Fitch Affirms Renton, WA Water & Sewer Revs at 'AA+'; Outlook Stable

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

--$13.92 million water and sewer system revenue bonds, series 2004, 2008A and 2008B;

-- $8.24 million water and sewer system refunding revenue bonds, series 2007.

The Rating Outlook is Stable.

SECURITY

The bonds are secured by a first-lien on net revenues of the water, sewer and storm system (the system) after payment of operation and maintenance expenses. The system has a debt service reserve funded with cash and surety policies.

KEY RATING DRIVERS

ROBUST COVERAGE, ADEQUATE LIQUIDITY: All-in system debt service coverage (DSC) is strong, averaging over 4x since 2011. Liquidity is adequate at 294 days of cash on hand for fiscal 2013 but low for the 'AA' rating category.

LOW DEBT BURDEN: Debt levels of $1,033 per customer are low and compare favorably to the 'AA' category median of $1,812. The system debt profile benefits from rapid amortization and manageable capital needs that are expected to be entirely cash funded.

WHOLESALE COST PRESSURES: The city is susceptible to operating cost pressures from its wholesale wastewater provider, King County Metro (Metro).

DIMINISHING RATE FLEXIBILITY: System rates lack flexibility compared to Fitch's affordability threshold when pass-through Metro charges are taken into account.

AMPLE SUPPLY AND CAPACITY: Groundwater sources and a long-term contract with the City of Seattle provide an anticipated ample water supply for the next fifty years. Wastewater collections are performed by the city's system and the flow is delivered to Metro for treatment.

CONCENTRATED YET RESILIENT ECONOMIC BASE: The Boeing Company (rated 'A' Rating Outlook Stable by Fitch) is a notable regional economic force as the top system user and the top area employer. The company's continued expansion contributes favorably to the area's socio-economic metrics. The city reports below average unemployment and has seen a notable increase in wealth levels over the last five years.

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

The city (general obligation debt rated 'AA+' by Fitch) has a population of just over 97,000 and is located about 12 miles southeast of downtown Seattle on the shore of Lake Washington. The retail system provides water and sewer service to approximately 17,500 customers and storm drainage service to 22,000. System water supplies are derived from groundwater wells in the Cedar Valley and Maplewood aquifers and are ample to meet area demand. The city has a long term contract with the city of Seattle to provide additional water on peak demand days and for future growth needs. These supplies should be sufficient to meet system demand for the next 50 years.

STRONG FINANCES & STRENGTHENED FINANCIAL POLICIES

In 2010 the city adopted stronger financial policies that resulted in large rate increases in 2011 and 2012 in order to generate revenues to fund capital reinvestment into the system for repair and maintenance. Boosted by the rate adjustments, liquidity in fiscal 2013 grew to $25 million in unrestricted cash and investments, or the equivalent of 294 days of cash on hand, from $11 million in fiscal 2010. The additional rate revenue also resulted in debt service coverage of 3.5x to 5.1x since fiscal 2011. Management projections, which appear reasonable, point to very robust all-in DSC of over 4.0x for the next five years.

Management does not anticipate the need for additional water and sewer rate increases, excluding Metro rate adjustments, for the next five years. Storm water drainage fees are anticipated to see additional annual rate increases of 4% from 2015 to 2018. Rates are structured with a substantial fixed component which provide for stable revenue to support operations. Fitch sees this structure as a positive credit factor.

Local water and sewer charges are low as a percentage of household income at 1.3% of median household income (MHI), excluding the pass through payment to Metro. Future rate flexibility is strained when taking into account Metro's pass through wastewater charge. While rates remain competitive to surrounding communities, they now register at 1.9% of MHI when taking into account Metro's charge and are expected to grow to 2.2% of MHI by 2018.

INCREASING WHOLESALE COSTS PRESSURES RATES

All wastewater flows are sent to Metro which serves as the regional wastewater treatment provider with the cost of treatment being passed through to customers as a separate line item on user's monthly bills. Payments to Metro make up a significant portion (70%) of the sewer fund's operating expenses and one-third of the entire system's operating expenses.

Metro is proposing a 5.6% increase in 2015, 6.5% in 2017 and 1.8% in 2018. The city anticipates holding its own sewer rates flat for the next five years; therefore the combined city/Metro rate adjustment represents a 3.6% increase in 2015, 4.2% in 2017 and 1.2% in 2018 to system customers. The Metro rates are revised from the prior year proposal which indicated multiple years of 10% rate increases.

LOW DEBT BURDEN CONTINUES TO DECLINE

The city's recently adopted financial policies require the system to increase its reserves and to use less debt for funding the ongoing capital maintenance. Implementation of these policies strengthened the credit by increasing margins and cash levels, while decreasing the utility's already reasonable debt burden. Debt per customer is low at $1,033, compared to the 'AA' median level of $1,812. The system's five-year capital improvement plan (CIP) totals a manageable $73 million and focuses primarily on system maintenance. There is no additional borrowing planned to fund the CIP. The system debt burden is excepted to remain low as projected debt per customer in five years registers at $714 per customer, well under 'AAA' ($1,068) and 'AA' ($1,973) median levels.

STABLE, PROSPEROUS SERVICE AREA WITH SOME CONCENTRATION

The utility serves an economically robust service area that includes Boeing, one of the world's largest airplane manufacturing plants, several major retailers and a sizeable suburban residential population with above-average demographic characteristics. Renton's traditional exposure to the economically cyclical aerospace manufacturing industry remains, with Boeing accounting for over a quarter of the city's jobs. But this concentration has gradually decreased over the years, as Boeing cut local jobs and other employers, including major retailers and government agencies, have increased employment.

The local economy also benefits from its participation in the Seattle metropolitan area's large and dynamic economy. Renton's unemployment rate has remained below the national average during the recession and was 4% in April 2014, below Washington's 5.6% rate and the nation's 5.9% rate. Local demographic indicators are also healthy with median household income growing 21% since 2005, registering at 123% of the national average and 110% of the state level as of 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 and Zillow.

Applicable Criteria and Related Research:

--'Revenue-Supported Rating Criteria' (June 2014);

--'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=839423

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Contacts

Fitch Ratings
Primary Analyst
Teri Wenck, CPA
Associate Director
+1-512-215-3742
Fitch, Inc.
111 Congress, Suite 2010
Austin, TX 78701
or
Secondary Analyst
Andrew Ward
Associate Director
+1-415-732-5617
or
Committee Chairperson
Doug Scott
Managing Director
+1-512-215-3725
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, Inc.
111 Congress, Suite 2010
Austin, TX 78701
or
Secondary Analyst
Andrew Ward
Associate Director
+1-415-732-5617
or
Committee Chairperson
Doug Scott
Managing Director
+1-512-215-3725
or
Media Relations
Elizabeth Fogerty, New York, +1-212-908-0526
elizabeth.fogerty@fitchratings.com