Fitch Affirms Aurora, CO's Sewer Revs at 'AA+'; Outlook Stable

AUSTIN, Texas--()--Fitch Ratings affirms the 'AA+' rating on following Aurora, Colorado (the city) bonds:

--Approximately $32 million first-lien water revenues bonds.

The Rating Outlook is Stable.

SECURITY

The bonds are secured by wastewater and storm water system (the system) revenues, including connection fees.

KEY RATING DRIVERS

SOLID FINANCIAL PROFILE: The system continues to produce strong financial metrics with 2013 audited debt service coverage (DSC) of over 4x and unrestricted assets $56 million, or the equivalent of 500 days of cash on hand (DCOH).

LOW DEBT BURDEN: Debt levels are low at less than $433 per customer and should remain favorable despite planned debt financing of capital improvements in the near term.

WHOLESALER COST PRESSURES: The city is susceptible to operating cost pressure from its wholesale wastewater provider.

GROWING RATES: Combined wastewater and storm water rates register at 0.7% of median household income (MHI), falling below Fitch's 1% MHI affordability threshold. The system passes through a portion of its wholesale wastewater provider's rate increases and is anticipating adjustments to both the sewer and storm water rates over the next five years, pushing rates closer to the threshold.

STRONG FINANCIAL, RESOURCE PLANNING: Management has demonstrated extensive financial and capital planning.

RATING SENSITIVITIES

STABILITY EXPECTED: The rating is sensitive to fluctuations in various credit fundamentals including financial and operating performance, capital needs and debt levels. The Stable Outlook reflects Fitch's belief that such fluctuations are unlikely to occur.

CREDIT PROFILE

STRONG FINANCIAL METRICS

Financial performance is very good, characterized by healthy cash flows and strong liquidity. For 2013, annual debt service coverage (ADS) was in excess of 4.7x. Liquidity declined to a still strong 503 DCOH from 776 in 2012, following a $23 million prepayment of the series 2006 bonds. The city is proactive in its capital and financial forecasting, which has allowed it to successfully manage historical growth pressures.

While cash balances are expected to be drawn down somewhat for capital purposes over the next several years, expectations are for continued balance sheet strength. Management's financial forecasts, which appear reasonable, project DSC remaining very strong at over 5.0x in 2017 and 2018 when repayment of principal begins.

The system serves around 339,000 city residents. Customer growth in the early part of the decade was consistently above 3% annually but has slowed since 2007 as the national housing market collapsed. Population estimates for 2014 point to a 4% uptick in population, indicating a return of growth. To meet ongoing needs and accommodate expected future growth, the city anticipates around $128 million of capital spending from 2014 through 2018. Most of these needs are anticipated to be funded from cash reserves and approximately $20 million in bonds.

FAVORABLE DEBT PROFILE

The system has a very favorable debt profile, with low debt per capita at $100 and debt per customer of $433; significantly less than that of similarly rated credits. Debt as a percentage of plant assets is also low at 15%. Debt levels should remain low, even taking into account planned issuances. Projected debt in year five rises to $152 on a per capita basis and $677 on a per customer basis, both well below the 'AAA' and 'AA' rating category medians. The system's debt burden has benefited from the city's prepayment of debt and the city will continue to search for prepayment opportunities; however they are becoming more limited.

POTENTIAL PRESSURE FROM RISING WHOLESALE COSTS

In addition to its own capital needs, the system indirectly finances capital costs related to its wholesale sewer treatment provider, the Metropolitan Wastewater Reclamation District (MWRD) in which the system contributes around 20% of MWRD's annual revenue base. Currently, MWRD is in the midst of an expansive capital plan to meet regulatory requirements and expand its wastewater treatment facilities. MWRD has notified the system that it anticipates increasing rates by 5-7% annually through 2018. The system faces wholesale costs pressures as the payments to MWRD account for 55% of operating costs for 2013.

RATE AFFORDABILITY REMAINS

The city consistently adopted annual rate hikes related to both the sewer and storm water rates in recent years. Double-digit increases for both systems were experienced from 2006 to 2008 to elevate the rate base sufficient to generate the strong cash flows for the debt issued in 2006 as well as pay for the pay-go component of the CIP. Rates hikes have moderated somewhat since 2009 and have been driven by pass-through costs from MWRD and capital needs relative to storm water.

Currently the combined sewer and storm water bill is 0.7% of MHI, under the 1% Fitch affordability threshold. Rates include a strong portion (38%) of fixed charges. The city will continue to pass through MWRD rates but attempts to soften the impact to rate payers and is planning on 4% - 5% rate increase though 2018. Storm water rates, unchanged since 2011, have planned increases of 3% starting in 2016.

Located directly east of Denver, the city is an important part of the Denver metropolitan economy, given its location and size as the third largest city in the state. Economic activity is driven by a large medical and military presence, including Buckley Air Force Base. The city maintains core military/aerospace and retail economic elements but is also transforming into a major medical/bioscience center as redevelopment continues at Fitzsimons, a prior army base.

Unemployment is down year-over-year dropping to 6.1% in April 2014, compared to 6.9% the year prior. However, the city's jobless rate is higher than the county (5.5%), state (5.6%) and nation (5.9%). Wealth levels are below state (87%) and national (96%) averages. Employment growth has remained favorable showing gains since 2009, with the exception a less than 1% decline in 2012.

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 2013);

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

--'2014 Water and Sewer Medians' (December 2013);

--'2014 Outlook: Water and Sewer Sector' (December 2013).

Applicable Criteria and Related Research:

Revenue-Supported Rating Criteria

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=750012

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=835457

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Contacts

Fitch Ratings
Primary Analyst
Teri Wenck, CPA
Associate Director
+1-512-215-3742
Fitch Ratings, Inc.
111 Congress, Suite 2010
Austin, TX 78701
or
Secondary Analyst
Major Parkhurst
Director
+1-512-215-3724
or
Committee Chairperson
Karen Ribble
Senior Director
+1-415-732-5611
or
Media Relations
Elizabeth Fogerty, New York, +1-212-908-0526
elizabeth.fogerty@fitchratings.com

Sharing

Contacts

Fitch Ratings
Primary Analyst
Teri Wenck, CPA
Associate Director
+1-512-215-3742
Fitch Ratings, Inc.
111 Congress, Suite 2010
Austin, TX 78701
or
Secondary Analyst
Major Parkhurst
Director
+1-512-215-3724
or
Committee Chairperson
Karen Ribble
Senior Director
+1-415-732-5611
or
Media Relations
Elizabeth Fogerty, New York, +1-212-908-0526
elizabeth.fogerty@fitchratings.com