AUSTIN--(BUSINESS WIRE)--Fitch Ratings assigns an 'AA' rating to the following Albuquerque Bernalillo County Water Utility Authority, New Mexico (ABCWUA or the authority) bonds:
--Approximately $232.6 million senior lien joint water and sewer system refunding and improvement revenue bonds, series 2015.
The bonds are scheduled to sell via negotiated sale the week of March 16. Approximately $78 million in proceeds will be used for system capital improvements and the remaining proceeds will be used to refund outstanding debt for interest savings.
In addition, Fitch affirms the rating on ABCWUA's outstanding bonds as follows:
--$368.9 million senior lien joint water and sewer system revenue bonds at 'AA' (pre-refunding);
--$87 million subordinate lien water and sewer system revenue bonds at 'AA'.
The Rating Outlook is Stable.
SECURITY
The bonds are special limited obligations of the authority, payable solely from net revenues of the combined water and sewer system (the system). The senior lien bonds have a first lien on revenues while the subordinate lien is junior to payment of the senior lien bonds.
KEY RATING DRIVERS
IMPROVING FINANCIAL PERFORMANCE: Debt service coverage (DSC) has been weak in recent years but has begun to strengthen with the recent rate increases. Liquidity levels have been volatile but are projected to improve. While the authority's financial metrics are below average for the rating category, improvement in these metrics is expected over the medium term due to its declining capital needs and rapid debt amortization.
LACK OF NOTCHING: No distinction in the senior and junior lien ratings is made due to limited debt outstanding on the junior lien and the resulting consistent coverage margins between the two liens. Legal covenants for both liens are relatively strong in terms of rate and additional bonds test.
IMPROVED FINANCIAL REPORTING CAPABILITY: The authority no longer operates as a component unit of the city of Albuquerque (the city), which allowed the authority to produce its own set of financial statements in a timely manner in fiscal 2014.
RATE FLEXIBILITY: Rates remain affordable even with significant rate increases adopted in fiscals 2012-2015.
AMPLE WATER SUPPLY: Water supplies are projected to be sufficient to meet area needs for the next 50 to 55 years. Storage reservoirs provide ample capacity to contend with current drought conditions.
MODERATELY HIGH DEBT BURDEN TO FALL: Debt levels are above average on a debt per capita and debt-to-plant basis but are expected to decline over the next five years even with proposed debt issuance plans. The debt load is somewhat mitigated by rapid debt amortization.
RATING SENSITIVITIES
EROSION OF FINANCIAL METRICS: The rating reflects Fitch's expectation that liquidity will continue to improve to more adequate levels in the mid-term. While Fitch recognizes that rate increases combined with tempered borrowing plans are projected to strengthen the system's liquidity position and improve DSC levels, failure to build up adequate cash reserves could lead to negative rating action.
NOTCHING DIFFERENTIALS: Notching of the ratings could occur with material deviations from the current debt structure, closing of the senior lien and/or significant performance differences in DSC.
CREDIT PROFILE
The system primarily serves the city, which constitutes almost 90% of county residents. The city is the largest in the state and accounts for about one-quarter of its population. The national economic slowdown has had some effect on the area with employment growth slowing to modest levels through 2014. The county unemployment rate at 5.4% as of December 2014 was slightly lower than the state (5.5%) and on par with the national average. Income levels as measured by median household income (MHI) for county residents are below the national average and approximately 8% higher than those of the state.
FINANCIAL REPORTING DELAYS HINDERED MANAGEMENT
The authority's fiscal 2014 comprehensive annual financial report (CAFR) was the first to be reported on as a separate entity from the city and was completed on time. Since fiscal 2006, the authority's financial management was hindered as a result of the city's problems with implementation of its own enterprise resource planning system (ERP). The authority subsequently obtained approval from the state auditor to operate and report separately from the city and successfully rolled out a proprietary-owned ERP system beginning in fiscal 2013. The development of a proprietary-owned ERP system has enabled ABCWUA to more aptly assess the financial health of the system and improve disclosure through the issuance of timely annual audited financial statements. The fiscal 2013 CAFR was the last to be issued with the city's financials.
