Fitch Affirms 'AA+' Rating on Honolulu (HI) Water Revenue Bonds; Outlook Stable
AUSTIN, Texas--(BUSINESS WIRE)--Fitch Ratings affirms its 'AA+' rating on the following bonds of the Board of Water Supply City and County of Honolulu, Hawaii:
--$277.2 million outstanding water system revenue bonds.
The Rating Outlook is Stable.
Bondholders are secured by a net revenue pledge of the Honolulu Board of Water Supply's (BWS) water system.
KEY RATING DRIVERS
STABLE SERVICE AREA: BWS provides water service to the entire island of Oahu. Residential customers provide around 60% of revenues.
AMPLE, HIGH-QUALITY SUPPLY: The system has sufficient groundwater rights to meet its anticipated needs with limited treatment costs and no regulatory issues at present.
RATES ADOPTED; HIGH COMBINED BILL: Annual rate increases will fund 100% of the capital program from revenues. While water rates are modest, the combined bill with sewer rates may limit future rate flexibility.
STRONG FINANCIAL POSITION: Financial performance and liquidity are strong. Revenue growth comes from increased rates while demand is relatively stable. Expenditures are experiencing upward pressure but recently adopted rate increases will fund those increases.
AVERAGE DEBT; MANAGEABLE CAPITAL: Capital needs are related almost exclusively to repair and replacement of aging infrastructure, and capital spending is expected to increase substantially in fiscal 2014. Debt levels are average and no additional debt is anticipated.
SHIFTS IN FINANCIAL MARGINS: The rating is sensitive to shifts in fundamental credit characteristics including the strong debt service coverage. The Stable Outlook reflects Fitch's expectation that such shifts are highly unlikely.
SERVICE AREA STABILITY
BWS provides water service throughout the island of Oahu (City and County of Honolulu) to an estimated residential population of 976,000. As of fiscal year 2013, BWS served approximately 176,000 accounts, 93% of which are residential, lending stability to the customer base. BWS does not serve the military installations on the island that have their own well systems. User concentration is moderate, with the top 10 making up 20% of water revenues. However, the top three users are governmental entities, which helps mitigate concentration risk.
FULL RIGHTS TO AMPLE HIGH-QUALITY WATER SUPPLY
Water supply is provided from groundwater, though alternative sources are expected to account for an increasing percentage of the supply portfolio going forward. The groundwater supply is high quality and requires very limited treatment, resulting in a low-cost supply. The water supply is provided by aquifers located under the island; the largest of which is the Pearl Harbor aquifer. Currently, there is a sustainable yield of 407 million gallons per day (mgd) available water supply on the island of which 294 mgd is permitted. The board's authorized use is 182 mgd, which is sufficient to meet the system production of 159 mgd and subsequent sales of 142 mgd. Although excess capacity exists, water use has been largely flat for the past 10 years, given conservation efforts and lower agricultural use. Unaccounted-for system water loss is modest at 10%.
MANAGEABLE CAPITAL SPENDING EXPECTED FROM RATES
The capital plan is focused primarily on water delivery assets - the aging pipelines. While capital needs are sizable at around $369 million or $420 per customer annually, rates have been put in place to support the spending. Spending has begun to ramp up in fiscal 2014. Management expects capital spending to be around $74 million in fiscal 2014 as compared to $19 million in fiscal 2013. Debt levels of $1,726 per customer are average but should continue to decline with no additional debt issuance.
Honolulu has an older system, as evidenced by its average age of plant of 19 years, as compared to the Fitch median for the 'AA' category of 13 years. In recent years, capital spending has been less than the amount of annual depreciation, indicating reinvestment that has not kept pace with the aging of assets. As the capital plan gains momentum, improvement in these ratios is expected.
BOARD-APPROVED FIVE-YEAR RATE PACKAGE
Rates are established by the seven-member board, who are appointed by the Mayor and confirmed by City Council. In December 2011, the board adopted a five-year package of rate increases of 9.65% annually. The first three have been implemented.
The rates are designed to fund increases in operating expenditures and to generate up to $40 million-$50 million annual cash flow in the later years to support the planned capital spending discussed above. A prior five-year rate package was adopted in 2006 resulting in a cumulative 40% rate increase to begin funding the long-delayed capital needs of the system. The new package will result in a cumulative 48.25% rate increase by the end of fiscal 2016.
Even following these increases, water rates are competitive with other large urban systems, primarily as a result of the system not having to pay for water supply or expensive treatment processes. The average monthly residential bill is around $36 for an 8,500 gallon bill. However, sewer bills are above average so the combined bill is 2.2% of median household income on the island. The pressure resulting from combined rates could result in rate sensitivity in the future.
Residential customers were moved to monthly billing in fiscal 2013 which will improve BWS' cash flow and provide more level billing for customers. The bill is primarily volumetric with fixed charges accounting for only 8% of water revenues. Given that most system costs are fixed, there is a risk of revenue variability if demand fluctuates.
HEALTHY FINANCIAL PERFORMANCE
Financial performance has been strong with debt service coverage of revenue bonds at over 2.0x for the past four years. Debt service coverage in fiscal 2013 was 3.0x and all-in debt service coverage (including the system's subordinate state loans) was 2.8x. Expenditures increased by around $20 million, primarily with higher carbon and power costs as well as increased spending on pump station repair and maintenance. Revenues increased by around $20 million with the 9.65% rate increase implemented at the beginning of the year and the conversion to monthly billing mid-year. Debt service coverage of revenue bonds is projected to remain over 3.0x, which exceeds BWS' own policy target of 1.6x. Liquidity is strong at 496 days cash.
Additional information is available at 'www.fitchratings.com'.
Applicable Criteria and Related Research:
--'Water and Sewer Revenue Bond Rating Guidelines', dated Aug. 10, 2012.
Applicable Criteria and Related Research:
U.S. Water and Sewer Revenue Bond Rating Criteria