HEADLINE: Fitch Rts City of McFarland, California's Swr Sys Revs 'BBB-'
DATELINE: NEW YORK, Aug. 7, 2001
BODY: The City of McFarland, CA's (the city) approximately $1.36 million certificates of participation (2001 sewer-system financing project) are rated 'BBB-' by Fitch.
The certificates are scheduled to be sold competitively Aug. 8. The Rating Outlook is Stable.
The sewer-system enterprise provides service to the city of McFarland, a 2.1 square mile city located in Kern County, California. Located about 150 miles north of Los Angeles, the sewer-system infrastructure includes two lift stations and associated force mains, as well as, a treatment plant. Certificate proceeds will reimburse the city for the costs of acquiring additional property and upgrades to the system. The service area base includes over 2,266 service connections, mostly residential. The city's 2001 population is 10,168.
McFarland's sewer system utility's credit strengths include the service's essential nature to the community, good financial operations, a competitive rate structure, and a demonstrated ability and willingness to raise rates to meet capital program costs. Financial operations are characterized by its positive operating margins. Capital needs are reported to be manageable and no additional debt is anticipated. This offering is the city's only outstanding debt. Recently upgraded, the treatment plant has a capacity of 1.8 million gallons per day (MGD). Current effluent flow is reported at approximately 1.2 MGD. The utility charges an annual flat rate of$185.95 per customer. Payment is collected on the property tax bill. Fiscal 2002 net revenues are projected to provide maximum annual debt service (MADs) coverage of 2.11 times (x). Cash balances are good relative to the utility's size.
Offsetting credit factors include extreme revenue concentration, and the agriculturally dependent economy. More than 42% of total operating revenues are generated from the Wackenhut Correctional Facility, operators of three prisons within the service area. The prisons average 1,300 inmates per year, and the city charges the prisons the standard flat rate per prisoner. Two of the three prisons have contracts with the California Department of Corrections through 2007. The third contract is set to expire this year and an extension is uncertain. Failure to extend the operating contracts presents a credit concern. The high concentration of revenues with one customer creates a higher level of dependence by the utility on that one entity. Discounting all revenue generated from the prison facilities, debt service is still met on a projected basis, however fiscal and economic stress would be likely if the contracts were not extended. The service area is characterized by the significant agricultural component in the economy, and, the city has above-average unemployment and low income levels, typical of agricultural economies.
Legal provisions are sound. These certificates are secured by a first lien on water enterprise net revenues. The city is required to set and collect rates and charges for each year such that net revenues equal 125% of average annual debt service. Proceeds from this issuance will be used to fund a debt service reserve fund in an amount equal to maximum annual debt service. The enterprise is limited in the issuance of further debt by a traditional historical or projected additional bonds test.