AUSTIN, Texas--(BUSINESS WIRE)--Fitch Ratings has assigned an 'AA+' rating to the following Aurora, Colorado (the city) bonds:
--Approximately $415.4 million first-lien water refunding revenue bonds, series 2016 (green bonds).
The bonds are expected to sell via negotiation the week of July 18. Proceeds, along with debt service reserve fund monies, will be used to refund the city's outstanding series 2007A bonds, series 2008A bonds and the city's Colorado Water Conservation Board loan for debt service savings and pay issuance costs.
In addition, Fitch affirms the following ratings:
--$461.5 million (pre-refunding) in outstanding first-lien water revenue bonds at 'AA+'.
The Rating Outlook is Stable.
The bonds are secured by a first lien on the net income of the water system (the system), including connection fees.
A debt service reserve will not be funded in connection with the series 2016 bonds.
KEY RATING DRIVERS
SOLID FINANCIAL PROFILE: The system continues to produce strong financial metrics with 2015 total debt service coverage (DSC) of over 1.8x net of connection fees and unrestricted reserves of $111 million, or roughly 760 days of cash on hand.
HIGH DEBT RAMPING DOWN: The system is highly leveraged, though the city has actively prepaid debt and has no additional borrowings planned in the near- to medium-term, so debt levels should decline. Debt per customer and per capita levels are three times higher than the 'AA' rating category medians, while debt as a percent of plant assets is more moderate at 34%.
RATE FLEXIBILITY: Water rates register at a moderately high 1.1% of median household income (MHI). But on a combined basis with sewer charges the monthly bill is affordable at 1.6% of MHI, providing sufficient ongoing rate-raising flexibility if needed.
STRONG FINANCIAL, RESOURCE PLANNING: Comprehensive long-term financial, capital and water supply planning practices have positioned operations well and provide a strong enhancement to credit quality.
CONTINUATION OF CURRENT TRENDS: A continued trend of Aurora, Colorado water system's strong financial results coupled with the ability to lower debt ratios would be viewed favorably by Fitch.
The city's water system provides mainly retail service to residents of the city of Aurora. The city is located adjacent to and directly east of Denver, and with a population in excess of 351,200 is the third largest in the state. Given the city's close proximity to downtown Denver and the Denver International Airport, its location along the light rail corridor and strong and growing employment base, the city's planning department is estimating population will grow at a rate of approximately 1.7% per year going forward.
The city's unemployment rate is down year-over-year dropping to 3.6% in May 2016, compared to 4.6% the year prior; the rate is on par with the state (3.6%), above county (3.3%) but below national (4.5%) levels. Wealth levels are below state (91%) but above national (104%) averages. The city maintains core military/aerospace and retail economic elements but is also transforming into a major medical/bioscience center as redevelopment continues at Fitzsimons, a prior army base.
STRONG FINANCIAL PERFORMANCE
For 2015, annual DSC was 3.3x (2.2x net of connection fees) on senior bonds and 2.8x (1.8x net of connection fees) on all debt. Connection fees comprised a sizeable portion of pledged sources in the past equating to about 50% of operating revenues, but for the last five fiscal years have declined, making up an average of 19%. Even without these one-time revenues, senior DSC has remained over 2.0x since 2008. The system also has accumulated over $111 million in unrestricted cash and investments, equal to over 760 days of operations.
Given the city currently has no future debt issuance plans and has been actively prepaying debt, senior-lien DSC is projected to range between 2.0x and 2.2x (net of connection fees) over the fiscal 2016 to 2020 period. Nevertheless, the city currently has no rate increases built into its forecast, so cash margins are projected to decline to support all capital improvement plan (CIP) activities.
NEW REVENUES EXPECTED TO FURTHER BOLSTER FINANCIAL PROFILE
Aurora has formed the Water Infrastructure and Supply Efficiency (WISE) partnership with Denver Water (revenue bonds rated 'AAA'/Stable Outlook) and the South Metro WISE Authority, which will utilize the additional yield from the city's extensive Prairie Waters Project (PWP) to provide water to 10 communities in the south Denver metro area. The full amount of water to be provided by the WISE partnership is estimated at 72,250 acre-feet (af) over 10-year periods. Limited WISE deliveries are expected to begin in late 2016, with full deliveries expected by 2021.
ELEVATED BUT DECLINING DEBT BURDEN
Fitch acknowledges the importance of PWP and the city's long-term water development programs as well as the foresight of the city to procure such supplies. Nevertheless, we note that a key credit concern is the system's high debt ratios; debt levels on a per capita basis are over 3.2x those of similarly rated credits. The moderately slow amortization rate of system debt, which is 76% in 20 years, is another concern. Within the last three years the city has made strides in reducing its debt burden by using excess cash reserves to steadily prepay debt, reducing debt-to-net plant to 34% in 2015 down from 62% in 2008. Debt ratios should decrease over the long term as the city continues to follow prudent debt management practices. The city also has no debt issuance plans for the next five years, which will alleviate future leverage pressures.
The five-year system CIP totals over $358 million with 64% of CIP projects dedicated to water supply. This marks a 30% increase from the 2014-2018 CIP primarily due to the build-out cost ($92 million) of the Wild Horse Reservoir, which is estimated to provide the city with an additional 32,000 af of water storage. The city plans to fund all of its CIP projects from pay-go, which means that reserve fund balances could decline if rates are not increased in the interim.
ADVANCED RESOURCE PLANNING
Water supply is derived largely from renewable mountain snowmelt, which annually recharges city reservoirs. Recognizing the need to drought-harden the system and provide for ongoing growth, the city proactively began developing PWP as part of its CIP in 2007. The $637 million project was completed in 2010 and will enhance firm-yield supplies by 20%. Moreover, with future expansion of PWP and other water initiatives identified in the city's long-range capital program, the city will ensure adequate supplies through at least 2045.
COMBINED USER RATES REMAIN AFFORDABLE
Water charges are somewhat high on an affordability basis but are comparable to other regional providers. Concerns regarding water charges are somewhat mitigated by the low cost of wastewater treatment which brings combined utility costs just below Fitch's affordability range (1.6% of MHI), providing sufficient overall rate-making flexibility. The city has been on a rate holiday since 2011 and no rate increases are currently forecast, although adjustments may be needed over the forecast period if the city plans to entirely cash-fund its current five-year CIP.
Strong financial results have allowed the city to extend the rate relief longer than originally planned and institute smaller than originally planned rate adjustments. Over the last few years, other Colorado utilities, and western utility credits in general, have been faced with large CIPs for source-water development. As a result, over the medium term, Aurora utility charges have become more in line with or even slightly below other providers.
Additional information is available at 'www.fitchratings.com'
Revenue-Supported Rating Criteria (pub. 16 Jun 2014)
U.S. Water and Sewer Revenue Bond Rating Criteria (pub. 03 Sep 2015)
Dodd-Frank Rating Information Disclosure Form