IMPROVED METRICS EXPECTED
A slowdown in housing starts and resulting decline in connection fees coupled with the inability of authority management to quickly assess the system's financial position led to a weakening in the system's financial profile over the 2009 through 2011 fiscal years. Senior lien annual DSC dropped below the authority's rate covenant of 1.33x in fiscal 2009 and remained below the rate covenant through fiscal 2011.
Fitch views the delay in rate increases to offset operating pressures during this period as a credit weakness, while noting that authority management acted promptly to bolster finances once audited information became available. After holding rates flat to fiscal 2007 levels, a significant water and sewer rate increase became effective on July 1, 2011 (the beginning of fiscal 2012). Additional rate increases necessary to generate a 5% annual increase in revenues were implemented for fiscals 2014 and 2015. Furthermore, 5% rate increases have already been adopted for fiscals 2016 and 2018 for both water and sewer services.
The additional rate revenue helped to strengthen all-in DSC to 1.34x for the last three fiscal years (2012 to 2014). The audited fiscal 2014 results were slightly better than what was previously anticipated and without the need to utilize the rate stabilization reserve as was planned. For fiscal 2015, management implemented a 5% rate increase to base rates ahead of its prior plans to make up for revenues lost due to a marked reduction in water demand for the year. Total DSC is now projected to range from 1.43x to 1.51x over the 2015-2019 forecast period which, though below Fitch's median for the rating category, is much improved from recent years.
Unrestricted cash reserves also deteriorated in fiscals 2009-2011 and have remained somewhat volatile since then. At the close of fiscal 2013, days cash was a low 15 days while working capital equaled 30 days, which Fitch also considers to be low. While still below the 'AA' rating category medians, both liquidity and working capital at the close of fiscal 2014 improved to 70 days as expected. Despite the rate hikes, liquidity and working capital are not expected to rise significantly given the authority's policy of cash funding 50% of basic capital improvements, but nonetheless will improve to more adequate levels in the mid-term.
CAPITAL NEEDS SLOWING DOWN
Fitch views as a credit positive the fact that the authority has largely completed its major capital initiatives. Also, rapid principal amortization will help to bring debt levels down in the near future. The authority's largest project to date for water supply - the San Juan-Chama Drinking Water Project (SJCDWP) - has been completed.
The authority's five-year capital improvement program (CIP) has steadily declined to the current $271 million for fiscals 2015-2019. The focus of the CIP is primarily for rehabilitation and replacement of existing infrastructure. Because of the recent borrowings associated with the authority's water resource management strategy (WRMS) which included funding for the SJCDWP, leveraging of net plant assets has increased from 31% in fiscal 2004 to a moderate 55% as of fiscal 2014. Likewise, debt per customer rose during this period from a modest $710 to a moderately high $1,700. Nevertheless, even with this issuance and the planned $56 million bond sales in each of fiscals 2017 and 2019, debt levels are projected to decline with debt per customer estimated at $1,400 in five years. The decline reflects the authority's conservative amortization policy of debt maturities that do not extend longer than 12 years.
WATER SUPPLY SUFFICIENT TO MEET LONG-TERM NEEDS
The authority currently provides water and wastewater service to around 674,000 residents through approximately 198,000 water and sewer connections within the city and county. Water supplies traditionally have been obtained through extraction of resources from the Rio Grande basin aquifer underlying the city. However, in an effort to reduce depletion of the aquifer, the authority is implementing its WRMS strategic plan. Initially adopted in 1997, the WRMS guided the provision of a sustainable water supply through conservation, the use of surface water, reclaimed water, and shallow and deep groundwater. The SJCDWP is the cornerstone of the WRMS and is expected to provide up to 70% of the service area's water needs over the next 40 years. Nearly 45% of the area's drinking water supply is already being derived from the project.
Additional information is available at 'www.fitchratings.com'
In addition to the sources of information identified in the 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 2014);
--'Water and Sewer Revenue Bond Rating Guidelines' (July 2013);
--'2015 Water and Sewer Medians' (December 2014);
--'2015 Outlook: Water and Sewer Sector' (December 2014).
Applicable Criteria and Related Research:
Revenue-Supported Rating Criteria
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=750012
2015 Outlook: Water and Sewer Sector
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=818410
2015 Water and Sewer Medians
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=818409
U.S. Water and Sewer Revenue Bond Rating Criteria
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=715275
Additional Disclosure
Solicitation Status
http://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=980449
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