In the course of routine surveillance, Fitch affirms the 'A' rating on Belmont, California's Joint Power Financing Authority's (the authority) sewer revenue bonds series 2001 and 2006. The Rating Outlook is revised to Stable from Positive.
The Outlook revision primarily reflects the system's sizeable capital needs and significant projected rate increases. The 'A' rating is based on the increased financial performance highlighted by its robust coverage levels and high liquidity levels. Other credit factors include the service area's continued strong economic indicators, the guaranteed revenue collections through the Teeter plan, and the below average legal structure.
The authority has historically issued bonds on behalf of the city's sewer system which are secured by installment payments made by the city to the trustee on behalf of the authority. Installment payments are in turn secured by a first lien pledge of the system's revenues, net of operation and maintenance costs.
The system provides sewer service to the all parcels in the city of Belmont, which is largely built out. City assets provide for sewer collection and the wastewater treatment plant is operated by a regional authority in which the city maintains 11% equity. The plant is expected to undergo a substantial renovation over the next decade which will markedly increase Belmont's debt, although the issuances are expected to be secured by a new user fee and will not be on par with current outstanding debt. Capital expenditures over the last seven years have focused on rehabilitation to reduce infiltration and intrusion (I+I) levels. Additional debt of $11 million is anticipated for fiscal 2009 to fund the third portion of the system rehabilitation. Debt to net assets for the system is currently high at 130% and leverage is expected to grow with debt per customer reaching a substantial $6,000 per customer over the next five years.
Financial operations are sound with debt service coverage increasing from 1.9x in fiscal 2004 to 3.5x in fiscal 2006. While the city issued additional debt in fiscal 2007, coverage remained constant at 3.5x due to the prudent implementation of rate increases. Future rate and fee increases are expected to be considerable over the next few years averaging 24% annually.
Fitch issued an exposure draft on July 31, 2008 proposing a recalibration of tax-supported and water/sewer revenue bond ratings which, if adopted, may result in an upward revision of this underlying rating (see Fitch research 'Exposure Draft: Reassessment of the Municipal Ratings Framework').
Fitch's rating definitions and the terms of use of such ratings are available on the agency's public site, www.fitchratings.com. Published ratings, criteria and methodologies are available from this site, at all times. Fitch's code of conduct, confidentiality, conflicts of interest, affiliate firewall, compliance and other relevant policies and procedures are also available from the 'Code of Conduct' section of this site.
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