Fitch Rates Central Brown County Water Auth (WI) Water System Revs, 2014A 'AA-'; Outlook Stable
AUSTIN, Texas--(BUSINESS WIRE)--Fitch Ratings assigns an 'AA-' rating to the following bonds issued by the Central Brown County Water Authority, WI (CBCWA or the authority):
--$109.6 million water system revenue bonds, series 2014A.
The bonds are expected to sell via negotiation the week of July 21. Bond proceeds will be used to refund the outstanding water system revenue bonds, series 2005, to fund the reserve account, if the authority so chooses, and to pay cost of issuance.
In addition, Fitch downgrades the 'AA' rating on the authority's outstanding water system revenue bonds to 'AA-'.
The Rating Outlook is Stable.
The bonds are secured by net system revenues of the Central Brown County Water Authority, which consist of payments made under water sales contracts from its six members' respective water systems (the charter members).
KEY RATING DRIVERS
DOWNGRADE REFLECTS CHANGE IN AGREEMENT: The downgrade reflects the recent change to the water purchase and sale contract which somewhat weakens payment requirements by charter members. With this change, Fitch believes structural provisions no longer support a rating one-notch higher than that of the authority's largest member, the city of De Pere (water utility revenue bonds rated 'AA-' by Fitch with Stable Outlook).
SOLID MEMBER CREDIT QUALITY: The rating is primarily driven by the credit quality of the charter members' water systems. The largest of such members is the city of De Pere, which represents approximately 31% of CBCWA's water sales, while the next three largest members combine for approximately 59% of the authority's sales.
STEP-UP PROTECTION: If a member defaults on its payment obligation, the remaining members are obligated to make up any shortfall on a proportional basis, via funds available in their respective security fund accounts held by CBCWA. However, Fitch believes practical limits as to the affordability of increased costs to the members limit the value of this provision to the rating.
STRONG RESERVE BALANCES: Fiscal 2013 liquidity measured a strong 542 days of cash available for operations.
SUBSTANTIAL DEBT BURDEN: CBCWA's debt burden is high, given the limited operating responsibilities of the entity. Debt service accounted for 74% of expenditures in fiscal 2013.
CHANGES IN MEMBER CREDIT QUALITY: Any changes to the credit characteristics of CBCWA's largest members could impact the authority's credit quality.
CBCWA's distribution system provides water on a wholesale basis to the charter members, which include the city of De Pere, the villages of Howard, Allouez, and Bellevue, and the towns of Lawrence and Ledgeview. The charter members service a combined total of approximately 28,000 water connections in and around the city of Green Bay, WI.
SOLID MEMBER CREDIT QUALITY
CBCWA's rating is based primarily on the credit quality of the largest charter members given the step-up requirements of the contract. In fiscal 2013, De Pere accounted for 31% of water sales, Howard accounted for 26%, while Allouez and Bellevue accounted for 17% and 16%, respectively. Fitch only maintains a public rating on De Pere's water system. Fitch therefore conducts an internal analysis of each of these other large members as part its review of the authority. In its review, Fitch found each to be of strong credit quality and, in general, performance has been stable-to-improved since Fitch's review in 2013.
Under the contract between CBCWA and the charter members, CBCWA bills members for operations and maintenance (O&M) costs, fixed costs (including the payment of debt service and capital costs), and security fund deposits. If a charter member cannot make its payment under the contract, CBCWA is obligated to draw monies from the defaulting charter member's security fund to cover the costs under the contract. If the draw from the defaulting member's security fund proves insufficient, CBCWA shall draw from the non-defaulting charter members' security funds per the joint-and-several nature of the contract, thereby providing a step-up obligation of the non-defaulting charter members. Each member's security fund is sized at a minimum of two months of allocable O&M and debt expenses.
An absolute and unconditional take-or-pay obligation in the water sales contracts requires members to pay debt service regardless of whether or not any water is delivered. Member retail systems make payments as an operating expense of their respective retail water system.
With the 2014A bond issue, the water purchase and sale contract no longer requires charter members to make payments related to bond debt service one year in advance. In the past Fitch had noted this as a positive credit attribute.
LIQUIDITY PROVIDES ADDED STRENGTH
CBCWA maintains a significant level of unrestricted cash in addition to restricted monies allocated to each charter member's security fund and the renewable and replacement account (the latter of which was new in 2013). Combined, these sources of reserves equaled $4.5 million in fiscal 2013, enough to cover 542 days of operational costs. Total funds available for operations, which include the coverage account, the security fund, the repair and replacement fund, and a new O&M liquidity reserve, are projected by management to be $5.9 million in August 2014.
PLENTIFUL SUPPLY PROVIDED BY MPU
Upon completion of CBCWA's water distribution system in 2007 the charter members have received 100% of their water supplies from CBCWA pursuant to the water sales contracts. CBCWA is a wholesale water customer of Manitowoc Public Utilities (MPU), which draws water from Lake Michigan. MPU's current treatment capacity allocated to CBCWA is 20 million gallons per day (mgd), well above the combined charter members' average flows of approximately 7.1 mgd in 2013.
DEBT LEVELS HIGH, CAPITAL NEEDS MODEST
Given the borrowing related to the initial construction of CBCWA's distribution system, fixed costs are high and have resulted in significant increases to charter members' cost of service over the last several years. However, with completion of the distribution system, prospects for additional borrowing over the next five to 10 years are modest. Therefore, escalation in CBCWA's pass-through costs to charter members over the intermediate term should be limited absent any further decline in purchases. Water purchases have declined over the last few years as a result of conservation efforts and correction of unaccounted-for water losses. Additionally, the refunding associated with this issue will provide marginal debt service reductions and amortization smoothing.
HEALTHY UNDERLYING ECONOMY
Brown County's unemployment rates have historically been below state and national rates. In April 2014, the county recorded an unemployment rate of 5.2%, lower than the 5.9% recorded for the state and nation. The county's median household income levels are about on par with the state and nation.
For more information on De Pere, see Fitch's press release 'Fitch Affirms De Pere, WI's Water Utility Revs at 'AA-'; Outlook Stable', published in October 2013, which is available at www.fitchratings.com.
Additional information is available at 'www.fitchratings.com'.
In addition to the sources of information identified in Fitch's U.S. Municipal Revenue-Supported Rating Criteria, this action was additionally informed by information from Creditscope.
Applicable Criteria and Related Research:
--'Revenue-Supported Rating Criteria' (June 2014);
--'U.S. Water and Sewer Revenue Bond Rating Criteria' (July 2013);
--'2014 Water and Sewer Medians' (December 2013);
--'2014 Outlook: Water and Sewer' (December 2013).
Applicable Criteria and Related Research:
2014 Outlook: Water and Sewer Sector
2014 Water and Sewer Medians
U.S. Water and Sewer Revenue Bond Rating Criteria
Revenue-Supported Rating Criteria