NEW YORK--(BUSINESS WIRE)--Fitch Ratings assigns an 'AAA' rating to the following Suffolk County Water Authority, NY's (the authority) revenue bonds:
--Approximately $65 million water revenue bonds, series 2014A;
--Approximately $50 million water system revenue bonds, series 2014B.
The bonds are expected to sell via competition on Oct. 16. Series 2014A bond proceeds will be used to finance the cost of acquisition and construction of improvements to the authority's water system (the system). Series 2014B proceeds will retire all of the authority's outstanding series 2013B bond anticipation notes (BANs). Proceeds from both series will also fund deposits to the debt service reserve funds and pay issuance costs.
In addition, Fitch affirms the following bonds and BANs:
--Approximately $580 million water revenue bonds, 1997A, 2001A, 2003C, 2007A, 2009, 2009A, 2009B, 2011, 2012, 2012A, and 2013 at 'AAA';
--Approximately $72 million (subordinate lien) water revenue bonds, series 2005 at 'AAA';
--$100 million BANs, 2013A and 2013B (subordinate lien) at 'AAA'.
Fitch has withdrawn its ratings for the following Suffolk County Water Authority (NY) bond due to prerefunding activity:
--Water system senior lien revenue bonds series 2005C (all maturities).
The updated rating history for the above maturities is now reflected on Fitch's web site at 'www.fitchratings.com'.
The Rating Outlook is Stable.
The 2014A, 2014B and all of the outstanding parity bonds are secured by a senior lien on the authority's net system revenues. Subordinate lien obligations are payable from net system revenues after senior obligations have been paid.
KEY RATING DRIVERS
STABLE SERVICE AREA, AMPLE SUPPLY: The authority benefits from a large, affluent service area and an abundant source of high-quality water that requires minimal treatment and cost to produce. Operations are well-managed.
CONSISTENTLY SOLID FINANCIAL RESULTS: Favorable operating results are demonstrated by consistently solid all-in debt service coverage (DSC) levels and robust liquidity.
SLIGHTLY ELEVATED DEBT PROFILE: Debt ratios are high for the rating, although capital needs are manageable and will focus on system renewal and replacement. In addition, affordable user charges and strong liquidity provide a significant offset to the elevated debt burden. Additional borrowing plans are not expected to result in a meaningful increase in leverage despite a slow amortization rate for existing bonds.
SENIOR AND SUBORDINATE RATINGS ON PAR: The 'AAA' rating on outstanding subordinate lien bonds and BANs reflects the modest (approximately 10% prior to issuance) amount of subordinated debt outstanding relative to the system's overall debt profile. After issuance coupled with a cash defeasance of the 2005 bonds, subordinate debt will consist of the 2013A BANs only and comprise just 6.8% of total outstanding debt.
RATING STABILITY EXPECTED: The rating is sensitive to shifts in various credit fundamentals including debt and capital management, consistent financial and operating performance, and strong system liquidity. The Stable Outlook reflects Fitch's expectation that such changes are unlikely over the near term.
STABLE FINANCIAL RESULTS, STRONG LIQUIDITY AND LOW RATES PROVIDE FLEXIBILITY
The authority's financial performance remains stable characterized by good financial margins and DSC, and robust cash balances. Dry weather conditions persisted throughout much of fiscal 2011, prompting sizeable growth in consumption that drove a 15% increase in operating revenue at the time and favorable DSC of 2.6x and 2.1x on senior-lien and all-in obligations, respectively.
The adoption of modest rate hikes for the past several years boosted operating revenues further, although DSC remained largely unchanged due to a decline in capital reimbursement fees in fiscal 2013. Even so, all-in coverage remained above 2.1x for fiscal 2013. Results for audited fiscal 2014 are similar to fiscal 2013, with all-in DSC above 2.0x. Liquidity remains substantial; fiscal 2014 ended with $207 million of unrestricted cash, or a very strong 635 days cash on hand, and more than 2.0x the amount of short-term notes outstanding for the year.
