Fitch Affirms City and County of Denver, Colorado's Wastewater Revs at 'AAA'; Outlook Stable

AUSTIN, Texas--()--Fitch Ratings affirms the following ratings on the City and County of Denver, Colorado's (the city) outstanding bonds:

--$46 million in outstanding wastewater enterprise (the system) revenue bonds, series 2012 at 'AAA'.

The Rating Outlook is Stable.

SECURITY

The bonds are secured by a first lien on storm drainage and sanitary sewerage system revenues after payment of operations and maintenance expenses. Connection fees are not pledged for debt service.

KEY RATING DRIVERS

Mixed Financial Performance: Debt service coverage (DSC) is expected to remain solid, but liquidity has weakened in the last few years with substantial pay-go capital funding. Fitch expects cash balances to remain satisfactory over the forecast period.

Very Low Debt Burden: The system's prudent practice of funding the majority of capital needs on a pay-as-you-go basis has resulted in very low debt levels and minimal leveraging, leaving the system with a substantial amount of flexibility. Future capital projects are anticipated to be funded entirely from cash.

Affordable Rates: A recently adopted multi-year rate package adds financial stability and should not materially erode overall rate flexibility; rates as of fiscal 2013 are very affordable at 0.7% of median household income (MHI).

Increasing Wastewater Treatment Costs: Credit challenges focus on maintaining good operating margins as the Metropolitan Wastewater Reclamation District (Metro) continues to raise wholesale rates.

Stable Service Area: The service area is stable and diverse.

RATING SENSITIVITIES

Strong DSC Key: Declining DSC beyond projected levels could lead to a lowering of the rating in light of expectations of continued below-average liquidity through the forecast period.

Increased Wholesaler Provider Costs: The rating is susceptible to operating cost pressure from Metro, its wholesale wastewater treatment provider.

CREDIT PROFILE

SOUND FINANCIAL PROFILE

System financial performance has been sound with total DSC at a strong 5.5x in 2012. Issuer-provided financial projections are reasonable and yield total DSC above 2.8x through fiscal 2017. The forecast includes a sanitary sewer rate increase of 10% that is already in effect for fiscal 2013, rates indexed to the metropolitan statistical area CPI for fiscal years 2014 and beyond (as approved by the board on June 20, 2011), as well as no planned borrowings. Assuming sewer flows of 6,000 gallons per month, wastewater rates at $29.84 currently are very affordable at 0.7% of MHI. Despite the annual rate adjustments, charges should remain below Fitch's 1% of MHI affordability threshold through the fiscal 2017 forecast period.

With the exception of a new money issuance in 2012, the system has predominantly cash-funded its capital improvement plan (CIP) over the past 10 years, leaving it with below-average liquidity of 132 days cash on hand yet with very low debt levels. The automatic rate hikes are anticipated to help maintain the city's adequate reserve levels over the next five years. Nevertheless, staff is prepared to propose additional rate adjustments above the CPI, if necessary, to preserve liquidity and/or if capital funding requirements increase beyond current projections.

VERY FAVORABLE DEBT PROFILE

The city's 2013-2017 CIP totals a manageable $118 million. A good portion of the plan is dedicated to addressing improvements to the storm drainage facilities. Capital funding is expected to come entirely from existing reserves, excess operating revenues and sanitary availability fees. Outstanding debt is equal to less than one-eighth of system assets, and debt per customer is well below-average at $411 as of fiscal 2012. Furthermore, debt amortization is rapid with principal payout at 66% and 100% in 10 and 20 years, respectively. Given the system has no planned borrowings, leverage ratios are anticipated to further decline and be at less than one-fifth the average for 'AAA' credits in five years.

THE SYSTEM

The wastewater management division of the city provides storm drainage facilities to mitigate the impact of stormwater drainage, as well as sanitary sewer facilities to collect and carry wastewater effluent. Sewage is treated by Metro and the city is the largest of Metro's 40+ member agencies. Metro's annual charge comprised 45% of the system's total operating expenses in fiscal 2012. Storm drainage is provided to 165,000 accounts, and 156,000 accounts receive sanitary sewer service.

SERVICE AREA

As both a regional center and the state capital, Denver's economy has strong underpinnings. Population growth has averaged approximately 2% annually over the last five years. The county unemployment estimate for August 2013, measured at 7%, is above the state (6.7%) but just below the national (7.3%) average for the month. Major economic sectors include healthcare, telecommunications, technology, and defense-related manufacturing, along with commercial activity.

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.

Applicable Criteria and Related Research:

--'Revenue-Supported Rating Criteria' (June 3, 2013);

--'U.S. Water and Sewer Revenue Bond Rating Criteria' (July 31, 2013);

--'2014 Water and Sewer Medians' (Dec. 12, 2013);

--'2014 Outlook: Water and Sewer Sector' (Dec. 12, 2013).

Applicable Criteria and Related Research:

Revenue-Supported Rating Criteria

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=709499

U.S. Water and Sewer Revenue Bond Rating Criteria

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=715275

2014 Water and Sewer Medians

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=724358

2014 Outlook: Water and Sewer Sector

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=724357

Additional Disclosure

Solicitation Status

http://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=811853

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. FITCH MAY HAVE PROVIDED ANOTHER PERMISSIBLE SERVICE TO THE RATED ENTITY OR ITS RELATED THIRD PARTIES. DETAILS OF THIS SERVICE FOR RATINGS FOR WHICH THE LEAD ANALYST IS BASED IN AN EU-REGISTERED ENTITY CAN BE FOUND ON THE ENTITY SUMMARY PAGE FOR THIS ISSUER ON THE FITCH WEBSITE.

Contacts

Fitch Ratings, Inc.
Primary Analyst
Julie G. Seebach, +1-512-215-3740
Director
111 Congress, Suite 2010
Austin, TX 78701
or
Secondary Analyst
Doug Scott, +1-512-215-3725
Managing Director
or
Committee Chairperson
Amy R. Laskey, +1-212-908-0568
Senior Director
or
Media Relations:
Elizabeth Fogerty, New York
+1-212-908-0526
elizabeth.fogerty@fitchratings.com

Sharing

Contacts

Fitch Ratings, Inc.
Primary Analyst
Julie G. Seebach, +1-512-215-3740
Director
111 Congress, Suite 2010
Austin, TX 78701
or
Secondary Analyst
Doug Scott, +1-512-215-3725
Managing Director
or
Committee Chairperson
Amy R. Laskey, +1-212-908-0568
Senior Director
or
Media Relations:
Elizabeth Fogerty, New York
+1-212-908-0526
elizabeth.fogerty@fitchratings.com