Fitch Affirms Aurora, Colorado's Water 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:

--$504.1 million first-lien water revenue bonds, affirmed at 'AA';

--$5.8 million CWRPDA drinking water revenue bonds affirmed at 'AA';

In addition Fitch takes the following rating action on Colorado Water Resources & Power Development Authority bonds for which Aurora is the obligor:

--$100 million series 2005D bonds affirmed at 'AA'.

The Rating Outlook is Stable.

RATING RATIONALE:

--Debt service coverage has declined in the last two years (although levels are still good) due to a decrease in connection fee revenues; projections indicate coverage will remain at current levels due to continued slowed housing growth.

--Liquidity margins remain very strong.

--Planning efforts are sound and demonstrate foresight in meeting future consumption demands.

--Debt ratios, while high, should decline over the long term as the capital improvement plan (CIP) ramps down.

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

--Successful completion of the Prairie Waters Project (PWP) will provide long-term consumptive supplies and position Aurora for future economic growth.

KEY RATING DRIVER:

--Maintenance of good financial metrics over the medium term is key to the current 'AA' rating level.

SECURITY:

The bonds are secured by a first lien on the net income of the water system.

CREDIT SUMMARY:

For 2009, audited annual debt service (ADS) coverage was 2.2 times (x) on senior bonds and 1.7x on all debt. Connection fees comprised a sizeable portion of pledged sources in the past but fell from $50.1 million in fiscal 2005 to $11.8 million in fiscal 2009. Without these one-time revenues senior ADS coverage fell from 4.0x in fiscal 2005 to 1.9x in fiscal 2009. The system also has accumulated over $200 million in unrestricted cash and investments, equal to over 2,200 days of operations. With progression of the CIP through 2014, senior lien ADS coverage is projected to remain at current levels which are still healthy and commensurate with other comparably rated systems. Likewise, while cash balances will be used to support CIP activities, annual margins are anticipated to remain above average.

Recognizing the need to drought-harden the system and provide for ongoing growth, the city began developing PWP as part of its CIP in 2007. The project is now near completion. When completed, PWP will enhance firm-yield supplies by 20%. Moreover, with future expansion of PWP and other water initiatives identified in the city's long range capital program, the city will ensure adequate supplies through at least 2045. Fitch acknowledges the importance of PWP and the city's long-term water development programs as well as the foresight of the city to procure such supplies. However, a key long-term credit concern will continue to be the high debt ratios (customer debt levels are over 6x those of other similarly rated credits); the slow amortization rate of system debt, which is just over 51% in 20 years, is another concern.

Water charges are relatively high both on an affordability basis and relative to other regional providers. However, this is somewhat mitigated by the low cost of wastewater treatment which brings combined utility costs just within Fitch's affordability range. Furthermore, the city was able to save over $100 million on the PWP due to a favorable bidding environment. The city was also able to defer some capital projects due to slowed growth. Given the savings on PWP and the city's deferral of growth-related capital projects, it is looking to forego raising rates in fiscal 2011 and 2012. The city may also draw on some of its available cash reserves to help provide customers with some rate relief. It is expected that over the next several years other Colorado utilities, and western utility credits in general, will be faced with large CIPs for source water development. As a result, over the medium-term, Aurora utility charges may become more in line with or even slightly below other providers.

The city is located adjacent to and directly east of Denver, and with a population in excess of 320,000, the city is the third largest in the state. Water supply is derived largely from renewable mountain snowmelt, which annually recharges city reservoirs. Drought conditions reduced reservoirs to less than 30% of capacity by the beginning of 2003, which led to implementation of restrictive measures. However, due to precipitation in the last few years reservoir levels have now fully recovered.

The recent national economic downturn has impacted unemployment somewhat, with city rates as of May 2010 at 9.4%, above county (7.6%), state (7.7%) and national (9.3%) averages. The city maintains core military/aerospace and retail economic elements but is also transforming into a major medical/bioscience center as redevelopment at Fitzsimons, a prior air force base, continues.

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:

Water and Sewer Revenue Bond Rating Guidelines

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

Revenue-Supported Rating Criteria

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

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