Fitch Affirms Albuquerque Bernalillo Co Wtr Util Auth, NM's Wtr/Swr Revsat 'AA'; Outlook to Stable
Sep 12, 2013 (Close-Up Media via COMTEX) --
Fitch Ratings assigns the following ratings to Albuquerque Bernalillo County Water Utility Authority, New Mexico (ABCWUA or the authority) bonds:
--Approximately $64.7 million joint water and sewer system improvement revenue bonds, series 2013A at 'AA';
--Approximately $57.6 million joint water and sewer system refunding revenue bonds, series 2013B at 'AA'.
The bonds are scheduled to sell via negotiated sale the week of Sept. 16th. Bond proceeds will be used to finance system improvements and upgrades pursuant to the authority's basic capital program, advance refund a 2004 New Mexico Finance Authority loan, and pay costs of issuance.
In addition, Fitch affirms the rating on ABCWUA's outstanding bonds as follows:
--$420.8 million joint water and sewer system revenue bonds at 'AA'.
The Rating Outlook is Stable.
The bonds are a special limited obligation of the authority, payable solely from and secured by a first lien on and pledge of net revenues of the combined water and sewer system.
KEY RATING DRIVERS
IMPROVED FINANCIAL PERFORMANCE EXPECTED: Debt service coverage (DSC) has improved due to the recent enactment of utility rate increases that led to double-digit operating revenue growth in fiscal 2012. While the authority's financial metrics are still below-average for the rating category, its declining capital needs and rapid debt amortization are expected to improve financial performance over the medium term.
DECLINING CAPITAL NEEDS: Long-term capital needs are manageable and the capital improvement plan (CIP) is ramping down.
PROPRIETARY FINANCIAL REPORTING CAPABILITY: As of fiscal year-end 2012, the authority is no longer a component unit of the city of Albuquerque. ABCWUA is in the process of developing its own enterprise resource planning system (ERP), which will enable the authority to produce its own set of financial statements beginning in fiscal 2014 and thus 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 rate hikes.
AMPLE WATER SUPPLY: Water supplies are sufficient to meet area needs for the next 50 to 55 years.
MODERATELY-HIGH DEBT BURDEN TO FALL: Debt levels are slightly 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.
CONTINUED IMPROVEMENT IN FINANCIAL POSITION: The Stable Outlook reflects Fitch's expectation that recently adopted rate increases will strengthen the system's liquidity position and improve DSC levels.
CONTINUED FINANCIAL REPORTING DELAYS: Continued delays in the availability of timely information regarding the system's financial position could lead to negative rating action.
IMPROVED FINANCIAL MARGINS 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 debt service coverage (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. Additional rate increases necessary to generate a 5 percent annual increase in revenues were adopted for fiscals 2014, 2016 and 2018 for both water and sewer.
The fiscal 2012 additional rate revenue helped to boost senior lien and total annual DSC to 1.4x for the year. Total DSC is projected to range from 1.3x to 1.5x over the forecast period which, though below Fitch's median for the rating category, is much improved from recent years.
Unrestricted cash reserves also deteriorated in fiscals 2009, 2010 and 2011. Days cash on hand was a high 164 in fiscal 2008 but dropped to 87 days cash in fiscal 2009 and to an eight-year low of 11 days operating cash in fiscal 2010. Cash balances have showed some recent improvement with days cash on hand at 49 in fiscal 2012, although liquidity is still below average for the category 'AA' rating medians.
Nevertheless, given the recent enactment of rate increases for fiscal years 2012, 2014, 2016 and 2018, not only is DSC projected to improve, but reserves are also expected to steadily increase and approach the authority's target of 1/12th of annual budgeted expenditures by fiscal 2015. Fitch notes that while the financial metrics are below-average when compared to comparably rated credits, given that capital needs are ramping down and the authority's debt amortizes rapidly, it is expected that financial margins will improve to levels that are more in line with the category 'AA' rating medians over the medium to long-term.
CAPITAL NEEDS RAMPING DOWN
Fitch views as a credit positive the fact that the authority has largely completed its major capital initiatives as well as rapid amortization which will help to bring debt levels down in the immediate future. One such major project for water supply is the San Juan-Chama Drinking Water Project (SJCDWP), with ongoing capital costs expected to decline significantly in the immediate future.
The authority's five-year CIP has steadily declined to the current $300 million for fiscal years 2013-2017. The focus of the CIP is primarily for rehabilitation and replacement. Because of the recent borrowings associated with the water resource management strategy (WRMS), leveraging of net plant assets has increased from 31 percent in fiscal 2004 to a moderately high 54 percent as of fiscal 2012. Likewise, debt per customer rose during this period from a modest $710 to a moderately high $1,820. Nevertheless, even with two planned debt issuances of $70 million and $56 million in fiscals 2014 and 2016, respectively, debt levels are projected to decline with debt per customer estimated at $1,292 in five years.
FINANCIAL REPORTING DELAYS HINDERED MANAGEMENT
Through fiscal 2012, the authority was a component unit of the city of Albuquerque. The city of Albuquerque's comprehensive annual financial reports (CAFRs) had been issued late since fiscal 2006 due to problems with the city's new ERP system.
Effective fiscal year-end 2012, with the state auditor's approval, the authority is no longer a component unit of the city. ABCWUA is rolling out a proprietary-owned ERP system, with phase I currently on schedule to go live on July 1, at which time phase II of the project will begin with an estimated completion date of calendar year-end 2013. The fiscal 2013 CAFR will be the last to be issued with the city's financials, with the fiscal 2014 CAFR to be 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 financial reporting without being dependent on the city to first complete its own set of financial statements.
WATER SUPPLY SUFFICIENT TO MEET LONG-TERM NEEDS
The authority currently provides water and wastewater service to around 630,000 residents through approximately 200,000 water 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 a strategic plan - the WRMS. 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 percent of the service area's water needs over the next 40 years. Nearly 45 percent of the area's drinking water supply is already being derived from the project.
The system primarily serves the city, which constitutes almost 90 percent 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 2011. The county unemployment rate at 7.5 percent as of July 2013 was on par with the state (7.5 percent) but slightly below national (7.7 percent) averages for the month. Income levels for county residents are below national averages and approximately 8 percent higher than those of the state.
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