TEXT-Fitch rates NYC Muni Water Finance Authority revs 'AA+'

Thu Feb 14, 2013 4:48pm EST

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Feb 14 - Fitch Ratings has assigned an 'AA+' rating to the following water
and sewer system (the system) second general resolution (SGR) revenue bonds for
the New York City Municipal Water Finance Authority (NYW):

--Approximately $435 million water and sewer system SGR revenue bonds, fiscal
2013 series CC.

The fiscal 2013 series CC bonds are scheduled for negotiated sale on Feb. 20.
Proceeds will provide funds for NYW's ongoing capital program and retire
outstanding commercial paper notes.

In addition, Fitch has affirmed NYW's outstanding bonds as follows:

--$8.2 billion first general resolution (FGR) revenue bonds at 'AA+';
--$19.7 billion SGR revenue bonds at 'AA+';
--$200 million extendable municipal commercial paper notes, series seven at
'F1+';
--$200 million extendable municipal commercial paper notes, series eight at
'F1+'.

The Rating Outlook is Stable.

SECURITY

The SGR bonds are special obligations of NYW, payable solely from and secured by
a subordinate lien on gross revenues of NYW. FGR bonds are secured by a first
lien on gross revenues of NYW. The bonds currently being issued will not have a
debt service reserve fund.

Note interest is secured by moneys and investments in the FGR subordinated
indebtedness fund, on parity with outstanding SGR bonds. Note principal is also
secured by moneys and investments in the FGR subordinated indebtedness fund,
and, ultimately, the authority pledges the sale of first resolution bonds or SGR
bonds to the payment of principal on the notes. The original maturity on the
notes is 1-90 days; however, NYW has the option to extend the maturity of any
note by an additional 180 days, and redeem notes at any time during the
extension period.

KEY RATING DRIVERS

SOUND LEGAL PROTECTIONS: NYW's primary credit strength is its legal structure,
including its status as a bankruptcy-remote issuer, providing substantial
protection to bondholders from potential operating risks associated with the
system and New York City (the city).

REGIONAL PROVIDER OF AN ESSENTIAL SERVICE: The combined system provides an
essential service to an exceptionally large and diverse service area and
benefits from an abundant, high-quality water supply exempt from expensive
filtration requirements and transmission costs.

INDEPENDENT RATE-SETTING AUTHORITY: Strong financial management and a proven
ability and willingness to independently raise rates are reflected in
consistently solid financial results, despite the continued volatility in
consumption.

WELL-MANAGED CAPITAL PROGRAM: Sophisticated capital planning efforts have helped
achieve compliance with large and costly mandated regulatory projects and
ensured the successful implementation of the large capital improvement plan
(CIP).

HIGHLY LEVERAGED SYSTEM: Leverage is high as a result of having to comply with
environmental mandates and maintain a large urban system and its aging assets.
Declining but still sizeable debt plans programmed into the current capital plan
will keep debt levels elevated for the long term.

IMPROVED COLLECTIONS: Below-average collection rates persist, although payment
incentives and strong enforcement mechanisms have yielded positive results in
recent years.

RATING SENSITIVITIES

MAINTENANCE OF SUFFICIENT RATES: Failure to achieve rate hikes sufficient to
ensure adequate financial margins and maintain current debt service coverage
(DSC) levels on senior and subordinate lien obligations would be viewed
negatively.

DEBT LEVELS EXCEEDING PROJECTIONS: Escalation of debt levels beyond what is
currently included in the five-year financial forecast would place added
pressure on the system's debt profile.

CREDIT PROFILE

SOUND LEGAL PROTECTIONS

Fitch believes NYW bondholders benefit from strong legal protections that
include:
--Revenues collected in a lock box structure controlled by the trustee and used
to pay debt service of FGR and SGR bonds before operations and maintenance (O&M)
expenses;
--The bankruptcy-remote, statutorily defined nature of the issuer;
--Ownership of system revenues by the bankruptcy-remote New York Water Board
(the board), which sets rates without city council approval;
--Legal covenants that require adjustment of water and sewer rates sufficient to
provide at least 1.15x coverage of FGR bond annual debt service and 1.0x
coverage on SGR bonds and O&M expenses.

These layers of protection serve to significantly shield bondholders from the
operational risks of the city's massive water and sewer enterprise as well as
other city government operations. NYW SGR bondholders benefit from similar legal
protections afforded FGR bondholders. SGR bondholders' claim on gross revenues
is subordinate only to FGR debt service deposits, NYW administrative costs, and
FGR debt service reserve fund (DSRF) requirements.

Following such deposits, revenues flow from the subordinated indebtedness fund
of the FGR revenue fund directly to the SGR revenue fund to pay SGR debt service
deposits. Only after monthly required deposits under the SGR are satisfied and
held by NYW's trustee are funds released from the lock box to pay O&M expenses.

