AUSTIN, Texas--(BUSINESS WIRE)--Fitch Ratings assigns the following ratings to Massachusetts Water Resources Authority, Massachusetts' (MWRA, or the authority) bonds:
-- Approximately $85 million general revenue bonds, 2014 series D 'AA+';
-- Approximately $38.4 million general revenue refunding bonds, 2014 series E 'AA+';
-- Approximately $160.2 million general revenue refunding bonds, 2014 series F 'AA+'.
The bonds are scheduled to sell competitively the week of Nov. 3. Bond proceeds will be used to fund a portion of the authority's capital program, refund certain outstanding bonds of the authority for interest savings without extension of maturity, and pay costs of issuance.
In addition, Fitch affirms the following ratings of the authority:
-- $3.5 billion (pre-refunding) general revenue bonds at 'AA+';
-- $1 billion subordinate general revenue bonds at 'AA'.
The Rating Outlook is Stable.
The bonds and parity general revenue bonds are payable from a first lien on net revenues of the authority, derived largely from wholesale rates and charges assessed on local units of government. The subordinate lien bonds are payable from a second lien on net authority revenues, subordinate only to the authority's lien securing its senior lien obligations.
KEY RATING DRIVERS
REGIONAL PROVIDER OF ESSENTIAL SERVICE: MWRA provides an essential service to a large and diverse service area with strong economic underpinnings.
STRONG PROTECTIONS ENSURE PAYMENT: Local governments served by the authority are required to pay for MWRA services as a general obligation, and non-payment is subject to a tested state aid intercept.
ABILITY TO SET RATES INDEPENDENTLY: The authority maintains independent rate-setting authority, prudent budgetary practices, comprehensive long-term planning, and vigilant project oversight and prioritization of its capital program.
DIMINISHED FLEXIBILITY: Financial flexibility has diminished over time due to significant leveraging. As the authority enters into the peak years of debt service costs, end-user charges will escalate further but should stabilize over time.
DECLINE IN CAPITAL PROJECTS: The authority's capital improvement program (CIP) has transitioned from costly court-mandated projects to ongoing rehabilitation.
IMPECCABLE COLLECTIONS: MWRA has achieved strong collection rates of 100% since its inception.
ABUNDANT CAPACITY: The wholesale system benefits from an ample long-term water supply and sufficient excess water and sewer treatment capacity.
ESCALATION IN CAPITAL COSTS: A reversal to increased capital expenses and corresponding debt funding would likely weaken MWRA's credit profile.
DEBT SERVICE COVERAGE PRESSURE: A decline in debt service coverage (DSC), particularly total DSC, could pressure the rating.
LARGE SERVICE TERRITORY WITH STRONG ENFORCEMENT MECHANISMS
MWRA provides wholesale water and wastewater services to 61 communities located primarily in eastern Massachusetts. Almost 2.8 million people (or over 40% of the population of the commonwealth) reside in the authority's service area. The largest of these is the city of Boston (general obligation bonds 'AAA', Stable Outlook), which contributes approximately one-third of MWRA's revenue derived from rates and charges. Fitch rates the Boston Water and Sewer Commission's (BWSC) revenue bonds 'AA+', Stable Outlook. The service area generally is economically diverse, and wealth levels tend to be above state and national averages.
The 61 local communities included in the service area are required to pay for MWRA services as a general obligation, and rate-setting is not subject to any limitations, including the state's Proposition 2 1/2. These protections, coupled with the authority's ability, pursuant to its enabling act, to utilize a local aid intercept to recover amounts unpaid by one of its member communities (excluding revenues of the BWSC), provide significant operating flexibility and are important credit considerations.
HIGH RATES LIMIT FLEXIBILITY
MWRA's rates are an ongoing credit concern as flexibility continues to diminish. However, the size of needed rate hikes has trended downward in recent years as annual capital spending has begun to decline to a more manageable level. Over the last five years through fiscal 2015 the authority raised rates on average a moderate 3.0% annually; fiscals 2014 and 2015 adjustments were 3.5% and 3.4%, respectively.
Rates are forecast to climb by an average of 5.1% annually through fiscal 2020 to keep pace with increasing debt service. Actual rate adjustments may be less, though, as MWRA has prudently been applying surplus revenues to level off near-term escalations in debt service costs. Beyond fiscal 2021, debt service carrying costs begin to drop off, which should afford the authority ample capacity to limit growth in rate adjustments in future years.
STABLE FINANCIAL PERFORMANCE
The authority's financial operations have remained very stable despite escalating debt service and a reliance on moderate rate hikes. Historical DSC on senior lien obligations has averaged a strong 1.9x over the five years through fiscal 2014 (based on Fitch's calculation of DSC, which includes certain accruals from the income statement). All-in DSC, which includes subordinate public debt and privately placed state revolving fund loans, has been low but adequate at 1.1x over the last five fiscal years. Liquidity has been favorable and equaled 315 days cash for fiscal 2014, similar to historical norms.
Fiscal 2014 ended with a sizeable budgetary surplus that was prudently applied to the retirement of approximately $27 million of outstanding bonds in the fiscal 2015-2018 timeframe, providing budgetary relief during those years. Fiscal 2015 year-to-date results also show a positive variance and are expected to allow the authority to defease additional debt that will provide additional budgetary relief in future fiscal years. MWRA's positive variances are driven by conservative budgeting estimates (particularly with regard to variable interest rate costs) and tight expenditure controls.
SUBSTANTIAL LEVERAGE TEMPERED BY IMPROVING CAPITAL CYCLE
The projected base-line spending cap for capital projects spanning fiscal years 2014-2018 is now estimated at $765 million (down from $792 million last year due to the removal of $55 million related to MWRA's local assistance program from the spending cap) and includes a significant shift in funding priorities from regulatory compliance projects to renewal and replacement (R&R) of system assets. Estimated spending for asset protection is now over 55% of the CIP compared to 31% in the fiscal 2009-2013 capital cycle. Conversely, costs related to the ongoing court-mandated combined sewer overflow (CSO) control plan will drop to just 7% of capital spending versus 38% over the last five years.
The authority's CIP remains sizeable but is significantly below historical spending levels, which were driven by the cleanup of Boston Harbor in the 1990s and the completion of the majority of the CSO master plan in recent years. Fitch believes future capital costs will remain manageable given MWRA's vigilant project oversight and its board's self-imposed spending cap for capital projects.
Funding for capital needs will continue to come almost entirely from long-term borrowings, including revenue bonds and state revolving fund loans. The authority's debt levels have been and will remain high for the foreseeable future due to past borrowings. Debt-to-net plant is notably high at 99%, and annual debt service costs consume over one-half of gross annual revenues. Fitch expects this trend to continue for the intermediate term. Favorably, more debt is expected to roll off through fiscal 2018 than will be issued. This positive variance of amortization to debt issuance is expected to continue beyond fiscal 2018, which should help to improve the authority's debt profile over time.
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', June 2014;
-- 'U.S. Water and Sewer Revenue Bond Rating Criteria', July 2013;
-- '2014 Water and Sewer Medians', dated Dec. 2013;
-- '2014 Outlook: Water and Sewer Sector', dated Dec. 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