Fitch Affirms Aurora, Colorado's Sewer Revs at 'AA'; Outlook Stable

AUSTIN, Texas--(BUSINESS WIRE)--Fitch Ratings takes the following rating action on Aurora, Colorado as part of its continuous surveillance effort:

--Approximately $55.7 million first-lien sewer improvement revenue bonds, series 2006, affirmed at 'AA'.

The Rating Outlook is Stable.

RATING RATIONALE:

--Financial metrics are strong.

--There are sizeable direct and indirect utility capital costs.

--Combined sewer and storm drainage rates are moderate, but cumulative utility charges - including water - are somewhat high.

--The city maintains good planning efforts and policies.

--The service area has experienced some weakening with unemployment rates above state and national averages.

KEY RATING DRIVERS:

--Maintenance of a solid financial profile is key to the rating level.

--Continued rate flexibility on a combined water, sewer and storm drainage basis are important to credit quality given ongoing growth pressures.

SECURITY:

The bonds are secured by a first lien and pledge of the net revenues of the combined sanitary sewer and storm drainage system (the system).

CREDIT SUMMARY:

Financial performance is very good, characterized by healthy cash flows and strong liquidity. For 2009, annual debt service coverage (ADS) was in excess of 3.5 times (x) while surplus cash as a percent of annual depreciation was over 210%. For the same period, liquidity balances stood at 890 days of operations for cash and 905 days for working capital. The city is proactive in its capital and financial forecasting, which has allowed it to successfully manage historical growth pressures. While cash balances are expected to be drawn down somewhat for capital purposes over the next several years, expectations are for continued strong balances. Two small borrowings are included in the forecast, leading to a rise in fixed costs and a subsequent decline in ADS coverage to a low of 1.7x in fiscal 2013. However, coverage is projected to rebound to 1.9x by fiscal 2014.

The system serves around 325,000 city residents. Customer growth in the early part of the decade was consistently above 3% annually but has slowed since 2007 as the national housing market collapsed. To meet ongoing needs and accommodate expected future growth, the city anticipates around $154 million of capital spending from 2011 through 2014. Most of these needs are anticipated to be funded from remaining 2006 bond proceeds and two small debt issuances that have yet to be sized but are preliminarily slotted for fiscal 2012 and 2013. In addition to its own capital needs, the system indirectly finances capital costs related to its wholesale sewer treatment provider, the Metropolitan Wastewater Reclamation District (MWRD) in which the system contributes around 20% of MWRD's annual revenue base. Currently, MWRD is in the midst of expanding its wastewater treatment plant, with capital costs estimated at around $475 million.

The city regularly has raised both sewer and storm drainage rates and most recently adopted 6% increases for both for 2010. The city is currently working on its sewer rates, but preliminary estimates point to sewer rate hikes averaging 5% over the fiscal 2011 to 2014 period; storm drainage rates are expected to remain flat through fiscal 2014. Since the city was able to defer growth-related capital projects due to the housing collapse, rates will not be increased by as much as initially forecast (on average 7% for sewer and 3% for storm drainage) over the next five years. The city also plans to use some of its cash reserves to provide rate relief. Currently, combined sewer and storm drainage charges are moderate. However, sewer and storm drainage costs are billed together with water charges and on a combined basis the average cost to customers is relatively high at around 2% of median household income. Fitch believes the planned increases in sewer and storm drainage costs, combined with the cost of water service, could ultimately place pressure on the system's rate base and reduce rate flexibility.

Located directly east of Denver, the city is an important part of the Denver metropolitan economy, given its location and size as the third largest city in the state. Economic activity is driven by a large medical and military presence, including Buckley Air Force Base. Indicative of the deterioration in national economic conditions, unemployment within the city has risen year-over-year and was above state (7.7%) and national (9.3%) levels at 9.4% for May 2010.

Applicable criteria available on Fitch's web site at 'www.fitchratings.com':

--'Revenue-Supported Rating Criteria' (Dec. 29, 2009);

--'Water and Sewer Revenue Bond Rating Guidelines' (Aug. 6, 2008).

Additional information is available at 'www.fitchratings.com'.

Related Research:

Revenue-Supported Rating Criteria

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=493154

Water and Sewer Revenue Bond Rating Guidelines

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=395918

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