The Rating Outlook is Stable.
The bonds are secured by a senior lien pledge of the net revenues of the city's water and sewer utilities, a gross lien on the storm drainage system (together, the consolidated system), and available system development charges.
KEY RATING DRIVERS
STABLE RESIDENTIAL CUSTOMER BASE:
STABLE FINANCIAL PERFORMANCE: Financial performance remains solid in fiscal 2013 despite a sharp rise in annual debt service beginning in fiscal 2011. Very strong liquidity provides financial flexibility and serves as an offset to the slightly below average net revenue coverage.
MANAGEABLE CAPITAL PROGRAM: The system is nearing completion of a comprehensive capital plan that includes advanced wastewater treatment (AWT) upgrades necessary to meet stricter guidelines for biological nutrients. Going forward, capital needs will focus mainly on system renewal and replacement projects.
STABLE OPERATIONS: The near-completion of AWT coupled with sizable and relatively clean local water supplies leaves the system in a favorable operating position.
DEBT BURDEN TO REMAIN ELEVATED: The previously large capital program left the system with a slightly elevated debt burden. Slow amortization of existing debt along with a small amount of future debt will likely keep debt ratios somewhat high for the foreseeable future.
RATES TO REMAIN COMPETITIVE: Water and sewer rates have been on the rise but remain competitive. Storm system fees also are very manageable.
STABLE FINANCIAL PERFORMANCE EXPECTED: A decline in net revenue debt service coverage (DSC) from current levels coupled with erosion in other financial metrics may put downward pressure on the rating.
STABLE EMPLOYMENT BASE ANCHORED BY PUBLIC SECTOR
The city of
Government and educational institutions provide a stabilizing force for employment and have historically insulated the area from high jobless rates and weak housing market trends prevalent throughout much of the state in recent years. The unemployment rate for the
The city owns and operates the system, which was consolidated along with the natural gas system into a single underground utilities department in 2008. However, each utility is still accounted for as a separate enterprise fund of the city, and each is operated as a self-sufficient stand-alone utility. Only the revenues from the water, sewer and storm utilities are pledged to bondholders.
The system serves approximately 280,000 residents within the city and portions of
STABLE FINANCIAL PERFORMANCE EXPECTED
System financial results were strong historically with solid financial margins and cash flows producing strong DSC and robust annual free cash flow (FCF). However, the issuance of the series 2010 bonds led to a sharp rise in debt service and a subsequent decline in financial metrics. When calculating DSC using gross storm system revenues, coverage totaled 2.3x in fiscal 2013. However, Fitch believes calculating coverage using net revenues for all three enterprises more appropriately reflects actual results and provides a better picture of long-term system operating performance. On a net revenue basis, DSC was below average but adequate at 1.8x in fiscal 2013. Coverage of all system obligations, including annual transfers to the general fund, was satisfactory at 1.5x in fiscal 2013.
Debt service is not expected to increase for at least the next several years, and coupled with automatic inflation-adjusted rate increases, financial performance should remain close to current levels over the intermediate term. While a small amount of additional debt is projected in about 2015, the city plans to undergo a comprehensive rate sufficiency analysis to determine if and how much debt might be needed to fund a portion of the capital program. Fitch does not expect current estimates of an additional
Liquidity is strong on a consolidated basis with over
ELEVATED LEVERAGE BUT MANAGEABLE FUTURE CAPITAL NEEDS
System leverage has increased substantially since fiscal 2007. The system had a total of
Of note, the city is in the latter stages of a large capital program that will allow the system to meet more stringent nutrient guidelines for treated wastewater. The updated five-year capital improvement plan (CIP) for fiscals 2014-2018 totals
A large proportion of the CIP will address renewal, replacement and improvement (RR&I) of system assets and requires only a small amount of additional bonds (about
STABLE OPERATIONS EXPECTED
Fitch views the system's stable operating profile positively, and expects operations to remain stable going forward. Raw water supply is abundant and relatively clean, in need only of chlorination and fluoridation at the well sites prior to distribution. Completion of AWT is viewed to be significant as it removes operating and capital uncertainties regarding the numeric nutrient limits facing many utilities throughout the state. Sewer treatment capacity is solid, and distribution and collection system pipes are well maintained as evidenced by acceptable levels of unaccounted for (and unbilled) water, and relatively low water line breaks and sewer overflows per 100 miles of pipes.
INDEPENDENT RATE-SETTING AUTHORITY
Rates are set by the city and are structured with base fees and volumetric charges with an inclining block rate charged per thousand gallons. Fixed monthly charges comprise a favorable 23% of the total bill, providing some stability to the revenue base. Most customers fall under the first tier, which includes the first 7,000 gallons used. For fiscal 2014, the typical residential customer pays a reasonable
Rates have been on the rise with the majority of the increases focused on the sewer system to fund the AWT project. Since 2006, sewer rates have been increased by roughly 39%, while water rates saw about a 30% increase over that time. For fiscal 2012 and going forward, the city implemented annual inflation-adjusted increases for both water and sewer service, which is viewed positively by Fitch. Rates for water and sewer service have been increased modestly over the past few years.
Monthly stormwater fees, which have also been increased, are based on a structure's impervious surface area. The current fee is
Additional information is available at 'www.fitchratings.com'.
In addition to the sources of information identified in Fitch's Revenue-Supported Rating Criteria, this action was additionally informed by information from Creditscope.
--'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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