AUSTIN, Texas--(BUSINESS WIRE)--Fitch Ratings assigns an 'AA' rating to the following Albuquerque Bernalillo County Water Utility Authority, New Mexico (ABCWUA or the authority) bonds:
--Approximately $98.4 million senior lien joint water and sewer system refunding revenue bonds, series 2014A;
--Approximately $96.3 million subordinate lien joint water and sewer system refunding revenue bonds, series 2014B.
The bonds are scheduled to sell via negotiated sale the week of Aug. 18. Proceeds will be used to refund outstanding debt of the authority for interest savings and to restructure existing debt, as well as pay costs of issuance.
In addition, Fitch affirms the rating on ABCWUA's outstanding bonds as follows:
--$490 million senior lien joint water and sewer system revenue bonds at 'AA' (pre-refunding).
The Rating Outlook is Stable.
The bonds are special limited obligations of the authority, payable solely from and secured by a pledge of net revenues of the combined water and sewer system (the system). The senior lien bonds have a first lien on the revenues in the system's flow of funds while the subordinate lien bonds are payable from net system revenues on a basis that is junior to the payment of the senior lien bonds.
KEY RATING DRIVERS
ADEQUATE FINANCIAL PERFORMANCE: Debt service coverage (DSC) has been volatile in recent years but is expected to improve with the recent enactment of utility rate hikes. While the authority's financial metrics are still below-average for the rating category, progress in these metrics is expected over the medium term due to its declining capital needs and rapid debt amortization.
LACK OF NOTCHING: No distinction in the ratings between the senior and junior lien is made at this time because there is no material difference in the financial metrics when all of the system debt is considered. Also, legal covenants for both liens are relatively strong in terms of rate and additional bonds test.
PROPRIETARY FINANCIAL REPORTING CAPABILITY: As of fiscal year-end (FYE) 2012, the authority is no longer a component unit of the city of Albuquerque (the city). ABCWUA successfully developed and implemented its own enterprise resource planning system (ERP) enabling the authority to produce its own set of financial statements in a timely manner to more aptly assess the system's financial position.
RATE FLEXIBILITY: Rates are projected to remain very affordable over the next five years even with the adopted and planned rate hikes.
AMPLE WATER SUPPLY: Water supplies are sufficient to meet area needs for the next 50 to 55 years. Storage reservoirs are providing ample capacity to contend with current drought conditions.
MODERATELY HIGH DEBT BURDEN TO FALL: Debt levels are above average on a debt per capita and debt to plant basis but are expected to decline over the next five years even with proposed debt issuance plans. The debt load is somewhat mitigated by rapid debt amortization.
EROSION OF FINANCIAL METRICS: The rating reflects Fitch's expectation that liquidity will improve in the near term. While Fitch recognizes that the recently adopted rate increases combined with tempered borrowing plans are projected to strengthen the system's liquidity position and improve DSC levels, failure to build up adequate cash reserves could lead to negative rating action.
FINANCIAL REPORTING DELAYS: Delays in the availability of system audits could lead to negative rating action.
NOTCHING DIFFERENTIALS: Notching of the ratings could occur with material deviations from the current debt structure, closing of the senior lien, and/or significant performance differences in DSC.
FINANCIAL REPORTING DELAYS HINDERED MANAGEMENT
Through fiscal 2012, the authority was a component unit of the city. The city's comprehensive annual financial reports (CAFRs) had been issued late since fiscal 2006 due to problems with the city's new ERP system.
Effective FYE 2012, with the state auditor's approval, the authority is no longer a component unit of the city. ABCWUA successfully rolled out a proprietary-owned ERP system. The fiscal 2013 CAFR was the last to be issued with the city's financials, with the fiscal 2014 CAFR the first to be issued by the authority. The development of a proprietary-owned ERP system should enable ABCWUA to more aptly assess the financial health of the system and produce timely annual audited financial statements.
IMPROVED METRICS EXPECTED
A slowdown in housing starts and resulting decline in connection fees coupled with the inability of authority management to quickly assess the system's financial position led to a weakening in the system's financial profile over the 2009 through 2011 fiscal years. Senior lien annual DSC dropped below the authority's rate covenant of 1.33x in fiscal 2009 and remained below the rate covenant through fiscal 2011.
