Fitch Rates Erie County Water Authority's (NY) $47.7MM Revs 'AA'; Upgrades Outstanding Debt

2008-06-06 23:23:28 -

- Fitch Ratings has assigned an 'AA' rating to Erie County Water Authority, New York's (the authority) approximately $47.7 million fourth general resolution water revenue refunding bonds, series 2008. The bonds are scheduled to price June 18 through a negotiated sale. Fitch has also upgraded the authority's approximately $35 million in outstanding parity debt to 'AA' from 'AA-'. The Rating Outlook on all bonds is Stable.

Bond proceeds will refund outstanding water works system revenue bonds, series 1993A and 1993B previously issued under a 1990 bond resolution that granted bondholders a senior lien on net revenues of the authority. The refunding of the series 1993A-B bonds effectively closes this lien and gives current and future bondholders a first lien for debt issued under the fourth general resolution. The rating upgrade to 'AA' reflects the senior status previously afforded to bondholders prior to the current refunding of the series 1993A-B bonds.

The 'AA' rating on the subordinated fourth general resolution bonds is based on the authority's consistently healthy financial performance with ample liquidity and strong debt service coverage levels, manageable capital needs primarily funded by available cash resources, low rates, and ample water supply and treatment capacity. As a public benefit corporation, the authority has the ability to set rates independently without approval from the New York Public Service Commission or the county legislature. The rating also incorporates the below-average income levels of the authority's service area.

The authority provides water service to approximately 550,000 residents of western New York, including 35 municipalities in Erie County and parts of Chautauqua, Cattaraugus, Genesee and Wyoming Counties. Though the county's population and labor force continue to decline, Fitch believes the presence of health care and higher education provides a reliable degree of stability to the area economy. Wealth levels rank well below state and close to national levels, a factor that is somewhat offset by the relative low cost of living in the Buffalo region. The April 2008 unemployment rate of 5.1% measured slightly better than the state and national levels.

The authority draws its raw water supply from Lake Erie and the Niagara River and serves approximately 157,000 customers. Two water treatment plants operate with a combined treatment capacity of 156 million gallons per day (mgd), significantly above the fiscal 2007 average day demand of 74.8 mgd. Discounting prior takeovers of municipal systems, growth in customer accounts has been stagnant, averaging less than 1% annually. The authority's financial forecast assumes no growth in customers accounts.

Financial operations are sound, generating solid operating margins, strong debt service coverage and good liquidity. The system finished fiscal 2007 with well over 300 days cash on hand, and net revenues covered annual debt service on all outstanding debt, including debt issued through the New York State Environmental Facilities Corp., by a strong 2.5 times (x). While the authority's high unaccounted-for water loss rate of 28% is a potential concern, its impact on financial margins to date has been limited. The authority's financial forecast through fiscal 2012 shows annual debt service coverage on all outstanding obligations remaining at or above 2.0x with no additional debt issuances planned. Sizeable capital outlays made yearly on a pay-as-you-go basis limits the authority's reliance on debt issuance.

The system's rate structure is reportedly the second lowest among 38 area water systems. Rates have increased by an annual average of 4% over the last five years, and projections assume similar rate hikes annually through fiscal 2012. Capital improvements, totaling $94 million over the next four years, are needed primarily to address routine system maintenance. Dedicated CIP funding sources include unspent bond proceeds, excess operating revenues, and cash balances.

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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Ann Flynn, 212-908-9152
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