Fitch Rates City and County of Denver, CO's Series 2016 Wastewater Revs 'AAA'; Outlook Stable

AUSTIN, Texas--()--Fitch Ratings has assigned a 'AAA' rating to the following bonds issued by the City and County of Denver, CO (Denver):

--Approximately $115 million wastewater enterprise revenue bonds, series 2016.

The bonds are expected to sell via competitive bid the week of Oct 24. Proceeds will be primarily used to finance certain storm drainage capital improvements and to pay issuance costs.

In addition, Fitch affirms the following ratings:

--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 wastewater system (the system) revenues after payment of operations and maintenance expenses. Connection fees are not pledged for debt service.

KEY RATING DRIVERS

STRONG FINANCIAL PERFORMANCE: Fiscal 2015 finished with all-in debt service coverage (DSC) of 6.6x, which is better than Fitch's 'AAA' median of 2.6x. The system's DSC has been strong historically and is expected to remain so going forward. However, new debt service associated with the 2016 and the potential for future bonds will lead to a reduction in coverage, albeit at still robust levels.

IMPROVED LIQUIDITY POSITION: The system's liquidity position continues to improve over the weaker levels posted in 2011. More recently, fiscal 2015 finished at the equivalent of 340 days of operational costs.

LOW DEBT BURDEN: The system's prudent 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 measurable amount of financial flexibility. Fiscal 2015 debt-per-customer finished at a very low $285 (versus Fitch's 'AAA' median of $1,093).

AFFORDABLE RATES: Even after significant rate increases implemented in 2011-2013, the system's rates are still relatively low. Anticipated future rate increases tied to costs of new debt service and fees from the system's wastewater treatment provider should remain moderately affordable.

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 (MSA) and as the seat of state government.

RATING SENSITIVITIES

STRONG FINANCIAL MARGINS: Maintenance of strong financial coverage margins are necessary to offset the potential for decreases in liquidity as the wastewater system, operated by the city and county of Denver, spends down its cash to fund capital projects.

CREDIT PROFILE

The system provides storm drainage and sanitary sewerage service to approximately 660,000 residents within the city and county of Denver. Sewage is treated by the Metropolitan Wastewater Reclamation District (MWRD), for which the system is the largest of MWRD's 40-plus members.

STRONG DEBT SERVICE COVERAGE, SUFFICIENT LIQUIDITY

Benefiting from affordable debt service carrying costs and consistent rate increases since 2011, the system's financial profile remains strong, with all-in DSC finishing at an exceptional 6.6x in fiscal 2015. Projections provided in management's bond feasibility report demonstrate performance remaining robust throughout the forecast period ending in 2021. Inclusive of new debt associated with the 2016 bonds and potential new bonds in 2018, the forecast demonstrates all-in DSC bottoming out at 2.6x in 2019, a level consistent with Fitch's equivalent median. Fitch's calculation of DSC includes debt service related to privately placed certificates of participation allocable to the wastewater system, which are payable from state sources and are therefore not included in the city's own DSC calculation.

After reaching a very low 51 days cash in 2011, system liquidity has improved annually and finished fiscal 2015 at levels considered to be sufficient for the current rating level; fiscal 2015 finished at approximately 340 days cash. The system's strong financial coverage should help to offset any potential decreases in cash due to pay-go capital spending.

MANAGEABLE CAPITAL NEEDS, FAVORABLE DEBT PROFILE

The system's six-year capital improvement plan (CIP) totals $477.1 million. The 2016 bonds are being issued to fund, in part, the Platte to Park Hill project, which consists of storm drainage additions and upgrades meant to protect the service area against 100-year floods. Completion is slated for 2020, and the city anticipates issuing approximately $121 million of additional bonds in 2018 to complete the project, with $91 million of the par amount specifically earmarked for the project. The remaining portion of the CIP is for standard repair and rehabilitation projects, all of which is to be funded with surplus system revenues.

