NEW YORK--(BUSINESS WIRE)--Fitch Ratings assigns an 'AA-' rating to the following Austin, Texas revenue bonds:
--Approximately $457 million water and wastewater system revenue refunding bonds, series 2013A;
--Approximately $154 million water and wastewater system revenue refunding bonds, taxable series 2013B.
The series 2013A and 2013B bonds are scheduled for negotiated sale the week of July 8. A portion of the 2013A bonds will retire Austin Water Utility's (AWU, or the system) outstanding commercial paper notes, while the balance of the 2013A bonds and all of the 2013B bonds will refund outstanding water and wastewater system revenue bonds for cost savings with no extension of bond maturity dates.
In addition, Fitch takes the following action on the city's remaining revenue bonds, outstanding in amounts as of Sept. 30, 2012:
--$70.6 million combined utility systems (prior first lien) revenue bonds upgraded to 'AA' from 'AA-;
--$168.3 million combined utility systems (prior subordinate lien) revenue bonds affirmed at 'AA-;
--$2.1 billion water and wastewater system revenue bonds affirmed at 'AA-'.
The Rating Outlook is Stable.
The series 2013A and 2013B bonds are secured by net revenues of AWU, after provision for the prior first lien obligations of the combined utility systems. The series 2013A and 2013B bonds are on parity with the prior subordinate lien obligations of the combined utility systems and all outstanding water and wastewater revenue bonds. The 2013 series A and B bonds will not carry a debt service reserve.
The prior first- and subordinate-lien obligations are secured by a joint and several pledge of net revenues of the combined utility systems, consisting of AWU and Austin Energy (AE; electric revenue bonds rated 'AA-' with a Stable Outlook by Fitch). The issuance of additional bonds secured by a joint and several pledge of net revenues of AWU and AE is no longer permitted by the master bond ordinance, making both liens effectively closed. A default on the prior subordinate lien obligations and water and wastewater bonds would not trigger a default on the prior first lien bonds.
KEY RATING DRIVERS
STRONG SERVICE AREA: AWU provides water and wastewater treatment service, almost entirely on a retail basis, to a sizeable service territory that includes the city of Austin, TX (Public Improvement Bonds rated 'AAA' with a Stable Outlook) and neighboring areas of the city. AWU's growing service area exhibits a deep and diverse economy, exceptionally low unemployment, above-average wealth levels and a highly diversified customer base.
WEAK FINANCIAL PERFORMANCE: Financial metrics are weak for the given rating category. However, the city has demonstrated its commitment to raising and restructuring rates to bring about improved financial results and healthier liquidity over the next few years. AWU ended fiscal 2012 with all-in debt service coverage of 1.4x and 25 days of cash, compared to 'AA-' category medians of 1.6x and 425 days, respectively.
INCREMENTAL DECLINE IN RATE AFFORDABILITY: The city's water and electric utilities maintain autonomous rate-setting authority. However, AWU's combined rates are somewhat high relative to income levels, and moderately-sized planned rate increases needed to boost financial performance could ultimately lead to rate fatigue.
LEVERAGED SYSTEM: The system's debt levels are high for the rating category, although Fitch does not expect a meaningful increase in leverage, as scheduled amortization of existing debt will somewhat offset AWU's plans to fund approximately 70% of its nearly $1 billion capital program with additional borrowings.
SUFFICIENT CAPACITY: AWU's long-term water supply agreement with the Lower Colorado River Authority (LCRA) runs through 2050, with the option to extend through 2100. In addition, its water and wastewater treatment capacity will be sufficient for the foreseeable future, after completion of a new water treatment plant in 2014.
PRIOR LIEN UPGRADE: The upgrade to 'AA' on the prior first lien bonds reflects the closed nature of the lien, the very modest portion the bonds make up of AWU's and AE's overall debt profile and the strong debt service coverage provided by the pledge of the combined utilities. Coverage of prior first lien obligations should continue to improve given the decreasing annual debt service requirements.
IMPROVED FINANCIAL METRICS: The continuation of AWU's efforts to steadily improve its financial metrics will be critical to maintaining the current rating. Fitch considers AWU's stated financial targets to be positive, particularly the improved reserve levels, and any deviation in achieving its financial forecast over the next few years will result in downward rating action.
STRONG SERVICE AREA
AWU provides water and wastewater service to a highly diverse service area that includes approximately 214,000 water and 204,000 wastewater customer accounts. The system's customer base is diverse, comprised mostly of residential users with the 10 largest customers accounting for a nominal 6% of total revenues in fiscal 2012. The system also provides water and wastewater service on a wholesale basis to five municipal utility districts, one water control and improvement district, six water supply corporations, one private utility, and four neighboring towns. Wholesale revenues accounted for 4% of total system revenues in fiscal 2012. Wholesale rates are established annually based on a cost of service model.
