Fitch Rates Suffolk County Water Auth, NY's Rev Bonds and BANs 'AAA'; Outlook Stable
--Approximately \\$50 million water system revenue bonds, series 2015A';
--Approximately \\$115 million water system revenue bonds, series 2015 refunding';
--Approximately \\$75 million bond anticipation notes (BANs), 2015B.
The bonds and BANs are scheduled for negotiated sale the weeks of October 19 and Nov. 9, respectively. The series 2015A bonds will be used to retire outstanding BANs (series 2013A), fund a deposit to the reserve account and pay issuance costs. The series 2015 refunding bonds will refund certain outstanding senior lien bonds for interest cost savings, fund a deposit to the reserve account and also pay issuance costs. The BANs, 2015B will fund a portion of the authority's ongoing capital improvement program.
In addition, Fitch has affirmed the 'AAA' rating on the following outstanding bonds:
--\\$647 million water system revenue bonds, series 2006A, 2007A, 2009, 2009A, 2009B, 2011, 2012, 2012A, 2013, 2014A and 2014B;
--\\$50 million bond anticipation renewal notes, 2013A.
The Rating Outlook is Stable.
Water system revenue bonds, and BANs are payable from a first lien on net revenues of the authority.
KEY RATING DRIVERS
STABLE AND DIVERSE SERVICE AREA: SCWA is a retail water provider serving a highly diverse and largely affluent service area that includes approximately 1.2 million residents. The stability of the SCWA's service area and customer base underpin the authority's superior credit profile.
CONSISTENTLY STRONG OPERATING RESULTS: All-in annual debt service coverage has remained strong, trending above 2.0x over the prior five fiscal years with little deviation. Liquidity remains similarly strong with about 450 days of cash on hand. Fitch expects comparable operating results over the medium term based on the authority's most recent financial forecast extending through 2021.
AMPLE WATER SUPPLY: The authority maintains an abundant, high-quality water supply requiring minimal treatment and cost to produce. SCWA's water supply will continue to far exceed customer demand for the foreseeable future.
CONSIDERABLE RATE FLEXIBILITY: SCWA's demonstrated ability and willingness to exercise its autonomous rate-setting authority, coupled with exceptionally low water rates, provides SCWA with significant flexibility.
INCREASING DEBT BURDEN: The authority's capital program and related debt burden is currently manageable with the majority of the costs (60%) expected to be funded from pay-go revenues. However, leverage ratios are weak compared to median ratios for the rating category, and a steadily escalating debt service schedule through 2034 could pressure operating margins absent offsetting rate relief.
MAINTENANCE OF FINANCIAL PROFILE: Fitch expects Suffolk County Water Authority's financial margins beyond the current forecast period will be increasingly pressured as annual debt service obligations continue to rise. Rating stability over the long term will depend in large part on the authority's ability and willingness to maintain current financial metrics despite the scheduled escalation in debt service.
STRONG FINANCIAL RESULTS EXPECTED THROUGH FORECAST PERIOD
SCWA consistently generates solid debt service coverage while maintaining robust cash reserves. Annual rate hikes have sufficiently offset steadily rising debt service obligations, allowing coverage on an all-in basis to remain in excess of 2.0x over the last five consecutive years. A sizeable but prudent debt defeasance from cash reserves reduced unrestricted cash considerably in fiscal 2015, but with about 450 days of cash on hand, liquidity remains strong and generally in line with Fitch's median ratio for 'AAA' rated utilities.
Historically, the authority has targeted a 1.70x coverage level when establishing the budget, although the most recent financial forecast through fiscal 2021 now includes healthier margins at or slightly higher than 2.0x. Assumptions included in the forecast appear reasonable: modest annual rate increases, nearly flat customer growth, additional debt service attributable to planned debt issuances, and rising operating and maintenance costs of about 3% per annum.
SCWA benefits from an abundant supply of high-quality groundwater requiring minimal cost to produce and treat. The authority's water supply is drawn entirely from three underground acquifers estimated by the U.S. Department of Interior to contain more than 70 trillion gallons of water. SCWA, by comparison, pumps significantly less, equal to about 70 billion gallons per year. Existing water supplies are expected to remain well in excess of customer demand for the foreseeable future as generally consistent rainfall and snowfall continually replenish the aquifers.
LOW RATES EXPECTED TO CONTINUE
User charges increased by a total 18% over the last five years but remain very low in comparison to income levels for the service area and peer utilities within the state. Residential customers consuming almost 13,400 gallons per month currently pay approximately \\$30, equal to about 0.4% of median household income.
SCWA implemented modest rate increases of 1.2% and 4.2% in fiscals 2015 and 2016, respectively. Additional increases will be determined by a forthcoming rate study expected to be completed during the course of the current fiscal year.
GROWING DEBT BURDEN
SCWA's debt burden has remained manageable despite leverage ratios that are high for the rating category. The authority prudently applied approximately \\$70 million of its unrestricted cash to the defeasance of previously outstanding series 2005 bonds in fiscal 2015, reducing total debt outstanding from a peak level in fiscal 2013. Despite the deleveraging, debt measured on a per capita basis (\\$626) and as a percentage of net plant assets (69%) continues to exceed Fitch's median ratios of \\$349 and 26%.
The size and scope of SCWA's capital improvement program appears manageable with projected spending levels in line with historical five-year spending plans. Total annual expenditures between fiscal years 2016-2020 are forecast at \\$359.6 million. The authority's ongoing water main installation program will continue to account for the majority of planned capex (40%) while the balance will be devoted to routine renewal and replacement projects. Approximately 40% of the capital program will be financed with short-term BANs, including the 2015B notes. Additional note issuances are tentatively planned for fiscal years 2018 and 2020 and will ultimately be taken out with long-term revenue bonds.
With currently planned borrowings factored in, Fitch projects outstanding debt will rise by nearly 20% by fiscal 2019. Longer-term annual debt service obligations - not including any future borrowings beyond 2020 - will grow by approximately 50% by 2034. Accordingly, Fitch will continue to monitor the authority's ability and willingness to support its growing debt burden while maintaining cash flow metrics and leverage ratios supportive of the current rating category.
STRONG SERVICE TERRITORY
SCWA serves a highly diverse, almost entirely residential service territory that encompasses the vast majority of the county. Nearly 98% of the authority's customers are served on a retail basis. The balance is composed of three small municipally-owned water districts served on a wholesale basis. Just 3% of total system revenue is derived from the 10 largest accounts, which includes the three districts.
The county continues to exhibit a strong socioeconomic profile driven primarily by its proximity to New York City. With wealth levels equal to almost 150% and 160% of state and national figures, respectively, and a market value per capita of about \\$171,000, Suffolk County remains one of the wealthiest counties in the state. Unemployment continued below 5% through August 2015, also outperforming state and national rates.
SCWA's affordable water rates together with the county's high income levels continue to yield near-perfect revenue collection rates and provide the authority with considerable flexibility.