AUSTIN--(BUSINESS WIRE)--Fitch Ratings has affirmed the rating on the following bonds issued by the City and County of Denver, Colorado (Denver):
--Approximately $40.7 million in outstanding wastewater enterprise 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
STRONG FINANCIAL PERFORMANCE: The wastewater enterprise system's (the system) all-in debt service coverage (DSC) has been strong historically. DSC now is exceptionally high, finishing fiscal 2014 at above 7.5x.
VERY LOW DEBT BURDEN: The 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 financial flexibility.
SATISFACTORY LIQUIDITY: Although greatly improved over the past few years, the system's liquidity position remains somewhat below average for the rating level largely as a result of using cash for capital spending. Management forecasts liquidity to decrease to just over 100 days of cash on hand by 2019, a level considered just satisfactory by Fitch.
AFFORDABLE RATES: Even after significant rate increases implemented in 2011 - 2013, the system's rates are still relatively low.
LARGE ECONOMIC BASE: Denver's economy is fundamentally sound and diverse, serving as the hub of commerce for a large
10-county metropolitan statistical area and as the seat of state government.
RATING SENSITIVITIES
CONTINUED FINANCIAL STABILITY: The system's historically below-average and somewhat volatile liquidity will need to continue to be balanced by an otherwise strong financial and debt profile for the rating to remain stable.
CREDIT PROFILE
Denver's wastewater enterprise system provides wastewater service to approximately 660k residents within the city and much of the surrounding MSA. Sewage is treated by the Metropolitan Wastewater Reclamation District (MWRD), under which the system is the largest of MWRD's 40+ members. In addition, the system provides storm drainage facilities to the service area.
STRONG DEBT SERVICE COVERAGE, SATISFACTORY LIQUIDITY
The system's all-in DSC finished at an exceptionally strong 7.6x in fiscal 2014 and has remained above 5.8x since 2012 (for comparison purposes, Fitch's 'AAA' median for all-in DSC is 2.8x). In contrast, the system's liquidity has remained only adequate over the same timeframe and trends somewhat below average. For example, unrestricted cash balances in fiscal 2014 finished at a 5-year high equal to the approximately 284 days of operational expenditures, or 'days cash'. Fitch's 'AAA' median for days cash is a much higher 481.
Financial projections provided by management show DSC tapering off to around 3.0x by 2019 due to new debt service associated with the anticipated capital borrowing described below. Historically, management's forecasts have fallen on the conservative side, and 3.0x is still considered to be more than sufficient for the rating level. At the same time, forecasts show days cash falling to just over 100 in 2019 as cash is spent to management's target level of 25% of capital expenditures.
FAVORABLE DEBT PROFILE, MANAGEABLE CAPITAL NEEDS
With the exception of a new money issuance in 2012, the system has predominantly cash-funded its capital improvement plan (CIP) for many years. This has led to a favorable debt profile. Outstanding debt per customer is now well below-average at just $353 in fiscal 2014. Furthermore, debt amortization is rapid with principal payout at 71% and 100% in 10 and 20 years, respectively.
The system's most recent CIP includes a manageable $206 million in projects in 2016 - 2019. The majority of the plan is dedicated to addressing improvements to the storm drainage facilities. Capital funding is expected to come from existing net system revenues (pay-go), reserves in excess of targeted requirements, remaining 2012 bond proceeds, and a potential new debt issue to fund a $54 million drainage project. Given its current favorable debt position, Fitch does not expect moderate borrowing to have a large impact on the overall credit profile.
AFFORDABLE RATES PROVIDE FINANCIAL FLEXIBILITY
Rates remain affordable even after significant rate hikes in fiscal years 2011 - 2013 associated with increased wastewater treatment costs passed down by MWRD (increased treatment costs were driven by financing costs for a new treatment plant). Assuming sewer flows of 6,000 gallons per month, monthly customer bills approximated $33 in fiscal 2014, which translates to an affordable 0.7% of MHI.
The system is currently engaged in a study to determine, among other things, adequacy of rates and charges of the system. If approved by city council, rate changes beyond those tied to CPI increases will likely be effective in 2016, and would be used to cover increases to the CIP.
ROBUST SERVICE AREA
As both a regional center and the state capital, Denver's economy is large and has sound underpinnings. Population growth has averaged approximately 2% annually over the last five years. The county unemployment estimate in August 2015 measured at 3.7%, which was better than the state (3.8%) and national (5.2%) averages 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'.
Applicable Criteria
Revenue-Supported Rating Criteria (pub. 16 Jun 2014)
https://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=750012
U.S. Water and Sewer Revenue Bond Rating Criteria (pub. 03 Sep 2015)
https://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=869223
Additional Disclosures
Dodd-Frank Rating Information Disclosure Form
https://www.fitchratings.com/creditdesk/press_releases/content/ridf_frame.cfm?pr_id=996146
Solicitation Status
https://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=996146
Endorsement Policy
https://www.fitchratings.com/jsp/creditdesk/PolicyRegulation.faces?context=2&detail=31
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.