Fitch Ratings assigns an 'AA' rating to Boston Water and Sewer Commission's (BWSC, or the Commission) approximately $154 million general revenue and refunding bonds (senior series), 2009 series A and 2009 series B. The bonds are scheduled for negotiated sale the week of March 10, 2009. Proceeds from the 2009 series A bonds will be used to refund outstanding commercial paper notes ($72.2 million) and to fully fund a debt service reserve fund ($11.4 million), while the 2009 series B bonds will refund outstanding parity debt ($71.1 million) for savings. At this time, Fitch also affirms the 'AA' rating on BWSC's $307.3 million outstanding parity bonds. The Rating Outlook is Stable.
The 'AA' rating reflects the Commission's demonstrated ability to consistently maintain solid reserve levels and sound debt service coverage while aggressively addressing its share of costly court-mandated capital projects during much of the 1990s and the early part of the current decade. The rating also reflects Fitch's belief that capital demands going forward will remain manageable and that BWSC will continue to exceed its financial projections given its history of doing so. Additional credit factors include BWSC's strong financial management as well as its economically diverse service area with above-average wealth levels. Rates, as well as system leveraging attributable to historical capital spending, are high and will remain so for some time. However, the high rates are in part mitigated by the strong income levels in the service area and the slowing rate of future leveraging as the Commission's capital improvement plan (CIP) continues to transition from regulatory projects to ongoing rehabilitation.
BWSC serves approximately 87,000 retail customers in the city of Boston, with finished water supply and wastewater treatment provided by Massachusetts Water Resources Authority (MWRA, general revenue bonds rated 'AA' by Fitch). As the largest customer of MWRA, the Commission is directly affected by MWRA's $1.1 billion multi-year CIP, as capital expenditures are funded through assessments to member providers. Favorably, MWRA's capital needs are substantially lower than in the previous decade when Boston Harbor cleanup efforts necessitated double-digit annual assessment increases. With a limited role as a distribution and collection system coupled with MWRA's declining CIP, the level of required capital investment for BWSC is expected to stay at a manageable level going forward, particularly as the Commission nears completion of its combined sewer overflow (CSO) remediation program.
Financial operations are consistently stable due in large part to conservative budgeting and prudent financial management. Financial results have typically exceeded projections, which has kept debt service coverage and liquidity at sound levels. Based on unaudited results, net revenues covered senior lien debt service by 1.9 times (x) in fiscal 2008. Including annual debt service on loans from MWRA and the state revolving fund, debt service coverage dropped to a slightly narrower 1.4x. Unrestricted cash balances, which include a $60 million rate stabilization fund (RSF), totaled nearly $110 million in fiscal 2008, equal to nearly 200 days of cash on hand.
BWSC's current financial projections indicate senior-lien coverage declining to a range of 1.3x-1.4x through fiscal 2013 with annual draws on the RSF. However, Fitch believes BWSC is likely to outperform its financial forecast given its demonstrated history of maintaining cash reserves and generating debt service coverage in excess of projected margins. While BWSC's financial metrics are slightly below average for the 'AA' rating category, Fitch believes the Commission's limited role as a distribution and collection system somewhat mitigates the need for additional cushion provided by higher debt service coverage and liquidity levels.
Currently, MWRA projects assessments to rise at an annual rate of about 6% through fiscal 2013 to pay for its capital program. To fund BWSC's own $171 million three-year CIP as well as keep pace with MWRA's rising assessments, the Commission's financial forecast includes annual rate hikes of 3.5% for the current fiscal year, and 6.7% each year after through 2013. The Commission expects to issue parity debt to fund approximately two-thirds of its capital program with the balance funded from excess operating revenues and MWRA support.
Fitch's rating definitions and the terms of use of such ratings are available on the agency's public site, www.fitchratings.com. Published ratings, criteria and methodologies are available from this site, at all times. Fitch's code of conduct, confidentiality, conflicts of interest, affiliate firewall, compliance and other relevant policies and procedures are also available from the 'Code of Conduct' section of this site.
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Fitch Ratings
Christopher Hessenthaler, 212-908-0773 (New York)
Doug
Scott, 512-215-3725 (Austin)
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cindy.stoller@fitchratings.com