Fitch Ratings assigns its 'AA' rating to the Albuquerque Bernalillo County Water Utility Authority (the authority) $163 million joint water and sewer system refunding and improvement revenue bonds, series 2009A. In addition, Fitch affirms its rating on the authority's outstanding $582.5 million joint water and sewer revenue bonds and public project revolving fund loans. Bond proceeds will be used for the acquisition of the privately owned New Mexico Utilities, Inc. (NMU) water system, regular system improvements, water reclamation, the current refunding of the series 2001A bonds, and to pay costs of issuance. The bonds are expected to sell via negotiation the week of March 17. The Rating Outlook is revised to Stable from Positive.
The change in Rating Outlook to Stable from Positive is due to a lack of improvement in the authority's debt service coverage as previously expected. This is largely due to a cooling in the local housing market which has produced below-average connection fees and kept debt service coverage from approaching previous highs. The financial profile remains strong, but debt service coverage is not anticipated to improve significantly over the near term.
The 'AA' rating reflects the system's favorable operating performance, rapid debt amortization, healthy service area, and the availability of adequate water supply through at least the next 40 years. The authority has completed its sizeable water supply projects, including the San Juan-Chama Drinking Water Project (SJCDWP), with ongoing capital costs expected to decline significantly within in the immediate future. This, coupled with the authority's rapid debt amortization, should bring leverage ratios down over the near term. While operating performance has been good, financial performance in terms of debt service coverage is expected to remain relatively low over the next few years due to a slowing in connection fee revenues. As housing starts resume their historical steady growth and connection fees ramp back up, debt service coverage could improve.
The authority currently provides water and wastewater service to around 530,600 residents within the city and county. Water supplies traditionally have been obtained through extraction of resources from the Rio Grande basin aquifer underlying the city. However, in an effort to reduce depletion of the aquifer, the authority is implementing a strategic plan (the water resource management strategy, or WRMS), initially adopted in 1997, to provide a sustainable water supply through conservation, the use of surface water, reclaimed water, and shallow and deep groundwater. The four major projects identified in the 1997 WRMS include SJCDWP and three water reclamation and re-use projects, all of which are operational or will be nearing completion over the next calendar year. SJCDWP is the cornerstone of the WRMS and is expected to provide up to 70% of the service area's water needs through 2055. Approximately 25% of the area's drinking water supply is already being derived from the project. The project gradually will increase production and will be near full utilization by 2011.
As major projects associated with the WRMS have progressed, the authority's six-year capital improvement plan (CIP) has steadily declined to the current $309 million for fiscal years (FY) 2009-2013. With the completion of the WRMS, capital needs are anticipated to fall to just $52 million annually beginning in FY 2010 for rehabilitation and replacement. Because of the recent borrowings associated with the WRMS, leveraging of net plant assets has increased from 31% in FY 2004 to a more moderate 49% for FY 2008. Likewise, debt per customer rose during this period from a modest $710 to a relatively high $1,801.
Historical financial performance has been good, producing satisfactory debt service coverage. Annual debt service (ADS) coverage on parity bonds, based on pledged revenues, has ranged between 1.6 times (x) to 2.1x from FYs 2003-2008, while ADS coverage on all debt was between 1.5x-2.0x during the same period. ADS coverage in FY 2008 (unaudited) was at the lower end of historical results, posting a 1.6x and 1.5x for senior and subordinate obligations, respectively, due in large part to the slowdown in housing starts and resulting decline in collection of connection fees as well as rising operating costs related to power and chemicals. Given the limited amount of anticipated rate increases over the next several years, the authority is projecting similar, and even slightly reduced, coverage results through FY 2011, with organic growth offsetting rising operating and maintenance (O&M) costs and connection charges stabilizing at FY 2008 levels through FY 2011 before gradually increasing thereafter. While the authority maintains a target all-in ADS coverage of 1.5x, improvement to levels commensurate with historical highs would be viewed favorably.
Other financial metrics are sound, including high operating margins that have regularly exceeded 45% and rapidly increasing liquidity reserves that fell in recent years primarily from substantial pay-as-you-go capital funding. For FY 2008, unaudited results point to 164 days cash on hand and 217 days of working capital, with further improvement expected through FY 2013 based on cash flows provided by the authority. To provide additional operating flexibility, the authority recently created a rate reserve fund - currently funded at $3 million - at the beginning of FY 2008. Designed to provide an offset to future rate hikes or meet unforeseen contingencies, the rate reserve fund may be increased annually up to the current cap of $5 million if the working capital balance exceeds $10 million.
Concurrently with the creation of the rate reserve fund, the authority also instituted a water supply charge of $1,250 - currently at $1,285 - for new residential customers. The charge will be adjusted annually and is anticipated to allow for cash funding of new water sources in the future like SJC.
The system primarily serves the city, which constitutes almost 90% of county residents. In addition, with the acquisition of NMU, the authority's customer base will increase by approximately 17,000 customers. The acquisition of NMU is not expected to have any negative effects on authority financial profile or capital program.
The city is the largest in the state and accounts for about one-quarter of its population. The national economic slowdown has had some effect on the area to date with employment slowing to modest levels through fourth-quarter 2008 and the area experiencing some lost jobs from certain key employers including Intel and AOL. Nevertheless, unemployment year-over-year in December 2008 was at 4.2%, compared to the national unemployment rate, which was at 7.1% for the period. Income levels for city residents are on par with the national average and 10%-20% higher than those of the state.
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