The bonds are scheduled to sell the week of
In addition, Fitch affirms the following ratings of the authority:
The Rating Outlook is Stable.
The bonds are payable from a first lien on net revenues of the authority's water system (the system) plus amounts transferred to the revenue fund from the coverage fund.
KEY RATING DRIVERS
SOUND FINANCIAL PROFILE: Annual debt service (ADS) coverage margins have improved and are expected to rise further over the next few years. However, rising fixed costs are expected to push ADS coverage to more modest levels over the longer term.
SUBSTANTIAL CAPITAL AND DEBT NEEDS: The authority's capital improvement program (CIP) to meet future groundwater reduction restrictions is substantial and is anticipated to be almost entirely debt financed. This borrowing program will push the authority's moderately high debt burden to a very high level over the next 10 years.
RISING BUT AFFORDABLE RATES: User charges are expected to increase incrementally to fund additional capital needs, although rates are expected to remain moderate over the intermediate term.
BELOW-AVERAGE LEGAL COVENANTS: Legal provisions are somewhat weaker than peer wholesale systems but are adequate overall.
ESSENTIAL PROVIDER WITH STRONG ENFORCEMENT: The authority provides an essential service as a wholesale water provider to 110 utility districts in the suburban areas west of the city of
ACCELERATING CAPITAL COSTS: Significant increases in conversion cost requirements beyond what is currently planned would further pressure the authority's debt profile and rate structure.
Predominantly residential in nature, the authority's service territory is located in western
The authority has adopted, and the HGSD has approved, the authority's groundwater reduction plan (GRP), which incorporates construction of a surface water distribution system and purchase of treated water from the city for sale to groundwater users and other retail agencies within the authority's service area.
SIGNIFICANT CAPITAL NEEDS TO MEET REQUIRED GROUNDWATER REDUCTIONS
The GRP is designed to meet increasingly stringent pumping restrictions in 2010, 2025, and 2035; the authority met the 2010 conversion requirements ahead of schedule. Total capital costs for conversion to surface water supplies through 2025 are estimated at around
STRONG FINANCIAL RESULTS
ADS coverage has improved over the past few years from increased GRP fees and water sale fees (WSF) that have kept pace with rising debt service costs. For 2013, ADS coverage was 1.3x, slightly above prior projections. Liquidity levels traditionally have been very strong, and this remained the case over the last two years.
Days cash on hand exceeded 800 days in 2013, enabling the authority to redeem certain outstanding bonds prior to maturity. The five year forecast through 2019 shows strengthening ADS coverage as the authority implements rate hikes in preparation for upcoming debt plans. Significant debt issuances planned in the 2015-2024 timeframe to meet the 2025 pumping restrictions ultimately are expected to lead to a weakening in ADS coverage more commensurate with the rating level.
AFFORDABLE CHARGES DESPITE PLANNED HIKES
The authority's WSF and GRP fees are expected to increase significantly. Currently, the authority's WSF - the highest of the authority's two charges - equals
BELOW-AVERAGE LEGAL COVENANTS
Legal provisions are somewhat weaker than other peer covenants given the allowance for the use of fund balance in the rate covenant calculation. Nevertheless, legal provisions are adequate overall due to several required reserves. Per the indenture, there is a coverage reserve equal to 25% of maximum ADS. There is also a common debt service reserve pledged to bondholders. In addition, the authority is required to maintain an operating and maintenance (O&M) reserve equal to two months of budgeted O&M expenditures.
Additional information is available at 'www.fitchratings.com'
In addition to the sources of information identified in the U.S. Municipal 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', dated
--'2014 Outlook: Water and Sewer Sector', dated
2014 Outlook: Water and Sewer Sector
2014 Water and Sewer Medians
U.S. Water and Sewer Revenue Bond Rating Criteria
Revenue-Supported Rating Criteria
Source: Fitch Ratings
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