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
--$72.6 million in outstanding water system revenue bonds (subordinate lien) at
--$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.
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
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
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.
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
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