The city's population, estimated at roughly 811,000 for 2012, has increased more than 20% since 2000. Wealth indicators for the area are comparatively high and the city's March 2013 unemployment rate of 4.6% is exceptionally low relative to the state and national averages. The collection of monthly billings is consistently strong, leading to a notably low number of delinquencies each year.
AMPLE SUPPLY AND TREATMENT CAPACITY
AWU has an ample, long-term water supply, pursuant to an agreement with LCRA (revenue bonds rated 'A' with a Stable Outlook) that is extendable through 2100 at AWU's option. AWU's water treatment plants provide ample excess treatment capacity estimated to be sufficient until 2030 following the addition of a new facility in 2014.
AWU's two wastewater treatment plants provide 150 millions of gallons per day (mgd) of capacity, which was sufficient to meet average daily flows of 104 mgd in fiscal 2012. Existing treatment capacity is reportedly sufficient for the foreseeable future, and discharge permits are current. The Texas Commission on Environmental Quality (TCEQ) issued the city five-year discharge permits in 2009 and 2010. The system is not currently operating under any environmental judgments or consent orders.
WEATHER CONDITIONS HINDER FINANCIAL IMPROVEMENTS
AWU's financial performance has been largely uneven in recent years, driven by variable weather conditions and an ongoing drought. Water restrictions invoked early in 2010 due to drought conditions were followed by heavy rainfalls that limited customers' demand requirements. Drier weather in fiscal 2011 led to a nearly 25% increase in water consumption, although the positive growth was followed by a 13% reduction in demand in fiscal 2012.
The drop in demand in fiscal 2012 prompted an all-in debt service coverage decline to 1.4x compared to 1.7x in the prior year and Fitch's median ratio of 1.6x. A marginal improvement in liquidity in fiscal 2012 resulted in 25 days of cash on hand, still far below the rating category median of 425 days.
POSITIVE FINANCIAL FORECAST
The utility's financial projections through fiscal 2018 are consistent with AWU's 2012 multi-year plan. The forecast shows all-in debt service coverage remaining within an acceptable range of 1.5x-1.6x, assuming AWU's plans for modest annual rate hikes, and additional debt issuance in each year.
AWU's assumptions for water and wastewater demand included in the forecast are somewhat aggressive in Fitch's view given the more recent trend and the region's susceptibility to drought conditions. However, the service area continues to exhibit steady population growth, which could help increase sales as currently projected.
The forecast also shows a positive build-up of unrestricted cash to a level more consistent with the 'AA-' rating category. Management is targeting a minimum operating and maintenance reserve of 60 days cash by the close of 2014. The recent implementation of a 12-cent surcharge that will be raised to 15 cents by fiscal 2014 will also provide dedicated funding to a new water revenue stability reserve fund, which is expected to grow to $50 million by 2018, equal to 120 days cash. Fitch will continue to monitor AWU's ability to achieve its stated financial goals and respond accordingly.
DECLINING RATE AFFORDABILITY
The establishment of AWU's rates and fees requires only the approval of city council. However, the TCEQ maintains oversight on rates charged to customers residing outside the city's boundaries. Combined water and wastewater rates are high relative to income levels of city residents, and in comparison to other large urban systems.
Despite implementing only modest rate increases in recent years, the city's 2013 combined monthly residential bill (based on approximately 8,000 gallons/month) totals slightly more than $83, equal to 2.0% of median household income. Rates were increased by a combined 5.5% in both fiscals 2012 and 2013 but the revenue impact was muted from original expectations due to lower sales. An increase to the fixed charge component of the utility bill is a positive credit development and should reduce variability in revenues related to demand. Rates have not yet been adopted for fiscal 2014 and beyond but the system's current financial forecast relies on additional assumed annual increases through 2018, ranging from 2.3% to 3.8%.
Additional information is available at 'www.fitchratings.com'
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:
--'Revenue-Supported Rating Criteria' (June 3, 2013);
--'U.S. Water and Sewer Revenue Bond Rating Criteria' (Aug. 3, 2012);
--'U.S. Public Power Rating Criteria' (Dec. 18, 2012);
--'2013 Water and Sewer Medians' (Dec. 5, 2012);
--'2013 Outlook: Water and Sewer' (Dec. 5, 2012).
Applicable Criteria and Related Research:
2013 Outlook: Water and Sewer Sector
2013 Water and Sewer Medians
U.S. Public Power Rating Criteria
U.S. Water and Sewer Revenue Bond Rating Criteria
Revenue-Supported Rating Criteria