TEXT-Fitch rates Austin, Texas water, wastewater revs 'AA-'
(The following statement was released by the rating agency) June 15 - Fitch Ratings assigns an 'AA-' rating to the city of Austin, Texas' $336 million of water and wastewater system revenue refunding bonds, series 2012, to be sold via negotiation on or about July 10, 2012. In addition, Fitch affirms the 'AA-' rating on the city's following revenue bonds, outstanding in amounts as of June 1, 2012: --$70.7 million combined utility systems (prior first lien) revenue bonds; --$168.3 million combined utility systems (prior subordinate lien) revenue bonds; --$2.1 billion water and wastewater system revenue bonds. The Rating Outlook is Stable. SECURITY The series 2012 bonds are secured by net revenues of Austin Water Utility (AWU), after provision for the prior first lien obligations. The series 2012 bonds are on parity with the prior subordinate lien obligations and outstanding water and wastewater revenue bonds. KEY RATING DRIVERS LARGE SERVICE TERRITORY: Austin provides water and wastewater services to over 200,000 customers in the city and portions of Travis and Williamson counties. PLANNED RATE INCREASES: Projected rate increases through the 2017 planning period are intended to bolster AWU's improved operating margin, stabilize its debt service coverage ratios at near 1.6x annually, and build the utility's currently weak liquidity position. However, above-average rates relative to Fitch's 'AA' rating category medians and other large utilities might limit AWU's practical ability to implement the plan. BELOW-AVERAGE FINANCIAL METRICS: Fiscal 2011 financial metrics rebounded from their fiscal 2010 lows, and midyear 2012 results indicate a positive trend. However, key fiscal 2011 ratios including debt service coverage (1.65x) and days cash on hand (11) remain well below rating category medians and could ultimately be a source of rating pressure. LARGE CAPITAL PLAN: AWU's large capital plan ($1 billion) to manage customer growth has caused an increase in leverage to well above average levels, thereby depressing certain cash flow metrics. Fiscal 2011 debt to customers of approximately $5,250 was several times the rating category median. SUFFICIENT WATER SUPPLY AND INFRASTRUCTURE: AWU's long-term water supply agreement with the Lower Colorado River Authority runs through 2050, with the option to extend through 2100. In addition, its water and wastewater treatment capacity will be sufficient for the foreseeable future, after completion of a new water treatment plant in 2014. A gradual deleveraging is expected to ensue thereafter. STRONG SERVICE AREA: Austin's deep and diverse economy, which performed relatively well during the recent economic recession, limits customer concentration. Unemployment rates are well below national averages, and customer growth rates have averaged a healthy 2% annually since 2006. WHAT COULD TRIGGER A RATING ACTION INSUFFICIENT RATE INCREASES: AWU's large capital needs to manage healthy customer growth have contributed to its below-average financial metrics. Consequently, Fitch believes that projected rate increases are critical to the long-term stability of the utility's financial position. Any deviation from AWU's plan to increase rates or other unexpected change that further weakens its financial position could result in downward rating action. CREDIT PROFILE Drier weather in fiscal 2011 helped improve AWU's financial margins, and the first half of the current fiscal year shows a positive trend. Debt service coverage improved to 1.65x in fiscal 2011 from 1.15x in fiscal 2010, as AWU's operating margin reached a high 40% (including depreciation). While the rating category median is 2.2x, Fitch recognizes that AWU's debt service coverage and some other financial ratios are held lower by its considerable debt financing of growth-related needs. AWU's large capital improvement plan through 2017 totals $1.02 billion, the majority of which ($614 million) is for water projects. The completion of Water Treatment Plant No. 4 in 2014 is expected to begin a slowdown in capital spending and corresponding deleveraging that should help improve financial metrics over time. Currently, AWU's debt to customer ratio of approximately $5,250 is more than three times the rating category median. Other financial metrics including liquidity and rate affordability are also well below rating category medians and a source of potential downward rating pressure. AWU ended fiscal 2011 with just 11 days cash on hand versus the rating category median of 309 days. A timing delay in reimbursing unrestricted cash with proceeds of commercial paper goes some way toward explaining the deficiency, as does the large of amount of capital spending averaging a high 250% of expenses over five years. Nevertheless, an important indicator of AWU's financial strength will be an improved liquidity position that benefits, in part, from projected rate increases over the next several years. A 6.5% rate increase became effective November 2011, and projected rate increases trend downward from about 5% to 1.5% by 2017 with the gradual decline in capital spending. In addition, a new $4.40/month revenue stability fee implemented in fiscal 2012 is expected to reduce revenue volatility from traditional volumetric charges. AWU expects the fee to raise its proportion of fixed revenues to approximately 17% from 12%. Combined water and wastewater rates of $82/month (1.9% of median household income) are above the rating category median of $65/month (1.5%), and any practical or other limitations on rate increases could slow AWU's financial recovery. AWU's rate increases are approved by the Austin City Council. The fiscal 2013 budget process will include several recommendations from a city council-formed Joint Committee on AWU's Financial Plan. The recommendations include building a new revenue stability reserve equal to 120 days of expenses and increasing operating reserves to 60 days of expenses. The recommendations, if incorporated into the budget, would provide indication of the city council and management's commitment to improving the long-term financial strength of the utility. For more information on AWU, see Fitch's full report dated Dec. 2, 2011. Additional information is available at 'www.fitchratings.com'. The ratings above were solicited by, or on behalf of, the issuer, and therefore, Fitch has been compensated for the provision of the ratings. This action was informed by information identified in Fitch's Revenue-Supported Rating Criteria, U.S. Water and Sewer Revenue Bond Rating Criteria, and U.S. Public Power Rating Criteria. Applicable Criteria and Related Research: --'Revenue-Supported Rating Criteria' (June 12, 2012); --'U.S. Water and Sewer Revenue Bond Rating Criteria' (Aug. 10, 2011); --'2011 Water and Wastewater Medians' (Jan. 18, 2011); --'U.S. Public Power Rating Criteria' (Jan. 11, 2012). Applicable Criteria and Related Research: Revenue-Supported Rating Criteria here U.S. Water and Sewer Revenue Bond Rating Criteria here 2011 Water and Wastewater Medians here U.S. Public Power Rating Criteria here (New York Ratings Team)
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