NEW YORK--(BUSINESS WIRE)--Fitch Ratings affirms the ratings on the following Suffolk County Water Authority, NY's (the authority) outstanding water system revenue bonds and BANs:
--$580 million (senior lien) revenue bonds at 'AAA';
--$72 million (subordinate lien) revenue bonds at 'AAA';
--$100 million BANs, 2013A and 2013B (subordinate lien) at 'AAA'.
The Rating Outlook is Stable.
The bonds are secured by a senior lien on the authority's net revenues. Subordinate lien obligations, which include bonds and the outstanding BANs, are payable from net revenues of the authority after senior obligations have been paid.
KEY RATING DRIVERS
STABLE SERVICE AREA, AMPLE SUPPLY: The authority benefits from a large, affluent service area and an abundant source of high-quality water that requires minimal treatment and cost to produce. Operations are well-managed.
CONSISTENTLY SOLID FINANCIAL RESULTS: Favorable operating results are demonstrated by consistently solid all-in debt service coverage (DSC) levels and robust liquidity.
SLIGHTLY ELEVATED DEBT PROFILE: Debt ratios are high for the rating, although capital needs are manageable and will focus on system renewal and replacement. In addition, affordable user charges and strong liquidity provide a significant offset to the elevated debt burden. Additional borrowing plans are not expected to result in a meaningful increase in leverage despite a slow amortization rate for existing bonds.
SENIOR AND SUBORDINATE RATINGS ON PAR: The 'AAA' rating on outstanding subordinate lien bonds and BANs reflects the modest (approximately 10%) amount of subordinated debt outstanding relative to the system's overall debt profile. No changes to the debt composition are currently expected. Fitch also considers the strong credit quality of the authority and its expected ability to refinance or redeem the BANs at maturity.
RATING STABILITY EXPECTED: The rating is sensitive to shifts in various credit fundamentals including debt and capital management, consistent financial and operating performance, and strong system liquidity. The Stable Outlook reflects Fitch's expectation that such changes are unlikely over the near-term.
STABLE FINANCIAL RESULTS, STRONG LIQUIDITY AND LOW RATES PROVIDE FLEXIBILITY
The authority's financial performance remains stable characterized by good financial margins and debt service coverage (DSC), and robust cash balances. Dry weather conditions persisted throughout much of fiscal 2011, prompting sizeable growth in consumption that drove a 15% increase in operating revenue at the time and favorable DSC of 2.6x and 2.1x on senior-lien and all-in obligations, respectively.
The adoption of modest rate hikes for the past several years boosted operating revenues further, although DSC remained largely unchanged despite a decline in annual debt service due to a decline in capital reimbursement fees in fiscal 2013. Even so, all-in coverage remained above 2.1x for fiscal 2013. Liquidity is substantial; fiscal 2013 ended with $236 million of unrestricted cash, or a very comfortable 760 days operating expenses, and more than 2.0x the amount of short-term notes outstanding.
The authority's low rates provide additional flexibility that Fitch believes will be necessary to meet escalating debt service costs going forward. After holding charges flat in fiscal 2010 and through the first 10 months of fiscal 2011, multiple rate hikes of roughly 4% were implemented at the end of each of the past three fiscal years (2011-2013), followed by a smaller 1.2% rate hike for fiscal 2015 due to receipt of proceeds from the sale of authority-owned land. The forecast assumes continued annual rate hikes of 4% going forward. The average residential bill for service remains low at $30 in 2014, or just 0.5% of median household income.
The authority's financial forecast through fiscal 2019 shows solid DSC on an all-in basis at 1.7x, which is similar to previous forecasts shown to Fitch. Assumptions built into the forecast appear reasonable and include the aforementioned rate hikes, additional debt issuances, nominal growth in customer accounts and customer demand in line with more recent trends.
MANAGEABLE CAPITAL PROGRAM, ADDITIONAL DEBT REQUIRED
Capital needs total $336 million over the next five years and consist of various renewal and replacement projects including water main installation, continued implementation of an automatic meter reading system (AMR), upgrades and improvements to treatment facilities, and various remediation projects. The authority expects to fund roughly 40% of its capital program with additional bonds in fiscal 2015 and fiscal 2017, which appear necessary given estimates of future free cash flow (excess annual cash after operating expenses and debt service have been paid). The remainder is expected to be funded from pay-as-you-go resources and existing cash.
SLIGHTLY ELEVATED BUT WELL-MANAGED DEBT PROFILED
Debt levels are high for the rating, with metrics that compare more closely to medians for 'AA' category. Total debt outstanding in fiscal 2013, which includes short-term notes, was a fairly substantial 76% of net fixed assets, which is roughly 3.0x the median for 'AAA'; and funds available for debt service (FADs) and system equity were roughly twice the median for each ratio in fiscal 2013.
Positively, debt carrying costs are very manageable 17% of fiscal 2013 gross revenues. However, of some concern, annual debt service (ADS) from currently outstanding debt is scheduled to rise over time from the current roughly $30 million to approximately $40 million by 2020 and to $49 million by 2029 (assumes no additional debt). Even with projected 4% annual rate hikes, annual debt service will start consuming a greater share of operating revenues going forward and may result in diminished DSC over time. In addition, amortization is slow, which coupled with additional debt will leave debt ratios elevated for the foreseeable future.
The authority issues short-term BANs to fund capital needs. Two series of fixed-rate BANs totaling $100 million remain outstanding as of fiscal 2014. The series 2013A BAN matures on January 15, 2015, and the series 2013B matures on January 15, 2016. The authority has a long history of issuing BANs and eventually taking out the notes with long-term debt or existing cash. Fitch anticipates this practice will continue.
STRONG SERVICE AREA CHARACTERISTICS
The authority operates one of the largest groundwater systems in the country and maintains an abundant raw water supply from deep aquifers beneath Long Island, NY. The authority provides water service to 85% of the estimated 1.5 million residents of the county, which encompasses the eastern two-thirds of Long Island. With the service area largely built out, management budgets for minimal customer growth of less than 1% annually. The county's economy benefits from its proximity to the New York City metropolitan area as well as from its own broad employment base. Consequently, unemployment rates typically trend below the state and the nation while income indicators rank comfortably above the state and nation.
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 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
U.S. Water and Sewer Revenue Bond Rating Criteria
2014 Water and Sewer Medians
2014 Outlook: Water and Sewer Sector