Given the system's current favorable debt levels, moderate planned borrowing is not expected to have a large impact on the overall debt profile. Outstanding debt-per-customer is currently well below-average, and the addition of the new debt should still keep debt levels at or near Fitch's 'AAA' median. However, with the city issuing 30-year bonds, debt amortization will slow from currently favorable rates.

AFFORDABLE RATES PROVIDE FINANCIAL FLEXIBILITY

Rates remain affordable even after significant rate hikes from 2011-2013 primarily associated with increased sewage treatment costs passed down by MWRD and increased storm-related capital needs. MWRD's increased treatment costs were driven by financing costs for a new treatment plant. Assuming flows of 6,000 gallons per month, monthly residential customer bills approximated $33 in fiscal 2015, which translates to an affordable 0.7% of median household income. Going forward, further rate increases are anticipated to cover the cost of the new debt service and the increasing fees charged by MWRD. The increases range from 10%-11% for the storm system and 4%-5% for the sewerage system annually through 2020, and then inflation-based increases thereafter.

ROBUST SERVICE AREA

Denver's local economy continues to expand rapidly, with continued sector development in professional and business services, education and healthcare, and tourism. The expansive employment base remains resilient in the face of low oil prices and stalled exploration activity within the Front Range. The county's unemployment rate declined to a low 3.2% in August 2016 from 3.6% a year prior. A youthful population and highly educated workforce are expected to support healthy economic growth over the medium and long term per IHS. The city and county's 2015 median household incomes are 124% and 103% and of the U.S. average, respectively.

Additional information is available at 'www.fitchratings.com'

Applicable Criteria

Revenue-Supported Rating Criteria (pub. 16 Jun 2014)

https://www.fitchratings.com/site/re/750012

U.S. Water and Sewer Revenue Bond Rating Criteria (pub. 03 Sep 2015)

https://www.fitchratings.com/site/re/869223

Additional Disclosures

Dodd-Frank Rating Information Disclosure Form

https://www.fitchratings.com/creditdesk/press_releases/content/ridf_frame.cfm?pr_id=1012911

Solicitation Status

https://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=1012911

Endorsement Policy

https://www.fitchratings.com/regulatory

ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: HTTPS://WWW.FITCHRATINGS.COM/UNDERSTANDINGCREDITRATINGS. IN ADDITION, RATING DEFINITIONS AND THE TERMS OF USE OF SUCH RATINGS ARE AVAILABLE ON THE AGENCY'S PUBLIC WEB SITE AT 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.

Copyright© 2016 by Fitch Ratings, Inc., Fitch Ratings Ltd. and its subsidiaries. 33 Whitehall Street, NY, NY 10004. Telephone: 1-800-753-4824, (212) 908-0500. Fax: (212) 480-4435. Reproduction or retransmission in whole or in part is prohibited except by permission. All rights reserved. In issuing and maintaining its ratings and in making other reports (including forecast information), Fitch relies on factual information it receives from issuers and underwriters and from other sources Fitch believes to be credible. Fitch conducts a reasonable investigation of the factual information relied upon by it in accordance with its ratings methodology, and obtains reasonable verification of that information from independent sources, to the extent such sources are available for a given security or in a given jurisdiction. The manner of Fitch's factual investigation and the scope of the third-party verification it obtains will vary depending on the nature of the rated security and its issuer, the requirements and practices in the jurisdiction in which the rated security is offered and sold and/or the issuer is located, the availability and nature of relevant public information, access to the management of the issuer and its advisers, the availability of pre-existing third-party verifications such as audit reports, agreed-upon procedures letters, appraisals, actuarial reports, engineering reports, legal opinions and other reports provided by third parties, the availability of independent and competent third- party verification sources with respect to the particular security or in the particular jurisdiction of the issuer, and a variety of other factors. Users of Fitch's ratings and reports should understand that neither an enhanced factual investigation nor any third-party verification can ensure that all of the information Fitch relies on in connection with a rating or a report will be accurate and complete. Ultimately, the issuer and its advisers are responsible for the accuracy of the information they provide to Fitch and to the market in offering documents and other reports. In issuing its ratings and its reports, Fitch must rely on the work of experts, including independent auditors with respect to financial statements and attorneys with respect to legal and tax matters. Further, ratings and forecasts of financial and other information are inherently forward-looking and embody assumptions and predictions about future events that by their nature cannot be verified as facts. As a result, despite any verification of current facts, ratings and forecasts can be affected by future events or conditions that were not anticipated at the time a rating or forecast was issued or affirmed.

