Fitch Rates New York City Municipal Water Finance Authority's $600MM Revs 'AA+'; Outlook Stable

NEW YORK--(BUSINESS WIRE)--Fitch Ratings assigns an 'AA+' rating to the following New York City Municipal Water Finance Authority (NYW) bonds:

--$600 million water and sewer system second general resolution revenue bonds, fiscal 2011 series AA (Taxable Build America Bonds).

Fitch also affirms NYW's outstanding bonds as follows:

--$10.4 billion first general resolution revenue bonds, affirmed at 'AA+';

--$13.6 billion second general resolution revenue bonds, affirmed at 'AA+'.

The Rating Outlook is Stable.

The fiscal 2011 series AA bonds are scheduled for negotiated sale on Sept. 16, 2010. Proceeds will be used to retire outstanding commercial paper and fund capital improvement projects of the authority.

RATING RATIONALE:

--NYW's primary credit strength is its unique legal structure, including its status as a bankruptcy-remote issuer, providing substantial protection to bondholders from utility system and city municipal operating risks.

--NYW benefits from a large and diverse service area and enjoys an abundant quality water supply exempt from costly filtration requirements.

--NYW's strong capital planning efforts have helped achieve compliance with large, costly mandated regulatory projects and kept the full capital plan moving forward in a timely manner.

--Prudent financial management and a proven ability to raise rates are reflected in consistently solid financial results.

KEY RATING DRIVERS:

--Stability in the current rating will depend on the authority's ability to continue absorbing additional debt while maintaining its current financial profile.

--Fitch remains concerned regarding the continuation of below-average collection rates, although NYW has implemented several measures in recent years aimed at improving receipt of charges. Continued improvement in this area is expected.

SECURITY:

The second general resolution (SGR) bonds are special obligations of NYW, payable solely from and secured by a subordinate lien on gross revenues of NYW. First general resolution (FGR) bonds are secured by a first lien on gross revenues of NYW.

CREDIT SUMMARY:

Fitch believes NYW bondholders benefit from strong legal protections that are not common among most U.S. municipal water/sewer bonds. Structural protections include:

--The bankruptcy-remote, statutorily defined nature of the issuer;

--Ownership of system revenues by the bankruptcy-remote board that sets rates without city council approval;

--Annually required adjustment of water rates to a level to provide 1.15 times (x) coverage of FGR bond annual debt service and 1.0x coverage on SGR bonds and operating expenses;

--A gross lien on revenues provided to bondholders; and

--Revenues are collected in a lock box controlled by the trustee and are used to pay debt service of FGR and SGR bonds before operations and maintenance (O&M).

These layers of protection serve to shield bondholders significantly, but not entirely, from the operational risks of the city's massive water and sewer enterprise, as well as other city government operations. NYW SGR bondholders benefit from similar legal protections afforded FGR bondholders. SGR bondholders' claim on gross revenues is subordinate only to FGR debt service deposits, NYW administrative costs, and the FGR debt service reserve fund (DSRF). Following such deposits, revenues flow from the subordinated indebtedness account of the FGR directly to the SGR revenue account to pay SGR debt service deposits. Only after monthly required deposits under the SGR are satisfied are funds released from the trustee-controlled lock box to pay operations and maintenance.

NYW's strong financial management and conservative budgeting continue to yield solid operating results, despite sizeable growth in annual debt service obligations and recent declines in consumption. Favorably, historically below-average collection rates have improved in recent years with the ongoing use of a payment incentive program for delinquent customers, a reduction in the threshold applicable to accounts eligible for termination of service, and the legislative approval to conduct a lien sale program for property owners independent of the existence of property tax liens. For fiscal 2009, NYW's enforcement mechanisms coupled with a sizeable 14.5% rate increase helped boost operating revenues by about 16% and offset a notable 7% drop in water consumption. Audited financial results show annual coverage of FGR bonded debt service by net revenues improving over the prior year to a strong 2.2x from 1.8x. Coverage of all obligations, including SGR debt service, equaled a more moderate 1.5x. Reflecting the gross lien on revenues provided to bondholders, debt service coverage was higher in fiscal 2009 at 4.7x and 3.1x, respectively, for the FGR and SGR debt service.

Unaudited results for fiscal 2010 show a continued drop in consumption of about 2% compared to actual demand in the prior year. However, the declining trend appears to have abated as consumption in the latter months of fiscal 2010 and the first two months of fiscal 2011 are up over the same point in the prior year. The overall drop in demand for fiscal 2010 exceeds the 1% decline assumed in the adopted budget, and as a result, total revenues are projected to be almost 5% below budget, despite a large 12.9% adopted rate hike for the fiscal year. Favorably, the below budget revenues were offset by reducing some pay-go for capital projects, cutting $46 in operating expenses mid-year, and by recognizing $170 million in debt service savings related to favorable short-term interest rates compared to budgeted assumptions. The mid-year cost cutting and savings are expected to translate into slightly healthier than originally forecast debt service coverage margins of 2.5x on FGR debt and 1.5x on all-in debt from net revenues.

Another sizeable 12.9% rate increase adopted by the New York Water Board (the board) for fiscal 2011 marks the fourth consecutive year that rates have experienced a double-digit increase, although financial projections through fiscal 2014 show a return to slightly smaller annual increases of 9.8%. The financial forecast incorporates significant annual debt issuance, the aforementioned increases in user charges, and a 1% annual decline in consumption through fiscal 2014 resulting in annual debt service coverage on all obligations from net revenues staying at about 1.4x. With about 115 days of cash on hand at the close of fiscal 2009, NYW's unrestricted cash position is below that of other utility systems rated 'AA+' by Fitch.

Similar to most large, urban utility systems, NYW's capital needs are significant, primarily the result of state and federally mandated projects. The capital improvement plan (CIP) for fiscal years 2010-2019 includes an estimated $14.2 billion in water and sewer projects, down from a peak of $19.4 billion projected in the fiscal years 2008-2018 CIP. A planned delay in approximately 20% of capital commitments for fiscal years 2010 through 2012 lowered the size of the CIP from more recent years to its current total. The reduction in capital expenditures was prompted by the city's ongoing fiscal challenges related to the current economic slowdown. However, regulatory-driven capital projects will not be delayed. Management expects the release of its 2011-2020 10-year CIP in early part of calendar 2011. Officials expect a favorable shift in capital priorities that began in fiscal 2010 to continue going forward; regulatory projects are expected to decline to about one-fourth of total capital spending, down from an average of about 75% over the previous five years. Capital funding is expected to come almost entirely from NYW's extensive commercial paper program and long-term debt issuance. Rate increases are approved by the independent board without approval by the city council. Fitch believes overall debt service coverage levels will remain at an adequate margin given the board's demonstrated commitment to authorizing rate hikes necessary to cover increased costs.

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

Applicable Criteria and Related Research:

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

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

For information on Build America Bonds, visit 'www.fitchratings.com/BABs'.

Related Research:

Revenue-Supported Rating Criteria

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=548606

Water and Sewer Revenue Bond Rating Guidelines

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

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