AUSTIN, Texas--()--Fitch Ratings affirms the following revenue bonds issued by the village of Melrose Park, IL (the village) at 'A+':
--$6.7 million water revenue bonds, series 1998A.
The Rating Outlook is Stable.
SECURITY
The bonds are secured by the net operating revenues derived from the operation of the village's water supply system. The village and each of its wholesale customers are obligated pursuant to a water supply service agreement (the agreement) to pay the trustee a monthly capacity charge calculated to include each customer's pro rata share of debt service on bonds. The bonds are also backed by a debt service reserve fund that was initially funded with bond proceeds.
KEY RATING DRIVERS
IMPROVED FINANCIAL PROFILE: Financial performance of the village and its wholesale customers has improved since 2009, including increases in debt service coverage (DSC) and days cash on hand.
INTERGOVERNMENTAL SUPPORT BY UTILITY: The utility fund has traditionally provided support for non-utility purposes. Ongoing transfers out and interfund loans could potentially limit money available for capital, although this has not occurred to date.
SOUND LEGALS: Legal covenants and the service agreement provide sound security to bondholders, with no reported delinquencies from customers and step-up provisions in the event of delinquencies. The rating reflects Fitch's expectation that the Village has the financial resources to absorb any member delinquencies.
LOW DEBT LEVELS: The system's current debt levels are very low and amortization is very rapid. Future borrowing appears unlikely as most capital needs are expected to be pay-go financed.
RATING SENSITIVITY
WEAKENED METRICS FROM TRANSFERS OUT: Support of non-utility functions at the expense of utility financial results could negatively affect the rating.
CREDIT PROFILE
IMPROVED FINANCIAL PROFILE
The village is the largest member in terms of its resource use and therefore revenue allocation at about one-third of the total debt service costs on the bonds. In addition to the water supply system, the village owns its water distribution system and sewer system (the utility) from which revenues are derived to pay its capacity charges. Financial performance has been good in fiscal 2010 and 2011, generating solid cash margins and good debt service coverage in excess of legal covenants. In fiscal 2011, net revenues covered annual debt service by almost 2.7 times (x) and liquidity margins improved to 225 days cash on hand at fiscal year-end. This is a turnaround from previous years, as a large debt service payment in fiscal 2008 caused a decline in debt service coverage (DSC) to about 1.0x followed by a dip in liquidity in 2009 to just 10 days cash on hand.
Surplus revenues have typically been diverted to general governmental purposes, leaving little available cash on hand. Fitch views any large transfers as a credit negative as there can be no assurance of liquidity margins going forward. Technically, the village can transfer funds from the system after all indenture requirements are satisfied.
Other member capacity charges make up the remainder of total debt service costs on the bonds. Certain members have debt related to their respective distribution systems, but the amount of borrowing has been low and member bonds are subordinate in payment to the obligation to make capacity and quantity charges related to the bonds. To date there have been no reported member payment defaults. Fitch has not reviewed the members' credit quality, with the expectation that the Village could accommodate any member deficiencies.
VILLAGE MAINTAINS LOW DEBT LEVELS
Village debt levels associated with the utility system are low at $13.4 million, or about $439 per customer. Additionally, debt amortization is rapid with all debt scheduled to amortize within 10 years. Utility capital needs are modest and are anticipated to be funded from surplus revenues.
SERVICE AGREEMENT PROVIDES SOUND LEGAL SECURITY
The system provides water supply to the village and six other municipalities (the members) due west of Chicago and south of Chicago O'Hare Airport. Melrose Park entered into a 10-year water supply contract with the city of Chicago in 1997 that was subsequently renewed in 2007. Pursuant to the contract, Chicago agrees to sell to the village, and the village agrees to purchase and take, a supply of water derived from Lake Michigan. Chicago delivers treated water to a Melrose Park metered connection, which the village distributes to its retail customers and to each wholesale customer.
Pursuant to the agreement, the village and the members served by the system are required to remit to the trustee monthly capacity charges, which are equal to each customer's pro rata share of debt service on the bonds. As specified in the agreement, members are required to pay their pro rata capacity charges regardless of water delivery. In addition, if a member fails to make its scheduled payment of capacity charges, all non-delinquent members are required to make up such payment to ensure sufficient debt service coverage. Members have also covenanted in the agreement not to use any competing service and to pay the village a quantity charge directly for water transmitted. The agreement expires at the latter of 2023 or one year after the last debt service payment on the bonds (2021).
RATES LINKED TO CITY OF CHICAGO CHARGES
Under the service agreement, rates charged to the system are determined by the city of Chicago and are generally passed through to the system and hence the system's wholesale customers. Fitch notes that recent planned increases in charges from Chicago are expected to lead to increases in system rates beginning in fiscal 2013. At 1.7% of median household income, combined water/sewer bills are currently under Fitch's affordability threshold of 2%, creating some flexibility.
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 Criteria', Aug. 3, 2012;
--'2013 Water and Sewer Medians', dated Dec. 5, 2012;
--'2013 Outlook: Water and Sewer Sector', dated Dec. 5, 2012.
Applicable Criteria and Related Research
Revenue-Supported Rating Criteria
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=681015
U.S. Water and Sewer Revenue Bond Rating Criteria
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=684901
2013 Water and Sewer Medians
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=695756
2013 Outlook: Water and Sewer Sector
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=695755
ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: HTTP://FITCHRATINGS.COM/UNDERSTANDINGCREDITRATINGS. IN ADDITION, RATING DEFINITIONS AND THE TERMS OF USE OF SUCH RATINGS ARE AVAILABLE ON THE AGENCY'S PUBLIC WEBSITE 'WWW.FITCHRATINGS.COM'. PUBLISHED RATINGS, CRITERIA AND METHODOLOGIES ARE AVAILABLE FROM THIS SITE AT ALL TIMES. FITCH'S CODE OF CONDUCT, CONFIDENTIALITY, CONFLICTS OF INTEREST, AFFILIATE FIREWALL, COMPLIANCE AND OTHER RELEVANT POLICIES AND PROCEDURES ARE ALSO AVAILABLE FROM THE 'CODE OF CONDUCT' SECTION OF THIS SITE.
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