The bonds are scheduled to sell on
In addition, Fitch affirms the rating on the city's outstanding bonds as follows:
The Rating Outlook is Stable.
The bonds and obligations are payable from a first lien pledge on the net revenues of the system on parity with the outstanding water revenue bonds and obligations.
KEY RATING DRIVERS
IMPROVED FINANCIAL METRICS: The financial profile of the city's water system (the system) continues to improve, particularly in terms of liquidity.
ELEVATED DEBT PROFILE: Sizeable debt plans will keep the system's debt profile high over the next five years despite rapid amortization. However, at the expected levels, system leveraging should remain satisfactory.
AFFORDABLE RATES: At about 0.8% of median household income (MHI), system rates are considered affordable by Fitch.
SUFFICIENT WATER SUPPLIES: Extensive planning has resulted in sufficient water supply for long-term needs.
ECONOMIC RECOVERY UNDERWAY: Recovery from the severe recession continues at a moderate pace, as evidenced by a number of economically-sensitive indicators. The regional economy remains diverse and relatively stable, with a good mix of higher education, military and government employment.
MAINTENANCE OF FINANCIAL PROFILE: Failure to maintain debt service coverage (DSC) or liquidity at the minimum forecast levels would likely result in a rating downgrade.
INCREASED DEBT BURDEN: Increased debt beyond current levels could pressure the rating given the already weak debt profile.
IMPROVED FINANCIAL PROFILE
The system's financial performance continues to strengthen after recessionary pressure and capital outlays in fiscal years (FY) 2008 and 2009 resulted in below average DSC and liquidity margins. To regain its footing, the city imposed rate hikes beginning FY 2009 which have resulted in improved metrics in each subsequent year. FY 2013 finished with senior-lien and all-in DSC of 2.0x and 1.7x, respectively, while liquidity climbed to 145 days of cash on hand (which equates to 145 days of operational expenditures), up from just 11 days in FY 2009. FY 2013 DSC and liquidity were at five-year highs, although they are still slightly below Fitch's median levels for the rating category.
Management forecasts show an 8.3% annual rate increase in each of the next five years with resulting DSC ranging from 1.9x-2.2x on a senior-lien and 1.6x-1.8x on a junior-lien basis. Over the same period, the city is targeting liquidity balances equal to 85-90 days of cash on hand. These levels are thin for the rating level, so any results falling below these ranges would likely lead to a rating downgrade. Fitch notes that the city has a policy of maintaining a minimum of 1.75x senior-lien DSC calculated on a cash basis, in accordance with the master indenture.
ELEVATED DEBT BURDEN
The debt load per customer is expected to remain high as the system implements its comprehensive capital improvement plan (CIP). For FYs 2015-2019, the CIP totals
RATES TO REMAIN AFFORDABLE
The system will need to implement the planned 8.3% annual rate increases to maintain adequate DSC and liquidity since further declines in water consumption are anticipated and capital expenditures are expected to remain high. Nevertheless, current rates are low for the area and are below Fitch's affordability threshold of 1% of MHI, so Fitch expects rates to remain affordable over the intermediate term.
SUFFICIENT WATER SUPPLY
The large majority of the city's potable water supply is derived from
The city is currently purchasing its maximum annual allotment (144,172 acre-feet) of CAP water and using surplus amounts, which amount to about 54,000 acre feet per year, to replenish groundwater that has been depleted over many decades. Additionally, nationally-recognized conservation efforts have resulted in a net decrease in per capita water utilization over the last decade. Proactive water supply management practices such as these should keep water supply sufficient over the long term.
SOLID ECONOMY; DIVERSE SERVICE AREA
The economy is anchored by government, including military; higher education; medical; and tourism enterprises. Unemployment levels historically have been below those of the state, and the most recent monthly numbers are consistent with that trend. The
Additional information is available at 'www.fitchratings.com'.
In addition to the sources of information identified in Fitch's U.S. Municipal Revenue-Supported Rating Criteria, this action was additionally informed by information from Creditscope and the
--'Revenue-Supported Rating Criteria' (
--'U.S. Water and Sewer Revenue Bond Rating Criteria' (
--'2014 Water and Sewer Medians' (
--'2014 Outlook: Water and Sewer Sector' (
Revenue-Supported Rating Criteria
U.S. Water and Sewer Revenue Bond Rating Criteria
2014 Water and Sewer Medians
2014 Outlook: Water and Sewer Sector
Source: Fitch Ratings
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