The authority's low rates provide additional flexibility that Fitch believes will be necessary to meet escalating debt service costs going forward. After holding charges flat in fiscal 2010 and through the first 10 months of fiscal 2011, multiple rate hikes of roughly 4% were implemented at the end of each of the past four fiscal years (2011-2014), followed by a smaller 1.2% rate hike for fiscal 2015 due to receipt of proceeds from the sale of authority-owned land. The forecast assumes continued annual rate hikes of 4% going forward. The average residential bill for service remains low at $30 in 2014, or just 0.5% of median household income.
The authority's financial forecast through fiscal 2019 shows solid DSC on an all-in basis at a minimum of 1.7x, which is similar to previous forecasts. Assumptions built into the forecast appear reasonable and include the aforementioned rate hikes, additional debt issuances, nominal growth in customer accounts, and customer demand in line with more recent trends.
MANAGEABLE CAPITAL PROGRAM, ADDITIONAL DEBT REQUIRED
The authority's forecasted capital needs total $345 million over the next five years (fiscals 2015-2019) and consist of various renewal and replacement projects including water main installation, continued implementation of an automatic meter reading system (AMR), upgrades and improvements to treatment facilities, and various remediation projects. The authority expects to fund roughly 40% of its capital program with debt including the 2014A bonds, with an additional issuance anticipated in fiscal 2017. The remainder is expected to be funded from pay-as-you-go resources, including annual cash flows and existing cash.
SLIGHTLY ELEVATED BUT WELL-MANAGED DEBT PROFILE
Debt levels are high for the rating, with metrics that compare more closely to medians for 'AA' category. Total debt outstanding in fiscal 2014, which includes short-term BANs was a fairly substantial 72% of net fixed assets, or roughly 3.0x the median for 'AAA'. Debt to funds available for debt service (FADs) and debt to system equity were roughly twice the median for each ratio in fiscal 2014.
Positively, simultaneous with the issuance of the bonds, the authority will defease all of the outstanding subordinate lien series 2005 bonds with a combination of existing cash and approximately $6.5 million in debt service reserves associated with the bonds to be refunded. Debt ratios will improve as a result but remain elevated compared to similarly-rated systems. While cash is projected to decline, Fitch expects liquidity will remain healthy (near 400 days cash) given the expectations for additional excess cash flows of roughly $25 million in fiscal 2015.
Debt carrying costs are a very manageable 17% of fiscal 2014 gross revenues. However, of some concern, annual debt service (ADS) is scheduled to rise over time from the current roughly $31 million to approximately $40 million by fiscal 2020 and to $48 million by fiscal 2033 (assuming no additional debt).
Even with projected 4% annual rate hikes, ADS will start consuming a greater share of operating revenues going forward and may result in diminished DSC over time. In addition, amortization is slow, which coupled with expectations for additional debt will leave debt ratios elevated for the foreseeable future.
The authority issues short-term BANs to fund capital needs. After issuance, only one series of fixed-rate subordinate lien BANs totaling $50 million will remain outstanding. The series 2013A BAN, which matures on Jan. 15, 2016, will remain outstanding. Management expects to replace the 2013A BANs with another short-term BAN issuance closer to maturity. The series 2013B BAN matures on Jan. 15, 2015 and will be redeemed with the proceeds of the series 2014B bonds. The authority has a long history of issuing BANs and eventually taking out the notes with long-term debt or existing cash. Fitch anticipates this practice will continue.
STRONG SERVICE AREA CHARACTERISTICS
The authority operates one of the largest groundwater systems in the country and maintains an abundant raw water supply from deep aquifers beneath Long Island, NY. The authority provides retail water service to 85% of the estimated 1.5 million residents of the county, which encompasses the eastern two-thirds of Long Island. With the service area largely built out, management budgets for minimal customer growth of less than 1% annually. The county's economy benefits from its proximity to the New York City metropolitan area as well as from its own broad employment base. Consequently, unemployment rates typically trend below the state and the nation while income indicators rank comfortably above the state and nation.
Additional information is available at 'www.fitchratings.com'.
In addition to the sources of information identified in Fitch's 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 Sector' (December 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