SAN FRANCISCO--()--Fitch Ratings affirms the ratings on DuPage County's outstanding waterworks and sewerage project revenue bonds as follow:
--$6.48 million first lien bonds, series 2008A at 'AAA';
--$6.47 million second lien bonds, series 2008B at 'AA+'.
The Rating Outlook is Stable.
The County has an additional $2.2 million in parity first lien bonds outstanding, series 2012 that are not rated by Fitch.
Senior debt is secured by a first lien on pledged net revenues. Second lien bonds are secured by a second lien on net revenues. The County has third lien debt in the form of loans from the Illinois Environmental Protection Agency (IEPA).
KEY RATING DRIVERS
STRENGTHENED FINANCIAL PERFORMANCE: Financial performance has strengthened to levels in line with the ratings following annual rate increases over the past few years. Debt service coverage is expected to remain strong and liquidity is average.
STRONG RATE FLEXIBILITY: Fitch views rate flexibility as ample and the combined bill remains affordable at around 1% of median household income.
LOW DEBT; LIMITED CAPITAL NEEDS: Debt is low and amortization is rapid. Capital needs are limited and no additional debt is anticipated.
DECLINING DEMAND: Water and related sewerage billed usage have declined in the past few years. Usage appears strong in 2012 but a predominantly volumetric rate structure remains dependent on consistent usage patterns.
LIMITED SERVICE AREA: The County provides service to limited areas within the unincorporated county. Wastewater treatment is provided to around 35,000 customers while water service is only provided to around 3,000 customers.
STABLE OPERATIONS TO LIMITED SERVICE AREA IN COUNTY
DuPage County's Department of Public Works operates the water and sewer system and is responsible for service to areas that are not offered service by other local governments within the county. The population served by the system is approximately 160,000, representing about 17% of the county total. The majority of service provided by the system is wastewater. Growth is limited except from septic system conversions. The water system serves six separate small systems within the county with a combined customer count of approximately 3,000. Water supply is provided by a full requirements contract with the DuPage Water Commission that purchases treated water from the City of Chicago. Wastewater treatment capacity is adequate although the plants are older. Both systems are in regulatory compliance with limited future capital requirements.
RATE INCREASES BRING WATER RATES INTO PARITY IN 2013
Over the past five years, the county converted its water supply to Lake Michigan water. Water supply had previously been provided from well water, which is currently maintained as a back-up supply. The conversion to Lake Michigan water preserves ground water levels and provides improved water quality. The County had phased in rates over the past few years to bring all water customers receiving Lake Michigan water onto the same rate schedule and pay the higher costs associated with the system conversion and purchase of water from the Water Commission.
Large rate increases have been put in place, although the percentages varied across the water systems and additional rate increases are approved through 2015. Sewer rates have additionally been increased to reflect cost increases. The combined bill is very affordable at 1% of median household income. Future increases are anticipated to be modest. Both water and sewer rates include a capital expenditure component that provides dedicated revenues to fund ongoing capital of the systems. The rate structure includes a line item that collects the amount owed to purchase Lake Michigan water, so any rate increases for the water supply are passed through to customers on a real-time basis.
CAPITAL NEEDS ARE LIMITED; LOW DEBT BURDEN
Although the county's wastewater treatment facilities are older, limited growth is occurring and capital needs are limited to projects that will be funded from ongoing revenues. The water facilities are limited given the smaller size of the customer base. The system age of plant is 26 years, as compared to Fitch medians of 13 years, reflecting the age of the facilities. The County's five-year capital plan totals $11 million, which will be funded from 2008 bond proceeds still on hand and revenues. The County prudently funds all infrastructure replacement through ongoing maintenance expenditures. Only larger capital projects are funded outside operations.
Debt outstanding is limited to around $15 million. The County has $8.7 million outstanding in senior lien series 2008A and 2012A bonds and $6.5 million outstanding in subordinate lien series 2008B bonds. The county also has a $3.3 million loan from the IEPA that is paid junior to the subordinate lien bonds. The debt obligation is included in Fitch's all-in debt service coverage calculation. All debt amortizes in the next 15 years and debt per customer is low at $483 as compared to Fitch's median of $1,611.
STRONG FINANCIAL PERFORMANCE DESPITE DECLINING DEMAND
The system's financial performance declined in fiscal 2009 with lower usage levels but has recovered with rate increases even though lower demand levels persist. Debt service coverage of the senior bonds was 4.6 times (x) in FY11 and coverage of all obligations, including the EPA junior lien, was more modest at 1.5x. These coverage levels are projected to remain strong with additional rate increases in the next five years at over 4.5x on the senior lien and 2.0x all-in, respectively. Liquidity is healthy at $7.6 million at the end of FY11, or 165 days operating cash.
Additional information is available at 'www.fitchratings.com'. The ratings above were solicited by, or on behalf of, the issuer, and therefore, Fitch has been compensated for the provision of the ratings.
In addition to the sources of information identified in Fitch's Revenue-Supported Rating Criteria, this action was additionally informed by information from Creditscope.
Applicable Criteria and Related Research:
--'U.S. Water and Sewer Revenue Bond Rating Criteria' (Aug. 3 2012);
--'Revenue-Supported Rating Criteria' (June 12 2012);
--'2013 Water and Sewer Medians' (Dec. 5 2012);
--'2013 Outlook: Water and Sewer Sector' (Dec. 5 2012).
Applicable Criteria and Related Research:
U.S. Water and Sewer Revenue Bond Rating Criteria
Revenue-Supported Rating Criteria
2013 Water and Sewer Medians
2013 Outlook: Water and Sewer Sector