The information in this report is provided "as is" without any representation or warranty of any kind, and Fitch does not represent or warrant that the report or any of its contents will meet any of the requirements of a recipient of the report. A Fitch rating is an opinion as to the creditworthiness of a security. This opinion and reports made by Fitch are based on established criteria and methodologies that Fitch is continuously evaluating and updating. Therefore, ratings and reports are the collective work product of Fitch and no individual, or group of individuals, is solely responsible for a rating or a report. The rating does not address the risk of loss due to risks other than credit risk, unless such risk is specifically mentioned. Fitch is not engaged in the offer or sale of any security. All Fitch reports have shared authorship. Individuals identified in a Fitch report were involved in, but are not solely responsible for, the opinions stated therein. The individuals are named for contact purposes only. A report providing a Fitch rating is neither a prospectus nor a substitute for the information assembled, verified and presented to investors by the issuer and its agents in connection with the sale of the securities. Ratings may be changed or withdrawn at any time for any reason in the sole discretion of Fitch. Fitch does not provide investment advice of any sort. Ratings are not a recommendation to buy, sell, or hold any security. Ratings do not comment on the adequacy of market price, the suitability of any security for a particular investor, or the tax-exempt nature or taxability of payments made in respect to any security. Fitch receives fees from issuers, insurers, guarantors, other obligors, and underwriters for rating securities. Such fees generally vary from US$1,000 to US$750,000 (or the applicable currency equivalent) per issue. In certain cases, Fitch will rate all or a number of issues issued by a particular issuer, or insured or guaranteed by a particular insurer or guarantor, for a single annual fee. Such fees are expected to vary from US$10,000 to US$1,500,000 (or the applicable currency equivalent). The assignment, publication, or dissemination of a rating by Fitch shall not constitute a consent by Fitch to use its name as an expert in connection with any registration statement filed under the United States securities laws, the Financial Services and Markets Act of 2000 of the United Kingdom, or the securities laws of any particular jurisdiction. Due to the relative efficiency of electronic publishing and distribution, Fitch research may be available to electronic subscribers up to three days earlier than to print subscribers.

For Australia, New Zealand, Taiwan and South Korea only: Fitch Australia Pty Ltd holds an Australian financial services license (AFS license no. 337123) which authorizes it to provide credit ratings to wholesale clients only. Credit ratings information published by Fitch is not intended to be used by persons who are retail clients within the meaning of the Corporations Act 2001

Contacts

Fitch Ratings
Primary Analyst
Major Parkhurst
Director
+1-512-215-3724
Fitch Ratings, Inc.
111 Congress, Suite 2010
Austin, TX 78701
or
Secondary Analyst
Julie G. Seebach
Director
+1-512-215-3743
or
Committee Chairperson
Doug Scott
Managing Director
+1-512-215-3725
or
Media Relations
Elizabeth Fogerty, +1 212-908-0526
elizabeth.fogerty@fitchratings.com

Contacts

Fitch Ratings
Primary Analyst
Major Parkhurst
Director
+1-512-215-3724
Fitch Ratings, Inc.
111 Congress, Suite 2010
Austin, TX 78701
or
Secondary Analyst
Julie G. Seebach
Director
+1-512-215-3743
or
Committee Chairperson
Doug Scott
Managing Director
+1-512-215-3725
or
Media Relations
Elizabeth Fogerty, +1 212-908-0526
elizabeth.fogerty@fitchratings.com