AUSTIN, Texas--(BUSINESS WIRE)--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.
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.
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.
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'
Revenue-Supported Rating Criteria (pub. 16 Jun 2014)
U.S. Water and Sewer Revenue Bond Rating Criteria (pub. 03 Sep 2015)
Dodd-Frank Rating Information Disclosure Form
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