Fitch Affirms Erie County Water Authority, NY's Water Revs at 'AA+'

The following is from Fitch Ratings on January 29:

Fitch Ratings has affirmed the 'AA+' rating for the following Erie County Water Authority, NY's (the authority) revenue bonds:

--Approximately $45.7 million fourth general resolution water revenue bonds, series 2007 and 2008.

The Rating Outlook is Stable.

SECURITY

Outstanding revenue bonds are payable by a first lien on net revenues of the authority's water system (the system).

KEY RATING DRIVERS

CONSISTENTLY SOUND FINANCIAL RESULTS: Financial performance continues to yield strong operating margins and sound debt service coverage (DSC). Liquidity is considered below average for the rating category but healthy relative to the system's operating profile and capital program.

STABLE SERVICE TERRITORY: The authority provides water treatment and distribution to a stable service territory that includes a highly diverse customer base with sound economic and wealth indicators.

FAVORABLE DEBT PROFILE: Debt levels are exceptionally low and able to absorb a limited debt issuance currently proposed during the five-year forecast. Unfunded other post-employment benefit (OPEB) obligations are slightly elevated but annual costs are manageable.

MANAGEABLE CAPITAL PROGRAM: Capital needs appear moderate and are not burdened by costly regulatory requirements or growth pressures.

ABUNDANT CAPACITY: Available water supply and treatment capacity are sufficient to meet demand for the foreseeable future.

RATING SENSITIVITIES

SIZEABLE LONG-TERM OBLIGATION: The Eric County Water Authority's unfunded obligation related to other post-employment benefits is sizeable, although Fitch views recent changes to reduce the liability as positive.

CREDIT PROFILE

REGIONAL WATER PROVIDER

The authority provides water treatment and distribution service to a highly diverse and largely stable customer base. The authority serves 11 communities and municipalities via direct service, 14 through lease managed agreements, and 16 as bulk customers. The service area includes much of the eastern portion of Erie County (general obligation bonds rated 'A+'/Stable) with the exception of the city of Buffalo, which maintains its own water treatment and distribution system. A small number of the aforementioned communities served are also located in parts of Chautauqua, Cattaraugus, and western Genesee and Wyoming counties. Regional customer growth has been modest, averaging about 1 percent annually over the past five years.

SOUND FINANCIAL PROFILE

The authority's financial profile has been consistently strong, supported by ample rate flexibility, affordable capital needs and manageable debt obligations. Total DSC has remained favorable but has fluctuated somewhat in recent years due to sales reductions consistent with wet weather patterns. Fiscal 2014 DSC was a healthy 1.8x (excluding connection fees) and coverage levels in fiscals 2015 and beyond are forecast by management to exceed 2x.

Liquidity has historically been low compared to Fitch's median for the rating category, but Fitch believes that the authority's reserves of over 200 days cash on hand in recent years provide a sound cushion relative to the system's overall risk profile. Management prudently targets a healthy minimum reserve balance that approximates 20 percent of gross revenues after the payment of debt service and annual capital needs. Total reserves are consistently higher than management's stated target. Fitch expects financial metrics to remain strong over the next several years based on the authority's most recent financial forecast.

LOW DEBT LEVELS

Exceptionally low debt levels remain a key credit strength. Management's prudent practice of funding capital needs principally on a pay-go basis continues to result in leverage metrics that meet or exceed Fitch's 'AA' rating category medians. Outstanding debt as a percentage of net system assets was a low 21 percent in fiscal 2014 while total debt per capita was below $100. Fitch's medians for both metrics are considerably higher at 50 percent and $521, respectively. Total annual debt service costs are also low at only 17 percent of gross revenues (versus the 'AA' median of 23 percent).

The authority's long-term unfunded OPEB liability remains sizeable at $45.6 million and continues to grow as the authority pay-go's the actual annual OPEB costs to retirees versus the actuarial required contribution (ARC). In fiscal 2014 actual payments were $1.5 million compared to the $4.6 million ARC. However, as a result of reforms enacted in 2011 by the authority to raise the retiree eligibility age as well as require a 15 percent employee contribution toward the plan's premium, the authority expects its growing OPEB obligation to be limited going forward.

Overall, the authority's annual OPEB pay-go costs account for a nominal proportion of total revenues, and when combined with fully-funded pension ARC payments, consumed a reasonable 6.8 percent of the authority's budget in fiscal 2014. By comparison, fully funding the ARCs for both OPEB and the pension would total a still affordable 11.4 percent of fiscal 2014 revenues.

MANAGEABLE CAPITAL PROGRAM

The system's capital needs are manageable and should continue to be mostly funded on a pay-go basis. The current five-year capital improvement plan (CIP) through 2020 is estimated at $126 million, a nearly $50 million increase from the prior plan. The current CIP continues to focus on extensive repair and replacement projects aimed at keeping the system in good repair, with the increase in projected spending attributable to the authority's push to address targeted areas that have been greatly impaired over the course of recent severe winters.

The authority is able to take advantage of a significant decline in annual debt service starting in fiscal 2019 to potentially issue additional debt to fund the expanded CIP while maintaining affordable debt levels. Historically, capital expenditures have routinely exceeded the annual rate of depreciation, indicating the authority's commitment to maintaining system assets. Positively, capital spending remains wholly discretionary and is not dictated by regulatory or supply expansion requirements.

EXCESS CAPACITY EXISTS

The authority benefits from an ample water supply and significant excess treatment capacity. The system's water supply is drawn from the Niagara River and Lake Erie and is estimated to be sufficient for the foreseeable future. Two treatment facilities provide a combined 156 million gallons daily of available treatment capacity, more than two times the average daily demand. The system is reportedly in compliance with all regulations and water quality standards.

STABLE SERVICE AREA

The service area's exclusion of the city of Buffalo limits the authority's exposure to a customer base that in general exhibits weaker income levels, higher unemployment and potentially lower utility collection rates. Consequently, accounts receivable have remained low and annual write-offs continue to approximate a nominal 1 percent. Wealth and economic indicators for the balance of Erie County are generally more favorable, with median household and per capita income levels on par with national figures. Positively, the county as a whole is experiencing economic growth, with the county-wide October 2015 unemployment rate declining to a strong 4.8 percent.

Additional information is available at 'fitchratings.com'.

In addition to the sources of information identified in Fitch's Revenue-Supported Rating Criteria, this action was additionally informed by information from Creditscope.

Applicable Criteria

Revenue-Supported Rating Criteria (pub. 16 Jun 2014)

https://fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=750012

U.S. Water and Sewer Revenue Bond Rating Criteria (pub. 03 Sep 2015)

https://fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=869223

Additional Disclosures

Dodd-Frank Rating Information Disclosure Form

https://fitchratings.com/creditdesk/press_releases/content/ridf_frame.cfm?pr_id=998655

Solicitation Status

https://fitchratings.com/gws/en/disclosure/solicitation?pr_id=998655

Endorsement Policy

https://fitchratings.com/jsp/creditdesk/PolicyRegulation.faces?context=2&detail=31

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