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Rating Update:

RATING UPDATE: MOODY'S UPGRADES TO Baa2 FROM Baa3 THE RATING ON THE CITY OF CLOVIS REFUSE ENTERPRISE REVENUE BONDS

19 Nov 2010

$5.3 MILLION OF OUTSTANDING RATED DEBT IS AFFECTED

Clovis (City of) CA
Solid Waste
CA

Opinion

NEW YORK, Nov 19, 2010 -- Moody's Investors Service has upgraded to Baa2 from Baa3 the rating on the City of Clovis Refuse Enterprise Revenue Bonds. The bonds are secured by a first lien on the net revenues of the city's Solid Waste Refuse Disposal Enterprise.

RATING RATIONAL

The rating action is based upon the enterprise's improved finances following a severe deterioration of the enterprise's finances and its corrective actions to restore its compliance of the bond's legal covenants. The rating also reflects sound fundamental credit factors including the stability and diversity of the enterprise's small customer base, the city's control of the waste stream from curbside to landfill, and its completion of the landfill mitigation project. The rating also incorporates Moody's expectation that the city will issue additional refuse system debt during fiscal year 2011 which could serve to weaken overall credit quality by narrowing debt service coverage.

CORRECTIVE ACTIONS HAVE RESTORED FINANCIAL POSITION AND DEBT SERVICE COVERAGE

In fiscal years 2002 through 2004, the city failed to comply with the legal covenants that required net revenues to equal at least 100% of annual debt service. After spending reserves on the acquisition of property to buffer the landfill, in fiscal 2004, the city also failed to comply with a second covenant that requires that net revenues together with available retained earnings to equal at least 125% of annual debt service requirements. Following these breaches of covenant, the city took corrective action by raising rates and transferring reserve funds into the enterprise. Moody's then downgraded the rating to Baa3 from Baa1. Since 2006 coverage levels have remained in legal compliance and the enterprise has maintained sound financial operations. Fiscal year 2009 debt service coverage by net revenues was 4.8 times, and 6.47 times in fiscal 2010 according to unaudited actuals. Cash and reserves have also improved with $7.3 million working capital in fiscal 2009 and the maintenance of 213 days of cash on hand during fiscal 2009. The enterprise's improved fiscal position and renewed bond covenant compliance are credit positives. In order to maintain credit quality, the enterprise must continue to demonstrate covenant compliance and effective managerial control. In 2005, the city council adopted multi-year rate increases of 12.4% residential and 15.2% commercial effective January 2005, to be followed thereafter by 4% annual increases. The 4% rate increases have been adopted each year and do not require a public hearing unless the increase exceeds this amount.

BUDGETED NEW DEBT ISSUES WOULD NARROW DEBT SERVICE COVERAGE LEVELS

The enterprise has budgeted for a $5.5 million bond issuance proposed for mid-fiscal 2011. As a result, projected debt service coverage would diminish significantly. The enterprise anticipates that total debt service coverage would fall to 1.17 times in fiscal 2012. Coverage levels beyond 2012 are projected to improve given a modest assumption of increasing net revenues, but the 2015 coverage is still projected at a slim 1.3 times. The proposed bond proceeds would be used toward the construction of additional landfill cells. The current rating action recognizes that when the budgeted debt is issued, it may be structured as to offer more robust coverage levels. The material erosion of debt service coverage resulting from the issuance of additional debt could apply negative pressure to the rating.

COMPLETED MIGRATION PROJECT CORRECTS REGULATORY COMPLIANCE AND INCREASES CAPACITY

The landfill migration, which began in 1998, was completed in 2010, which has enabled the enterprise to be in compliance with all regulations. The enterprise built the project to respond to a clean-up order from the California Water Quality Control Board related to chemical releases. The city's 80-year old 50 acre landfill was excavated, relined and a new cell was built. As noted in previous reports, the project ran over schedule and budget, resulting in the enterprise's fiscal distress between 2002 and 2005. The project is expected to provide sufficient capacity until 2047. In July of 2010, the California Department of Resources Recycling and Recovery (CalRecycle) determined that excessive methane levels were identified in an adjacent tributary. The problem was rectified with the addition of a methane relief well. In October, CalRecycle confirmed that the methane levels were at compliant levels. Moody's considers regulatory compliance a credit concern as regulations have historically increased over time, which can add unexpected mitigation and litigation costs. While the enterprise's prompt mitigation is a positive, the recent and historic violations remain a concern for the system's internal monitoring practices.

