial policies, including reserve levels. The rate increase followed extensive cost savings efforts.
Rate restructuring was also done in 2013, which is viewed as a positive credit development. The new rate structure increased the fixed-charge component of rates and reduces EWEB's revenue reliance on volumetric charges or consumption. EWEB estimates that under the new rate structure 60% of its water residential revenues are provided by fixed charges in comparison to approximately 80% of its expenditures that are fixed.
Rates were increased by more modest amounts (between 3.6% and 5.7% annually each year since 2013 and future increases are expected by management to trend more in this range. The 5.7% increase in 2014 included a designated 3% retail rate increase that is generating revenues to fund the AWS project. The monthly water bill of around $32 for Fitch's baseline average of 7,500 gallons is still competitive with other regional water suppliers and moderate at 0.8% of median household income.
STRONG FINANCIAL METRICS
Revenue bond DSC is strong at over 4.5x in the last three years, excluding connection fee revenues. All-in DSC, including a subordinate lien note and lease payable to the electric system, is also strong at over 3.0x in the past three years. Management projections and policies indicate that all-in DSC should remain above 2.0x even with additional debt plans. The strong cash flows are reflected in the free cash flow to depreciation that has exceeded 200% over the past three years in comparison to the sector median of 91%.
Cash reserve levels, historically low for the rating level, were restored by the 2013 rate increase. EWEB had available cash reserves of $24.8 million at the end of fiscal 2015, or 581 days cash on hand. This is an improvement from just $4.4 million or 103 days cash at the end of fiscal 2012. These balances include $6.4 million in the capital improvement reserve at the end of fiscal 2014 that is board designated for capital but available for any purpose and $2.9 million in the designated AWS reserve.
EWEB's five-year CIP totals $118 million. Around $48 million will be funded from debt, including the series 2016 new money component. EWEB's leverage position is relatively low with Debt to FADS (funds available for debt service) of 2.3 (Fitch sector median is 6.2) and debt to net plant of 41% (sector median is 47%). Even with EWEB's planned debt issuance, debt levels should remain moderate.