Fitch Rts City of Napa, California $49MM Wtr Rev Bnds, Ser 2007 ‘AA’
Fitch Ratings assigns an ‘AA’ rating to $49 million City of Napa, California, water revenue bonds, series 2007 (water system improvement projects). Fitch also assigns an initial ‘AA’ rating to $5.2 million in outstanding parity water revenue bonds. The bonds are scheduled sell via negotiation let by Henderson Capital Partners on April 3, 2007. The Rating Outlook is Stable.
The ‘AA’ rating on the city of Napa’s (the city) water system’s (the system) water revenue bonds is based on the essentiality of the water delivery service provided to a moderately growing customer base in a healthy economic region. Additional strengths include adequate supply and treatment capacity through build-out and a healthy financial position with good liquidity and debt service coverage. Credit concerns are centered in the need for regular rate increases to maintain adequate debt service coverage as well as a history of flooding which is being addressed. Water rates and debt levels are affordable under the current plan, and after completion of this project the water system will be well positioned to maintain its strong financial condition.
The system is the major water utility serving the Napa Valley in one of northern California’s wine regions. In addition to retail service to the city and some unincorporated county residents, the system serves as a wholesale or supplemental provider of treated water to the communities of St. Helena, Calistoga, Yountville and American Canyon. Water supply, which is more than adequate to meet the estimated 82,000 people served by the system, is derived from two components: local sources impounded by two dams and a 75-year water purchase contract through 2035 with the state water project from its North Bay Aqueduct.
The bonds are secured by a pledge of net revenues from the water system and include a covenant to set water rates sufficient to generate coverage at 1.20 times (x) annual debt service (ADS). System revenues are generated primarily through water sales with a small portion of revenues coming from connection charges (about 3% of gross revenues). After performing a rate analysis, the city adopted three annual rate increases through October 2006 to be followed by annual rate increases at the regional consumer price index. Water charges are billed and collected bimonthly.
Water system financial operations in fiscal 2006 show strong debt service coverage of ADS of 4.7x, above historical norms of around 3.0x. Because of the size of the current offering, financial projections indicate a weakening of coverage to 1.7x in fiscal 2010 (the year of maximum ADS). However, because no future borrowing is planned, ADS coverage is anticipated to rise annually thereafter through at least fiscal 2013. Liquidity is sound and financial projections indicate good cash levels for the near term, including about $5.5 million in designated reserves as well as about $5 million in additional working capital.
The bonds will finance the expansion and improvement of the Jamieson Canyon Water Treatment Plant, one of the system’s three water treatment plants, which treats water from the state water project. Consistent with the system’s 1997 Master Plan, the city plans to increase capacity at Jamieson which will reduce operation and related costs at the other treatment plants and preserve the local water sources for high demand periods and emergency and drought situations. An additional benefit of the plan is the enhanced diversity in treatment and supply. Once complete, the system will include two water treatment plants with unrelated sources, each with 20 MGD (million gallons per day) capacity located over 20 miles apart. This is the final large project in the system master plan and ongoing capital needs total about $2.1 million annually for repair and replacement projects.
The city encompasses about 18 square miles about 50 miles northeast of San Francisco at the southern end of the Napa Valley. In addition to its important grape growing industry, the city also serves as the industrial, commercial and government center for the region. Concern about the concentrated nature of the regional economy is largely offset by its strong history as well as its international reputation. Furthermore, the city itself has been transforming from a largely agricultural- and industrial-based economy to a tourism and commercial center for the Napa Valley and northern San Francisco Bay Area. Reflecting this history, city wealth levels are below county but above state and national averages, and per capita retail sales are above county and state levels. Unemployment rates are low (4.4% for 2005) and consistently below state unemployment rates. Given the more average wealth levels within the city compared to the region, maintaining moderate rates will be important.
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