THE CUSTOMER BASE REMAINS DIVERSE AND STABLE

The solid waste enterprise provides collection and disposal services for the entire city of approximately 96,868. This includes 25,950 residential and 3,880 commercial addresses. The enterprise's ten largest users accounted for only 5.07% of revenues in fiscal 2009. Billing is completed on a bi-monthly basis along with the other user services provided by the city including water and sewer. The collection system distributes receipts first to sewer charges and then to refuse charges, with all delinquencies carried by the water enterprise. Due to the threat of water service discontinuation, historical delinquencies are minimal. City collection is mandatory for residential and commercial users, so the city controls essentially all of its waste flow from curbside to landfill. All collection is performed by city staff, except in the case of recycling, green waste and compactor service which are provided by private contractors selected by the city. The city does not accept any waste from outside haulers. These factors provide stability to the enterprise's pledged revenue and its operations.

KEY STATISTICS

Estimated 2010: Population: 96,868

August 2010 Unemployment: 8.3%

FY 2009 Debt Service Coverage: 4.8 times (audited financial statements)

FY 2009 Maximum Annual Debt Service Coverage: 4.79 times (audited financial statements)

FY 2009 Days of Cash On Hand: 213 (audited financial statements)

FY 2009 Residential Customers: 25,363 (audited financial statements)

FY 2009 Commercial Customers: 3,766 (audited financial statements)

WHAT COULD CHANGE THE RATING - UP

- Materially, improved financial performance resulting in stronger and sustained coverage levels and reserves

- Consistent and uninterrupted regulatory compliance

- Sustained growth of and improvement of city's economy and customer base

- Uninterrupted adherence to legal covenants

WHAT COULD CHANGE THE RATING - DOWN

- Declining financial performance resulting in narrowing coverage levels and reserves

- Declining net revenues due to expenditure increases without income growth

- Inconsistent environmental regulatory compliance

- Interruption of compliance with regards to legal covenants

PRINCIPAL METHODOLOGY

The principal methodology used in this rating was Credit Risks and Opportunities for the Municipal Solid Waste Sector published in October 1999.

REGULATORY DISCLOSURES

Information sources used to prepare the credit rating are the following: parties involved in the ratings, public information, confidential and proprietary Moody's Investors Service information, and confidential and proprietary Moody's Analytics information.

Moody's Investors Service considers the quality of information available on the credit satisfactory for the purposes of maintaining a credit rating.

Moody's adopts all necessary measures so that the information it uses in assigning a credit rating is of sufficient quality and from sources Moody's considers to be reliable including, when appropriate, independent third-party sources. However, Moody's is not an auditor and cannot in every instance independently verify or validate information received in the rating process.

Please see ratings tab on the issuer/entity page on Moodys.com for the last rating action and the rating history.

The date on which some Credit Ratings were first released goes back to a time before Moody's Investors Service's Credit Ratings were fully digitized and accurate data may not be available. Consequently, Moody's Investors Service provides a date that it believes is the most reliable and accurate based on the information that is available to it. Please see the ratings disclosure page on our website www.moodys.com for further information.

Please see the Credit Policy page on Moodys.com for the methodologies used in determining ratings, further information on the meaning of each rating category and the definition of default and recovery.

Analysts

Julian Metcalf
Analyst
Public Finance Group
Moody's Investors Service

Michael Wertz
Backup Analyst
Public Finance Group
Moody's Investors Service

Contacts

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RATING UPDATE: MOODY'S UPGRADES TO Baa2 FROM Baa3 THE RATING ON THE CITY OF CLOVIS REFUSE ENTERPRISE REVENUE BONDS
No Related Data.
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