NEW YORK--(BUSINESS WIRE)--Fitch Ratings has assigned a 'AAA' rating to the following Suffolk County Water Authority, NY (SCWA) obligations:
--Approximately $85 million water system revenue bonds, series 2016A;
--Approximately $40 million water system revenue bonds, series 2016B;
--Approximately $70 million water system revenue bonds, series 2016 refunding.
The 2016A bond proceeds will be used to retire outstanding bond anticipation renewal notes, 2015B, fund a deposit a deposit to the reserve account and pay issuance costs. The series 2016B bonds will fund a portion of the authority's ongoing capital improvement program while the 2016 refunding bonds will refund certain outstanding senior lien bonds for interest cost savings, fund a deposit to the reserve account and pay issuance costs.
In addition, Fitch has affirmed the 'AAA' rating on the following outstanding bonds:
--$723.6 million water system revenue bonds;
--$75 million bond anticipation renewal notes (BANs), 2015B.
The Rating Outlook is Stable.
Water system revenue bonds are payable from a first lien on net revenues of the authority. Outstanding BANs are payable on a subordinate basis after the payment of outstanding water system revenue bonds.
KEY RATING DRIVERS
CONSISTENTLY STRONG FINANCIAL RESULTS: All-in annual debt service coverage has remained sound, trending above 2.0x over the prior six fiscal years with little deviation. Liquidity remains similarly strong with about 575 days of cash on hand. Fitch expects comparable operating results over the medium term based on the authority's most recent financial forecast extending through 2022.
CONSIDERABLE FLEXIBILITY: SCWA's demonstrated ability and willingness to exercise its autonomous rate-setting authority coupled with low water rates provide SCWA with considerable flexibility.
INCREASINGLY LEVERAGED UTILITY: The authority's capital program and related debt burden is currently manageable. However, leverage ratios are weak compared to median ratios for the rating category, and a steadily escalating debt service schedule through 2034 will continue to pressure operating margins absent offsetting rate relief.
STABLE AND DIVERSE SERVICE AREA: SCWA is a large, regional water provider serving a highly diverse and largely affluent service area on a retail basis. The stability of the service area and primarily affluent customer base underpin the authority's superior credit profile.
AMPLE WATER SUPPLY: The authority maintains an abundant, high quality water supply requiring minimal treatment and cost to produce. SCWA's water supply will continue to far exceed customer demand for the foreseeable future.
MAINTENANCE OF FINANCIAL PROFILE: Fitch expects Suffolk County Water Authority's financial margins beyond the current forecast period will be increasingly pressured as annual debt service obligations continue to rise. Rating stability over the long-term will depend in large part on the authority's ability and willingness to maintain current financial metrics despite the scheduled escalation in debt service.
STRONG FINANCIAL RESULTS EXPECTED THROUGH FORECAST PERIOD
SCWA consistently generates solid debt service coverage while maintaining robust cash reserves. Annual rate hikes have sufficiently offset steadily rising debt service obligations, allowing coverage on an all-in basis to remain in excess of 2.0x over the prior five consecutive years. A sizeable, but prudent debt defeasance from cash reserves reduced unrestricted cash considerably in fiscal 2015, but with about 575 days of cash on hand, liquidity remains strong relative to the authority's operating profile and projected capital needs.
The authority has targeted a 1.70x coverage level historically when establishing the budget, although the most recent financial forecast through fiscal 2022 now includes healthier margins at or slightly higher than 2.0x. Assumptions included in the forecast appear reasonable, including annual rate increases of 4.2%, nearly flat customer growth, additional debt service attributable to planned debt issuances, and rising operating costs of about 3% per annum.
SCWA benefits from an abundant supply of high quality groundwater requiring minimal cost to produce and treat. The authority's water supply is drawn entirely from three underground aquifers estimated by the United States Department of Interior to contain more than 70 trillion gallons of water. SCWA, by comparison, pumps significantly less, equal to about 70 billion gallons per year. Existing water supplies are expected to remain well in excess of customer demand for the foreseeable future as generally consistent rainfall and snowfall continually replenish the aquifers.
LOW RATES EXPECTED TO CONTINUE
User charges increased by a total 18% over the prior five years but remain very low in comparison to income levels for the service area and peer utilities within the state. Residential customers consuming almost 10,000 gallons per month currently pay slightly less than $24, equal to about 0.3% of median household income.
SCWA implemented modest rate increases in fiscals 2016 and 2017 of 4.2% for both years. Similarly sized rate adjustments are programmed into each year of the authority's financial forecast, which, based on a 2016 rate study, also incorporates an additional one-time 3% rate increase in 2019.
GROWING DEBT BURDEN
SCWA's debt burden remains manageable despite leverage ratios that are high for the rating category. Leverage ratios improved slightly in fiscals 2014 and 2015 following the authority's prudent decision to apply approximately $70 million of its unrestricted cash to the defeasance of previously outstanding bonds. However, total debt outstanding increased in fiscal 2016 following the issuance of BANs in support of capital program costs.
The ratios of debt per capita ($707) and debt as a percentage of net plant assets (77%) far exceed Fitch's median ratios for the rating category. All-in annual debt service consumed a relatively manageable proportion of gross revenues in fiscal 2016 (18%), although the slow pay-out of existing principal relative to peer rate utilities and a steadily escalating debt service schedule will likely result in a sizeable increase absent offsetting rate relief.
The size and scope of SCWA's capital improvement program appears manageable with projected spending levels in line with historical five-year spending plans. Total spending between fiscal years 2017-2021 is forecast at $364.1 million. The authority's main installation program will continue to account for the majority of planned capex (40%) while the balance will be devoted to routine renewal and replacement projects.
Approximately 60% of the capital program will be financed with previously issued debt coupled, the current offering (series 2016B bonds) with additional borrowings tentatively planned for fiscal years 2019 and 2021. Excess cash flow and cash reserves will be relied upon to fund the balance of programmed spending.
Fitch anticipates total outstanding debt will rise by nearly 15% by fiscal 2021 as a consequence of additional debt issuance. Longer-term, annual debt service obligations - notwithstanding any future borrowings beyond 2020 - will grow by approximately 55% by 2033. Accordingly, future rating reviews will focus primarily on the authority's ability and willingness to continue raising rates to support its growing debt burden while maintaining cash flow metrics and leverage ratios supportive of the current rating category.
STRONG SERVICE TERRITORY
SCWA serves a highly diverse, almost entirely residential service territory that encompasses the vast majority of Suffolk County, NY (the county). Nearly 95% of the authority's customers are served on a retail basis. The balance is comprised of three small municipally-owned water districts served on a wholesale basis. Just 3% of total system revenue is derived from the 10 largest accounts, which includes the three districts.
The county continues to exhibit a strong socioeconomic profile driven primarily by its proximity to New York City. With wealth levels equal to almost 150% and 160% of state and national figures, respectively, Suffolk County remains one of the wealthiest counties in the state. Unemployment continued below 5% through July 2016, also outperforming state and national rates. SCWA's affordable water rates together with the county's high income levels continue to yield near-perfect revenue collection rates and provide the authority with considerable flexibility.
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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