TEXT - Fitch rates New York's Suffolk County Water Authority revs
Jan 15 - Fitch Ratings has assigned an 'AAA' rating to the following Suffolk County Water Authority, New York (the authority) bonds: --Approximately $60 million water system revenue bonds, series 2013A refunding. The bonds are expected to be sold via competitive sale the week of Feb. 4. Proceeds will be used to refund outstanding senior lien bonds for cost savings with no extension of maturity dates. In addition, Fitch affirms the following ratings: --$458.9 million in outstanding water system revenue bonds (senior lien) at 'AAA'; --$72.6 million in outstanding water system revenue bonds (subordinate lien) at 'AAA'; --$150 million in outstanding BANs, 2013A and 2013B (subordinate lien) at 'AAA'; --$50 million in outstanding BANs, 2011B (subordinate lien) at 'F1+'. The Rating Outlook is Stable. SECURITY The bonds are secured by a senior lien on the authority's net revenues. Subordinate lien obligations, which include outstanding BANs, are payable from net revenues of the authority after payment of senior lien obligations. KEY RATING DRIVERS STABLE SERVICE AREA WITH 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. The recent impact of Hurricane Sandy on the authority's operations and assets was nominal. CONSISTENTLY POSITIVE OPERATING RESULTS: Favorable operating results are demonstrated by consistently robust debt service coverage levels and strong liquidity. AMPLE FLEXIBILITY: Independent rate-setting authority and affordable user rates provide significant flexibility. LIMITED FUTURE BORROWING NEEDS: Leverage ratios are somewhat high for the given rating category, although capital needs are manageable, and the mature, largely built-out service area does not pose any growth-related risks. Borrowing plans over the medium term are not expected to result in a meaningful increase in leverage. WELL-MANAGED DEBT PORTFOLIO: The 'F1+' short-term rating assigned to outstanding subordinate lien BANs, 2011B considers the strong credit quality of the authority and its expected ability to issue future bonds to refinance outstanding BANs. The 'AAA' rating on outstanding subordinate lien bonds also reflects the moderate (approximately 15%) amount of subordinated debt outstanding relative to the system's overall debt profile. WEAK LEGAL COVENANTS: The rate covenant, which essentially requires just sum-sufficient coverage of debt service obligations, is considered weak. CREDIT PROFILE CONSISTENTLY SOUND OPERATING RESULTS The authority's financial performance continues to exhibit strong operating margins, good debt service coverage and healthy cash balances. Dry weather conditions persisted throughout much of fiscal 2011, prompting sizeable growth in consumption that drove a 15% increase in operating revenue and favorable annual debt service (ADS) coverage of 2.6x and 2.0x on senior-lien and all-in obligations, respectively. The adoption of modest rate hikes leading up to and in the midst of fiscal 2012 prompted ADS coverage to improve further, rising to 2.3x on an all-in basis based on audited financial results. Liquidity remains substantial as the ending balance of unrestricted cash in fiscal 2012 equaled about 650 days cash on hand. 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 3.75% were implemented at the end of fiscals 2011 and 2012. The average residential bill for customers of the authority remains comfortably below $30 or less than 0.5% of median household income. The authority's financial forecast through fiscal 2017 shows satisfactory ADS coverage on an all-in basis at 1.7x. Assumptions built into the forecast, which include the aforementioned rate hikes, additional debt issuance, nominal growth in customer accounts and customer demand in line with more recent trends, appear reasonable in Fitch's view. MANAGEABLE CAPITAL PROGRAM Capital needs, totaling $294.6 million over the next five years, consist of 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 its capital program from a 2011 note issuance, an additional $100 million in new money bonds planned for 2013, and cash reserves. Projected cash flows appear strong and should yield sufficient excess revenue to meet planned pay-go. HIGH DEBT LEVELS Debt levels are moderately high for the given rating category. Total debt outstanding as a percentage of net assets, funds available for debt service (FADs) and system equity was roughly twice the median for each ratio in fiscal 2012, although ADS continues to consume under 20% of gross revenues and the authority's affordable user charges provide ample flexibility. Prospectively, future debt service costs are scheduled to escalate significantly over the next several years, which could pressure operating margins and diminish ADS coverage assuming any future rate hikes do not keep pace. VERY STABLE SERVICE TERRITORY 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 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.