AUSTIN, Texas--()--Fitch Ratings has affirmed its 'AA+' rating on the following Fort Collins, CO (the city) bonds:
--Approximately $33 million wastewater utility enterprise sewer revenue bonds.
The Rating Outlook is Stable.
The bonds are secured by and payable from a first lien on the net revenues of the wastewater utility (the utility). Revenues include connection charges.
KEY RATING DRIVERS
SOLID FINANCIAL PERFORMANCE: The system has consistently produced debt service coverage (DSC) at or above 2.0x over the past several years.
ABUNDANT LIQUIDITY: Management has maintained high cash balances with more than 900 days cash on hand in fiscal 2011 from all available sources.
LOW DEBT BURDEN: Limited capital needs which have primarily been cash funded have helped to keep debt levels low.
PROACTIVE MANAGEMENT: Management has been swift in raising rates to combat revenue declines driven by events such as the loss of a major customer.
SOMEWHAT WEAK LEGAL COVENANTS: The rate covenant, which requires 1.15x coverage of debt service obligations, is considered by Fitch to be somewhat weak.
CONSISTENTLY SOUND OPERATING RESULTS
The financial profile of the utility continues to be strong, highlighted by solid DSC levels and high cash balances. This is in spite of projected revenue declines related to the recent loss of the system's largest customer. Management has been proactive in implementing a series of rate increases to mitigate this expected revenue loss. The most recent increases of 9% and 8% in 2011 and 2012 respectively have sustained DSC at above 2.0x through the same period and enabled the city to pay for capital projects from current revenues rather than from existing reserves. As a result of these actions, the city has produced increasingly stronger financial margins and preserved robust reserve levels.
Largely due to the loss of revenue driven by the largest customer leaving the system, coverage is conservatively forecast to dip to a low of 1.6x in 2013 prior to rebounding to above 2.0x the following year. Management historically has been conservative in their projections; actual results have outperformed forecasts for the previous few years, which Fitch views favorably.
Despite pay-as-you-go funding for the majority of the utility's capital spending, liquidity levels are expected to remain very strong over the forecast period. Fiscal 2011 results showed an extremely healthy 915 days cash on hand and unaudited 2012 results are even higher.
MANAGEABLE CAPITAL PROGRAM
Capital costs through fiscal 2017 are manageable, totalling slightly more than $34 million. The focus of the five-year capital improvement plan (CIP) is primarily on renewal and replacement of infrastructure and is expected to be funded from rate revenue and cash reserves. Although rates have risen in recent years and are expected to continue to rise, monthly wastewater rates should remain below Fitch's affordability threshold of 1% of median household income.
The city is in the process of planning and budgeting for new projects related to phosphorous and nitrogen removal, in anticipation of potential forthcoming EPA and state requirements. The city has estimated that such removal projects, which are expected to begin in 2018, will cost the utility approximately $27 million and $25 million for each project, respectively. Debt will be issued for the projects once the new requirements are passed and the compliance date is known. In addition, future rate increases are expected to partially cover associated increases in debt service.
LOW DEBT LEVELS
Outstanding debt per customer is currently low at $1,100 but could climb slightly over the next few years based on a planned small $1.9 million bond issue in 2014. Additionally, debt amortization is rapid with principal pay-out at 60% and 100% in 10 and 20 years, respectively.
STABLE SERVICE TERRITORY
The city is located approximately 60 miles north of Denver and has a 2011 population of around 147,000. The city is home to Colorado State University and is part of the broader Fort Collins-Loveland metropolitan area. The system serves most of the city and one area sanitation district. Customer accounts total around 33,000, and growth has been modest at just over 1% over the past five years. The customer base is fairly diverse but includes some technology sector concentration.
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 U.S. Municipal Revenue-Supported Rating Criteria, this action was additionally informed by information from Creditscope.
Applicable Criteria and Related Research:
--'Revenue-Supported Rating Criteria'(June 12, 2012);
--'U.S. Water and Sewer Revenue Bond Rating Guidelines' (Aug. 3, 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
2013 Water and Sewer Medians
Revenue-Supported Rating Criteria
2013 Outlook: Water and Sewer Sector