Fitch Affirms Hillsborough Public Financing Authority, CA's COPs at 'AA+'; Outlook Stable

2009-11-23 21:10:03 -

As part of ongoing surveillance, Fitch Ratings affirms the 'AA+' rating for the Town of Hillsborough (the town), CA's $38.2 million outstanding variable-rate revenue certificates of participation (COPs) issued for water and sewer system projects. The COPs are secured by a senior lien pledge of the net system revenues of the town's water and sewer system.
The Rating Outlook is

Stable.

Rated 'AA+/F1+', the COP's short-term rating 'F1+' is based upon a Standby Purchase Agreement (SPA) provided by JPMorgan Chase Bank, National Association. The 'F1+' rating is not reviewed as part of this surveillance.

The 'AA+' rating reflects Hillsborough's location as a wealthy bedroom community to the San Francisco and San Jose labor markets, and the utility system's solid financial management practices, which have led to a healthy financial position and good debt service coverage. Since the town is a wholesale water customer of the San Francisco Public Utility Commission (SFPUC), rising water costs associated with SFPUC's substantial infrastructure upgrades remains a credit concern. The town's large variable-rate debt portfolio and high debt burden are adequately offset by strong financial management and liquidity levels, solid rate raising flexibility, manageable capital needs, and very high wealth and income levels.

The system consists of the town's water, sewer, and storm drainage enterprises, providing essential services to its predominantly residential customer base of roughly 4,200. The town is located on the San Francisco Peninsula approximately 12 miles south of downtown San Francisco. The service area is wealthy and includes the town as well as portions of neighboring cities San Mateo and Burlingame, and unincorporated county area.

The town does not own its own water supply or operate any treatment facilities. Instead, as do 29 other wholesalers on the San Francisco peninsula, water is purchased through a long-term wholesale contract with SFPUC. Wastewater treatment services are also provided by neighboring communities through separate, long-term wholesale agreements. Capital needs are manageable and include additional water storage and other water system upgrades, and the replacement of a major sewer trunk line to address chronic wet-weather overflows and pursuant to a cease and desist order (the order) from the regional water quality control board. The town expects to use $1.5 million to $2 million of annual surplus cash for the next decade to fund its water projects and will apply for state revolving fund loans totaling approximately $9 million to meet its sewer needs related to the order. The town expects to complete the required upgrade according to the order on schedule.
While the additional near-term capital needs may increase already high system debt levels and above-average utility rates, very high demographic indicators - including median household income levels more than 4 times (x) the national average - helps offset any concerns.

Financial operations are strong, with healthy liquidity levels and strong historical debt service coverage. Debt service coverage from fiscal 2006 through 2008 has averaged 2.5x; coverage for fiscal 2009 (unaudited) dips to 1.5x, (still in line with the town's internal targets), mainly due to flat operating revenues, a slight increase in personnel and facilities costs, and lower investment earnings.

Liquidity, as measured by days' cash on hand, is very strong with 655 days at fiscal year end 2009.

Legal provisions are satisfactory. The enterprise covenants to set rates sufficient to yield net revenues at or in excess of 1.20x debt service coverage. The town has historically displayed a willingness and ability to raise rates to meet higher internal debt service coverage targets (at least 1.50x debt service) and maintain high liquidity. Expectations are for additional rate increases to be put in place over the next few years to meet various internal financial metrics and pay for near-term capital needs.

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Fitch RatingsAndrew DeStefano, +1-212-908-0284 (New York)Karen
Ribble, +1-415-732-5611 (San Francisco)Media RelationsCindy
Stoller, +1-212-908-0526 (New York) cindy.stoller@fitchratings.com : mailto:cindy.stoller@fitchratings.com