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:

--$19.6 million outstanding water and sewer system revenue bonds.

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, IMPROVING LIQUIDITY: All-in system debt service coverage (DSC) is strong, averaging over 4x since 2011. Liquidity has improved to over 400 days cash on hand (DCOH) for 2015, up from 153 DCOH in 2010. Liquidity levels are expected to decline closer to historical norms as the city plans to cash fund capital improvements.

LOW DEBT BURDEN: Debt metrics are very favorable with $825 debt per customer and 11% debt to net plant for 2015 which compares well to both Fitch's 'AAA' and 'AA' rating category medians. 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.

CONCENTRATED YET RESILIENT ECONOMIC BASE: The Boeing Company (Issuer Default Rating of 'A'/Stable Outlook by Fitch) is a notable regional economic force as the top system user and the top area employer. The company's recent expansion contributes favorably to the area's socio-economic metrics. The city reports below average unemployment and area wealth levels are above state and national averages.

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 50 years. Wastewater collections are performed by the city's system and the flow is delivered to Metro for treatment.

RATING SENSITIVITIES

STABILITY EXPECTED: Although unexpected, significant leveraging on the part of the city of Renton or its wholesale sewer provider or a change in the status of the Boeing Company could pressure the rating. The Stable Outlook reflects Fitch's belief that such fluctuations are unlikely to occur.

CREDIT PROFILE

The city (general obligation debt rated 'AA+'/Stable Outlook by Fitch) has a population of just over 100,000 and is located about 12 miles southeast of downtown Seattle on the shore of Lake Washington. The retail system provides water and sewer services to over 17,500 customers and storm drainage services to 23,000. System water supplies are derived from groundwater wells in the Cedar River Delta and Maplewood aquifers and are ample to meet area demand. The city recently entered into 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 AND STRENGTHENED FINANCIAL POLICIES

Financial policies adopted in 2010 resulted in significant rate increases in order to generate revenues to fund capital reinvestment into the system for repair and maintenance. Since then, cash balances have continued to improve growing to over 480 DCOH in 2015. Additional rate revenue also resulted in strong total DSC with a three year average of 5.2x. Management projections, which appear reasonable, point to very robust all-in DSC of over 4.5x for the next five years.

Management does not anticipate the need for additional water rate increases for the next five years. Sewer and storm water drainage fees are anticipated to see additional annual rate increases of 2.5% (sewer) and 4% (storm water) from 2015 to 2019. Rates are structured with a substantial fixed component, which provides for stable revenue to support operations. Fitch sees this structure as a positive credit factor.

Local water, sewer and storm water charges are affordable as a percentage of median household income (MHI) at 1.5%, excluding the pass through payment to Metro. Future rate flexibility is constrained when taking into account Metro's $42.41 monthly pass through wastewater charge. Taking Metro's pass through into account, charges grows to 2.3% of MHI in 2016, over Fitch's 2% MHI threshold.

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 5.2% cost increases in 2017 and 2019 and a 2.6% increase in 2021.

LOW DEBT BURDEN CONTINUES TO DECLINE

The city's 2010 financial policies require the system to increase its reserves and to use less debt for funding 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 $852, compared to the 'AA' median level of $2,050. The system's five-year capital program is just over $100 million, focusing primarily on system maintenance, water main replacement and building of a reservoir. The capital program will be largely cash funded, which will result in the continued improvement of debt ratios.

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 30% of the city's jobs. The city has seen an increase in commercial development activity recently which includes the addition of several hotels and over 700,000 square feet of proposed class A office space.

The local economy also benefits from its participation in the Seattle metropolitan area's large and dynamic economy. Renton's unemployment rate is favorable at 3.7% in April 2016, up slightly from 3.2% the year prior and below the state and national rates of 5.6% and 4.5%, respectively. Local demographic indicators are also healthy with MHI registering at 127% of the national average and 118% of the state level.

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=1006037

Solicitation Status
https://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=1006037

Endorsement Policy
https://www.fitchratings.com/jsp/creditdesk/PolicyRegulation.faces?context=2&detail=31

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Contacts

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

Contacts

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