STRONG FINANCIAL AND DEBT MANAGEMENT

NYW's strong financial management and conservative budgeting continue to yield
solid operating results, despite sizable growth in debt service obligations and
volatility in consumption. Financial results continued to outperform budgeted
expectations in fiscal 2012, despite a larger than forecast decline in
consumption of about 2.3% that partially offset the adopted 7.5% rate hike.
Consequently, year-end DSC from net operating revenues improved to 4.5x and 1.8x
on FGR and SGR debt service (7.5x and 3.1x reflecting the gross lien),
respectively, compared to 3.2x and 1.5x in fiscal 2011.

Liquidity has steadily grown in recent years to a more acceptable level.
Unrestricted cash and investments together with O&M reserves have equaled a
healthy average of 125 days cash on hand since 2008. NYW's prudent practice of
carrying forward and applying any operating surplus generated in the prior year
to the payment of debt service in the coming fiscal year prevents the build-up
of more robust cash balances, although Fitch continues to view the strategy
favorably.

The net surplus generated in fiscal 2012, measured on a cash basis, totaled $498
million. Results through the first seven months of the current fiscal year are
positive with year-to-date revenues reportedly up by almost 3% compared to the
adopted budget, despite little change in consumption through the first seven
months. Rates were increased in fiscals 2012 and 2013, albeit by a more moderate
7.5% and 7%, respectively, compared to a series of double-digit rate hikes
enacted between fiscals 2008-2011. Despite the annual increases, the average
monthly residential bill remains relatively affordable in comparison to the
median household income level.

IMPACT OF THE RECENT HURRICANE IS BELIEVED TO BE MANAGEABLE

Fitch does not expect the damage caused by Hurricane Sandy to have a material
impact on the financial operations or ongoing capital program of NYW. The
delivery of safe drinking water was continued during and after the October 2012
Hurricane, and despite needed bypasses and overflows at certain wastewater
treatment plants, officials do not expect to incur any regulatory penalties. The
assessment of system-wide damage is reportedly ongoing, but the latest cost
estimate includes approximately $51 million of O&M expenses and approximately
$44 million of capital expenses, the vast majority of which will likely be
reimbursable with Federal Emergency Management Agency funds.

PROJECTED FINANCIAL RESULTS REMAIN SATISFACTORY

Financial projections through fiscal 2017 are based on what Fitch believes to be
reasonable assumptions. The forecast assumes the continuation of moderately
sized rate hikes and incorporates sizeable annual debt offerings, 3% yearly
increases in salary and wage adjustments, and a 1.5% decline in consumption in
fiscals 2014 and 2015 followed by a 2% drop in 2016 and 2017. As a result,
all-in DSC from net revenues is projected to remain at a satisfactory level of
about 1.6x through the current planning period.

LEVERAGED SYSTEM

Similar to most large urban utility systems, NYW's capital needs are
significant, principally the result of state and federally mandated projects.
The CIP for fiscal years 2014-2023 includes an estimated $12.2 billion in water
and sewer projects, approximately $1 billion less than the 2012-2021 capital
program and down significantly from a peak of $19.5 billion projected for fiscal
years 2008-2018.

Funding for capital projects will continue to come almost entirely from
long-term debt issuance and an extensive commercial paper program. NYW's current
forecast shows additional bond issues through 2017 totaling $6.8 billion, or an
annual average of approximately $1.36 billion. Projected debt issuance, while
sizable, is a marked decline from the annual average of about $3.1 billion
incurred over the previous five years, including a peak of $4.6 billion in
fiscal 2011.

Debt levels are high and the projected escalation included in the current
forecast may pressure NYW's rating over the medium term. Debt to net plant now
exceeds 100% and measured on a per capita basis, leverage approximates slightly
more than $3,000. By comparison, Fitch's 'AA+' median ratios for debt to net
plant and debt per capita are 49% and $475, respectively. Fitch believes the
board's demonstrated commitment to raising rates as well as management's
conservative budgeting will be key to preserving operating margins and meeting
the continued growth in debt service costs included in NYW's financial forecast.


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.

In addition to the sources of information identified in Fitch's
Revenue-Supported Rating Criteria, this action was additionally informed by
information from Creditscope.

Applicable Criteria and Related Research:
--'Revenue-Supported Rating Criteria' (June 12, 2012);
--'U.S. Water and Sewer Revenue Bond Rating Criteria' (Aug. 3, 2012);
--'2013 Water and Sewer Medians' (Dec. 5, 2012);
--'2013 Outlook: Water and Sewer' (Dec. 8, 2011).

Applicable Criteria and Related Research:
2013 Outlook: Water and Sewer Sector
2013 Water and Sewer Medians
U.S. Water and Sewer Revenue Bond Rating Criteria
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