Fitch Downgrades Albuquerque Bernalillo Co Wtr Utility Auth, NM to 'AA'; Outlook to Negative

AUSTIN, Texas--()--Fitch Ratings downgrades the following Albuquerque Bernalillo County Water Utility Authority, New Mexico's (the authority) outstanding revenue bonds:

--$422.9 million joint water and sewer system (the system) revenue bonds to 'AA' from 'AA+'.

The Rating Outlook is Revised to Negative from Stable.

KEY RATING DRIVERS

--The rating downgrade reflects the downward decline in liquidity and debt service coverage, below the rate covenant, coupled with increasing operating expenses and lack of offsetting rate increases.

--The Outlook revision to Negative from Stable reflects the possibility that the authority's financial profile could erode further in the near term.

--Healthy financial margins have weakened in the last two fiscal years.

--Debt levels are elevated and will remain high given proposed debt issuance plans, although debt load is somewhat mitigated by rapid debt amortization.

--Rates are very affordable with room for projected increases.

--Capital needs are manageable and the capital improvement plan (CIP) is ramping down.

--Water supplies are sufficient to meet area needs through 2055.

FACTORS THAT MAY CONTRIBUTE TO A RATING ACTION

--Further deterioration in financial margins.

SECURITY

The bonds are a special limited obligation of the authority, payable solely from and secured by a first lien on and pledge of net revenues of the combined water and sewer system.

CREDIT PROFILE

The authority's healthy financial profile has weakened over the past two fiscal years. Senior lien annual debt service coverage (DSC) dropped below the authority's rate covenant of 1.33 times (x) to 1.25x in fiscal 2009 and unaudited fiscal 2010 results point to an additional DSC decline to 1.15x. The deterioration in DSC was driven by a slowdown in housing starts and resulting decline in connection fees, rising operating costs related to power and chemicals, reduced investment earnings and increased conservation leading to a reduction in water sales.

Fitch views the delay in revenue enhancements to offset operating pressures as a credit weakness. After holding rates flat to fiscal 2007 levels, a water and sewer rate increase of 5% of revenue requirements, respectively, became effective on July 2011. Additional 5% of revenue requirements were adopted for fiscal 2014 for water and sewer, respectively. The authority is projecting senior lien annual DSC results for fiscal 2011 to just meet the 1.3x rate covenant but only with depletion of rate stabilization reserves and additional rate revenue. DSC is projected to average 1.4x over the forecast period which is below both Fitch's median for the rating category and the authority's target of all-in annual DSC of 1.5x. Fitch notes that the authority anticipates providing service to a major industrial customer in the near future; potential increased revenues from the new customer are not included in authority projections. Improvement in DSC to levels commensurate with historical highs would be viewed favorably.

Unrestricted cash reserves also deteriorated in fiscal years 2009 and 2010. Days cash on hand was a high 164 in fiscal 2008, but dropped to 87 days cash in fiscal 2009 and to an eight-year low of 11 days operating cash in fiscal 2010. The decline was driven by the reduction in rate revenue from reduced water sales and continued pay-as-you-go capital funding. Given the recent enactment of rate increases for fiscal 2012 and 2014, reserves are expected to steadily increase and approach the authority's target of 1/12th of annual budgeted expenditures by fiscal 2015. Fitch views maintenance of this level of cash as marginal for the rating category.

The authority is a component unit of the city of Albuquerque (the city). Fitch notes that the city of Albuquerque's comprehensive annual financial reports (CAFRs) have been issued late since fiscal 2006 due to problems with the city's new enterprise resource planning system. A timely release of the city's CAFR is not expected until fiscal 2012.

The authority currently provides water and wastewater service to around 545,000 residents through 200,000 connections within the city and county. Water supplies traditionally have been obtained through extraction of resources from the Rio Grande basin aquifer underlying the city. However, in an effort to reduce depletion of the aquifer, the authority is implementing a strategic plan; the water resource management strategy (WRMS). Initially adopted in 1997, the WRMS guided the provision of a sustainable water supply through conservation, the use of surface water, reclaimed water, and shallow and deep groundwater. The San Juan-Chama Drinking Water Project is the cornerstone of the WRMS and is expected to provide up to 70% of the service area's water needs through 2055. Approximately 50% of the area's drinking water supply is already being derived from the project. The project gradually will increase production and is expected to be near full utilization by the end of 2012.

Fitch views as a credit positive the fact that the authority has largely completed its major capital initiatives as well as rapid amortization which will help to bring debt levels down in the immediate future. One such project for water supply is the SJCDWP, with ongoing capital costs expected to decline significantly in the immediate future. The authority's five-year capital improvement plan (CIP) has steadily declined to the current $249 million for fiscal years (FY) 2011-2015. The focus of the CIP is primarily for rehabilitation and replacement. Because of the recent borrowings associated with the WRMS, leveraging of net plant assets has increased from 31% in fiscal 2004 to a high 210% as of fiscal 2009. Likewise, debt per customer rose during this period from a modest $710 to a high $2,164.

The system primarily serves the city, which constitutes almost 90% of county residents. The city is the largest in the state and accounts for about one-quarter of its population. The national economic slowdown has had some effect on the area to date with employment slowing to modest levels through 2010. The city unemployment rate at 6.6% as of Apr 2011 was below state (6.9%) and national (8.7%) averages for the month. Income levels for city residents are below national averages and 5%-10% higher than those of the state.

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

In addition to the sources of information identified in Fitch's U.S. Municipal Revenue-Supported Rating Criteria, this action was additionally informed by information from Creditscope and IHS Global Insight.

Applicable Criteria and Related Research:

--'Revenue-Supported Rating Criteria', dated June 20, 2011;

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

--'2010 Water and Sewer Medians', dated Jan. 18, 2011;

--'2010 Water and Sewer Sector Outlook', dated Jan. 18, 2011.

Applicable Criteria and Related Research:

Revenue-Supported Rating Criteria

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=637130

Water and Sewer Revenue Bond Rating Guidelines

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

2010 Water and Sewer Medians

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=509146

2010 Water and Sewer Sector Outlook

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=499482

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Contacts

Fitch Ratings
Primary Analyst
Julie G. Seebach, +1-512-215-3740
Associate Director
Fitch, Inc.
111 Congress Avenue, Suite 2010
Austin, TX 78701
or
Secondary Analyst
Doug Scott, +1-512-215-3725
Managing Director
or
Committee Chairperson
Jessalynn K. Moro, +1-212-908-0608
Managing Director
or
Media Relations:
Cindy Stoller, +1-212-908-0526
Email: cindy.stoller@fitchratings.com

Contacts

Fitch Ratings
Primary Analyst
Julie G. Seebach, +1-512-215-3740
Associate Director
Fitch, Inc.
111 Congress Avenue, Suite 2010
Austin, TX 78701
or
Secondary Analyst
Doug Scott, +1-512-215-3725
Managing Director
or
Committee Chairperson
Jessalynn K. Moro, +1-212-908-0608
Managing Director
or
Media Relations:
Cindy Stoller, +1-212-908-0526
Email: cindy.stoller@fitchratings.com