Fitch Affirms Fresno, CA's Sewer Revs at 'AA-'; Outlook Stable

SAN FRANCISCO--(BUSINESS WIRE)-- Fitch Ratings has affirmed the following city of Fresno, CA ratings:

--$35.8 million subordinate lien sewer revenue bonds at 'AA-';

--$148.3 million senior lien sewer revenue bonds at 'AA'.

The Rating Outlook is Stable.

SECURITY

The bonds are secured by respective senior and subordinate liens on net revenues of the sewer system, including transfers from the rate stabilization fund and connection fees.

KEY RATING DRIVERS

STRONG FINANCIAL PERFORMANCE: Financial performance has been very strong with debt service coverage and liquidity levels at or above 'AAA' medians, but Fitch expects coverage and liquidity to decline to levels that are more typical for the rating level as the city issues additional debt to fund the expansion of its recycled water system.

AFFORDABLE RATES: The city council implemented the significant rate increases planned at the time of the 2008 bond issue but maintains some rate flexibility due to relatively low sewer rates that have not been raised since 2011.

MODERATE DEBT BURDEN: Debt levels are currently low and will remain below average with $69.1 million of additional borrowing planned over the next five years. This is a shift from the previous capital forecast that had anticipated greater debt funding of future capital needs.

MANAGEABLE CAPITAL NEEDS: The sewer system has significant long-term capital needs due to construction of a recycled water distribution system, but the city has considerable flexibility as to the timing of capital plans and has shown a willingness to delay projects as necessary to maintain financial performance.

REGIONAL SERVICE PROVIDER: The system provides essential retail sewer services to the city of Fresno and wholesale services to nearby communities. The city is the economic hub of the San Joaquin Valley, one of the nation's most productive agricultural regions. Its economy is growing at a healthy pace but suffers from chronically elevated unemployment and low incomes.

RATING SENSITIVITIES

PRESSURED BY ADDITIONAL LEVERAGE: The rating could come under downward pressure if debt service coverage falls below 1.5x for a sustained period due to additional leveraging.

CREDIT PROFILE

The utility provides retail sewer services to California's fifth most populous city with about 520,000 residents. It also provides wholesale treatment services to the more affluent neighboring community of Clovis with a population close to 100,000. Fresno is located about 250 miles north of Los Angeles in the heart of the agricultural San Joaquin Valley. The unemployment rate was 9.5% in August 2016. Median household income is low at 77% of the national level.

STRONG SEWER FINANCIAL PERFORMANCE

The sewer system's financial performance has been strong and is expected to remain very healthy. Senior lien debt service coverage averaged 4.4 times (x) over the three fiscal years ended June 30, 2015, while all-in coverage averaged a strong 2.5x. Unaudited results for 2016 show 4.3x senior coverage and 2.5x all-in coverage.

The enterprise's financial forecast shows all-in coverage decreasing to an average of about 2.0x over the next five years as debt service increases for new state revolving fund loans taken to fund expansion of the city's growing recycled water system. The forecast appears reasonably conservative with revenue gains driven by very gradual growth in the customer base and stable rates over the next four years. Management aims to keep coverage at or above 1.4x and tends to beat its conservative forecasts. While the utility's very stable revenues could support the current rating even with a decline in coverage, the rating could come under downward pressure if coverage approached management's 1.4x target on a sustained basis.

Liquidity grew rapidly in recent years, as the utility prepared for the upcoming major capital projects. Days cash was well above the 'AAA' median at 1,103 days at the end of fiscal 2015. Cash levels will decline as the city uses funds for capital improvements but are expected to remain adequate with at least six months of operating cash on hand across the forecast horizon.

Sewer rates are very low, but rate flexibility appears to be limited. Residential bills are quite affordable at $25.75, or 0.7% of median household income, and the Fresno City Council has raised rates as needed to support investments in the system's capital assets. However, the city is imposing very large water rate increases over the next few years that could make it difficult to raise sewer charges, which are on the same bill. The city does not currently plan to raise sewer rates until 2021 after absorbing large water rate increases.

DEBT TO REMAIN BELOW AVERAGE

The sewer utility's $207.3 million debt burden was low at $882 per customer at the end of fiscal 2015. The utility borrowed $24.7 million in state revolving fund loans in 2016 and plans to borrow another $61.9 million over the next five years. Even with the additional borrowing, debt will remain low at about half of the median projected debt for rated water and sewer enterprises at slightly less than $1,000 per customer in 2020. The utility's $315 million fiscal 2017 to 2021 CIP is driven by the city's need to expand its recycled water distribution system, which will help the city reduce over-reliance on ground water.

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 Lumesis.

Applicable Criteria

Revenue-Supported Rating Criteria (pub. 16 Jun 2014)https://www.fitchratings.com/site/re/750012

U.S. Water and Sewer Revenue Bond Rating Criteria (pub. 03 Sep 2015)https://www.fitchratings.com/site/re/869223

Additional Disclosures

Dodd-Frank Rating Information Disclosure Formhttps://www.fitchratings.com/creditdesk/press_releases/content/ridf_frame.cfm?pr_id=1013548

Solicitation Statushttps://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=1013548

Endorsement Policyhttps://www.fitchratings.com/regulatory

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Fitch Ratings
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Source: Fitch Ratings

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