Fitch views the delay in rate increases to offset operating pressures during this period as a credit weakness, while noting that authority management acted promptly to bolster finances once audited information became available. After holding rates flat to fiscal 2007 levels, a significant water and sewer rate increase became effective on July 1, 2011 (the beginning of fiscal 2012). Additional rate increases necessary to generate a 5% annual increase in revenues were adopted for fiscals 2014, 2016 and 2018 for both water and sewer. Furthermore, management adopted a 5% rate increase to base rates in fiscal 2015 to make up for revenue shortage in fiscal 2014 resulting from a decline in consumption.
The additional rate revenue helped to boost all-in DSC to 1.3x for fiscal years 2012 and 2013. The projected coverage level for fiscal 2014 is consistent with the prior two years; however, utilization of the rate stabilization reserve was necessary due to a marked reduction in water demand for the year. Fitch notes that management promptly enacted (ahead of schedule) a 5% increase to base rates for fiscal 2015 to stabilize the revenue stream. Total DSC is projected to range from 1.3x to 1.4x over the forecast period which, though below Fitch's median for the rating category, is much improved from recent years.
Liquidity remains low for the 'AA' rating category medians. Unrestricted cash reserves also deteriorated in fiscals 2009-2011 and have remained somewhat volatile since then. At the close of fiscal 2013, days cash was a low 15 days while working capital equaled 30 days, which Fitch also considers to be low. Management reports that unaudited results reached 72 days cash on hand for fiscal 2014 and projects 78 days for fiscal 2015. Despite the rate hikes, liquidity and working capital are not expected to rise significantly given the authority's policy of cash funding 50% of basic capital improvements.
CAPITAL NEEDS SLOWING DOWN
Fitch views as a credit positive the fact that the authority has largely completed its major capital initiatives. Also, rapid principal amortization will help to bring debt levels down in the near future. The authority's largest project to date for water supply - the San Juan-Chama Drinking Water Project (SJCDWP) - has been completed.
The authority's five-year capital improvement program (CIP) has steadily declined to the current $271 million for fiscal years 2015-2019. The focus of the CIP is primarily for rehabilitation and replacement of existing infrastructure. Because of the recent borrowings associated with the authority's water resource management strategy (WRMS) which included funding for the SJCDWP, leveraging of net plant assets has increased from 31% in fiscal 2004 to a moderate 52% as of fiscal 2013. Likewise, debt per customer rose during this period from a modest $710 to a moderately high $1,700. Nevertheless, even with three planned debt issuances of $71 million in spring of 2015 and two $56 million bond sales in fiscals 2017 and 2019, debt levels are projected to decline with debt per customer estimated at $1,423 in five years.
WATER SUPPLY SUFFICIENT TO MEET LONG-TERM NEEDS
The authority currently provides water and wastewater service to around 674,000 residents through approximately 195,000 water and sewer connections within the city and county. Water supplies traditionally have been obtained through extraction of resources from the Rio Grande basin aquifer underlying the city. However, in an effort to reduce depletion of the aquifer, the authority is implementing its WRMS strategic plan. Initially adopted in 1997, the WRMS guided the provision of a sustainable water supply through conservation, the use of surface water, reclaimed water, and shallow and deep groundwater. The SJCDWP is the cornerstone of the WRMS and is expected to provide up to 70% of the service area's water needs over the next 40 years. Nearly 45% of the area's drinking water supply is already being derived from the project.
The system primarily serves the city, which constitutes almost 90% of county residents. The city is the largest in the state and accounts for about one-quarter of its population. The national economic slowdown has had some effect on the area to date with employment slowing to modest levels through 2013. The county unemployment rate at 6.1% as of May 2014 was slightly higher than the state (5.9%) but on par with the national average. Income levels for county residents are below national averages and approximately 8% higher than those of the state.
Additional information is available at 'www.fitchratings.com'
In addition to the sources of information identified in the 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', dated June 16, 2014;
--'U.S. Water and Sewer Revenue Bond Rating Criteria', dated July 31, 2013;
--'2014 Water and Sewer Medians', dated Dec. 12, 2013;
--'2014 Outlook: Water and Sewer Sector', dated Dec. 12, 2013.
Applicable Criteria and Related Research:
Revenue-Supported Rating Criteria
U.S. Water and Sewer Revenue Bond Rating Criteria
2014 Water and Sewer Medians
2014 Outlook: Water and Sewer Sector