OREANDA-NEWS. Fitch Ratings has affirmed the following Eugene, OR (the city) bonds issued on behalf of the Eugene Water and Electric Board (EWEB):

--\$47.7 million water utility system revenue bonds series 2002, 2005, 2008 and 2011 at 'AA+'.

The Rating Outlook is Stable.

SECURITY

The bonds are payable from net revenues of the city's water system.

KEY RATING DRIVERS

STRENGTHENED FINANCIAL POSITION: Financial metrics have improved following a large rate increase and rate restructuring in fiscal 2013. Liquidity levels have improved and all-in debt service coverage (DSC) is high at over 3.0x, reflecting strong cash flow from operations to support debt service obligations and capital spending.

REVENUE STABILITY AND RATE FLEXIBILITY: Restructured rates provide around 45% of revenues from fixed charges, reducing the utility's financial exposure to cyclical usage and weather patterns. Rate flexibility remains with the utility's competitive regional water rates.

AMPLE SOLE-SOURCE WATER SUPPLY: EWEB has sufficient water rights on the McKenzie River and treatment capacity to meet long-term water demand. However, additional investment is being considered to develop a treatment and delivery system for a secondary water supply to increase reliability and redundancy.

HEALTHY CAPITAL SPENDING: EWEB has made significant investments in its water supply reliability and delivery infrastructure. Future capital needs appear manageable, including development of an alternative water supply, and will be primarily funded from debt. Debt levels are moderate and should remain so, even with planned additional debt.

RATING SENSITIVITIES

EROSION OF FINANCIAL METRICS: A significant change in the expected scope or pace of capital spending has the potential to erode financial margins for bondholders if rates are not adjusted accordingly. The Stable Outlook indicates that this scenario is not expected.

CREDIT PROFILE

EWEB provides retail water service to 52,200 customers in and around the city of Eugene and also provides wholesale service to two water districts that, in turn, serve another 8,600 retail customers. Eugene is located in central Oregon and is the second largest city in the state. The customer base is primarily residential with modest customer concentration, following the departure of the system's largest customer (20% of sales) in 2011.

Water sales have declined between 2007-2011 (averaging 4% decline annually) due to economic conditions, customer loss, wet weather conditions, and price signals. Sales stabilized in 2012-2014 at around 22 million gallons per day (mgd). Management conservatively budgeted for 20.8 mgd in water sales in fiscal 2015 and no growth is assumed in management's ten-year financial and rate model.

AMPLE WATER RIGHTS

EWEB has sufficient water supply through its rights on the McKenzie River to meet current and projected demand. EWEB's water treatment plant also has sufficient capacity of 88 mgd to meet EWEB's current and projected demand of around 22 mgd. There do not appear to be any material environmental concerns regarding the water supply or its delivery. However, since the McKenzie River is a sole-source supply, EWEB has been working to develop a secondary source of supply to provide reliability and redundancy.

In 2014, EWEB obtained rights to divert 20 mgd of water from the Willamette River. EWEB is now working on the design of an intake and treatment plant to develop and access the water rights. The ten-year capital improvement plan (CIP) includes assumed spending in the later years towards the secondary supply. While not needed to serve demand, the investment is viewed as a mitigation to potential risks related to emergency disruption or contamination of the primary water supply.

RATE RESTRUCTURING PROVIDES REVENUE STABILITY

In order to rebuild reserves and to continue funding ongoing infrastructure investment, EWEB implemented a 20% water rate increase in February 2013. The increase followed a formal rate study, evaluation of capital needs, and discussion with the governing body regarding financial policies, including reserve levels. The rate increase followed extensive cost savings already identified during the fiscal 2012-2013 budget process.

Rate restructuring was also done in 2013, which is viewed as a positive credit development. The new rate structure increased the fixed-charge component of rates and reduces EWEB's revenue reliance on volumetric charges or consumption. EWEB estimates that under the new rate structure 45% of its water revenues will be provided by fixed charges.

Rates were increased by a more modest 6% in 2014 and future increases are expected by management to trend more in this range. The monthly water bill of around \$30 for Fitch's baseline average of 7,500 gallons is still competitive with other regional water suppliers and moderate at 0.8% of median household income.

STRONG FINANCIAL METRICS

Revenue bond DSC is strong at over 5.0x in fiscals 2013 and 2014. All-in DSC, including a subordinate lien note payable to the electric system, is also strong at 3.4x in the past two years. Management projections and policies indicate that all-in DSC should remain above 2.0x even with additional debt plans.
Cash reserve levels, historically low for the rating level, were restored by the 2013 rate increase.

EWEB had undesignated cash reserves of \$10.8 million at the end of fiscal 2014, or 247 days cash on hand. This is an improvement from just \$2 million or 48 days cash at the end of fiscal 2012. These balances do not include another \$4.9 million in the capital improvement reserve at the end of fiscal 2014 that is board designated for capital but available for any purpose. When this balance is included, days cash increases to 359 days.

EWEB's five-year CIP totals \$99 million. Around \$40 million is for ongoing capital reinvestment and will be funded from rates. The remaining amounts will be funded by unspent bond proceeds and a planned \$11 million bond issuance in fiscal 2016. Even with EWEB's planned debt issuance, debt levels should remain moderate.