Fitch Ratings has assigned an 'AA+' rating to the following
water and sewer system second general resolution (SGR) revenue
bonds for the New York City Municipal Water Finance Authority (NYW,
or the authority):
--Approximately $475 million water and sewer system SGR revenue
bonds, fiscal 2015 series GG.
The Rating Outlook is Stable.
The fiscal 2015 series GG bonds are scheduled for negotiated
sale March 31. Proceeds will be used to retire outstanding First
General Resolution (FGR) bonds for cost savings with no extension
of maturity dates and to pay issuance costs.
SECURITY
The SGR bonds are special obligations of NYW, payable solely
from and secured by a subordinate lien on gross revenues of NYW's
combined water and sewer utility system (the system). FGR bonds are
secured by a first lien on gross revenues of NYW. The bonds
currently being issued will not have a debt service reserve fund
(DSRF).
KEY RATING DRIVERS
SOUND LEGAL PROTECTIONS: NYW's primary credit strength is its
legal structure, including its status as a bankruptcy-remote
issuer, providing substantial protection to bondholders from
potential operating risks associated with the system and New York
City (the city).
REGIONAL PROVIDER OF AN ESSENTIAL SERVICE: The system provides
an essential service to an exceptionally large, diverse and
economically important service area. The system benefits from an
abundant, high-quality water supply exempt from expensive
filtration requirements and transmission costs.
DEMONSTRATED RATE-RAISING WILLINGNESS: Strong financial
management and a proven ability and willingness to raise rates are
reflected in consistently solid financial results, despite
continued volatility in consumption.
WELL-MANAGED CAPITAL PROGRAM: Sophisticated capital planning
efforts have helped achieve compliance with large and costly
mandated regulatory projects and ensured the system's total assets
are adequately maintained.
HIGHLY LEVERAGED SYSTEM: Debt levels are high as a result of
having to comply historically with environmental mandates and
maintain a large urban system and its aging assets. Declining but
still sizeable debt issuances programmed into the current capital
plan will keep debt levels elevated for the long term.
IMPROVED COLLECTIONS: Below-average current collection rates
persist, although payment incentives and strong enforcement
mechanisms have yielded positive results in recent years.
RATING SENSITIVITIES
MAINTENANCE OF SUFFICIENT RATES: Failure to establish rates
sufficient to ensure the continuation of strong financial margins
and currently robust debt service coverage (DSC) levels on senior
and subordinate lien obligations would be viewed negatively.
RISING DEBT LEVELS: The continued escalation in the system's
debt levels remains an increasing concern that could ultimately
pressure the rating. Increases in leverage beyond what is currently
forecast would likely place added pressure on the authority's
current rating.
CREDIT PROFILE
SOUND LEGAL PROTECTIONS
Fitch believes NYW bondholders benefit from strong legal
protections that include:
--Revenues collected in a lock box structure controlled by the
trustee and used to pay debt service of FGR and SGR bonds before
operations and maintenance (O&M) expenses;
--The bankruptcy-remote, statutorily defined nature of the
authority;
--Ownership of system revenues by the bankruptcy-remote New York
Water Board, which sets rates independently without city council
approval.
These layers of legal protection serve to significantly shield
FGR and SGR bondholders from the operational risks of the city's
massive water and sewer enterprise as well as other city government
operations. Consequently, Fitch does not make a rating distinction
between FGR and SGR bonds. SGR bondholders' claim on gross revenues
is subordinate only to FGR debt service deposits, NYW
administrative costs, and FGR DSRF requirements.
Following such deposits, revenues flow from the subordinated
indebtedness fund of the FGR revenue fund directly to the SGR
revenue fund to pay SGR debt service deposits. Only after monthly
required deposits under the SGR are satisfied and held by NYW's
trustee are funds released from the lockbox to pay O&M
expenses.
STRONG FINANCIAL AND DEBT MANAGEMENT
NYW's strong financial management and conservative budgeting
continue to yield sound financial metrics, despite ongoing
volatility in consumption over the last several years and continued
growth in debt service obligations. FGR and SGR DSC from net
operating revenues improved for the fourth consecutive year in
fiscal 2014, increasing to 7.7x and 3x, respectively. Reflecting
the gross lien on system revenues, DSC grew to 12.6x and 4.8x,
respectively. The authority's favorable operating results were
driven in part by the adoption of a 5.6% rate increase that
positively offset a nearly 1% decline in consumption.
Liquidity has also steadily grown in recent years to a more
acceptable level. Unrestricted cash and investments together with
O&M reserves increased to nearly 280 days of cash on hand in
fiscal 2014, more than three times the amount on hand at the close
of fiscal 2010. NYW's prudent practice of carrying forward and
applying any operating surplus generated in the prior year to the
payment of debt service in the coming fiscal year prevents the
build-up of more robust cash balances but preserves rate
flexibility. Fitch continues to view this strategy favorably. The
net surplus generated in fiscal 2014 (measured on a cash basis)
totaled $985 million, up from the $750 million generated in fiscal
2013.
Results through the first eight months of the current fiscal
year are positive, with year-to-date revenues reportedly up by
nearly 2.4% compared to the adopted budget. Consumption, while down
about 1.7% to date, is almost in line with budgeted expectations.
The authority adopted modest rate increases of 5.6% and 3.5% in
fiscals 2014 and 2015, respectively, following several years of
more sizeable increases, including double-digit rate hikes enacted
in fiscals 2008 - 2011. Despite the escalation in rates, the
average monthly residential bill remains relatively affordable in
comparison to median household income levels for the service
area.
PROJECTED FINANCIAL RESULTS REMAIN SATISFACTORY
Financial projections through fiscal 2019 are based on what
Fitch believes to be reasonable assumptions. The forecast assumes
the continuation of moderately sized rate hikes and incorporates
sizeable annual debt offerings along with a 1.5% decline in
consumption in each of fiscal 2015 through fiscal 2019. As a
result, all-in DSC from net revenues is projected to remain at a
strong level of no less than 2.1x through the current planning
period and annual surpluses are forecast to remain in excess of
$750 million, which will continue to be applied to subsequent
year's annual debt service obligations.
LEVERAGED SYSTEM
Similar to many large urban utility systems, NYW's capital needs
are significant, principally the result of state and federally
mandated projects. The capital program for fiscals 2015 -2025
includes an estimated $12.8 billion in water and sewer projects,
down significantly from a peak of $19.5 billion projected for
fiscals 2008 - 2018.
Funding for capital projects will continue to come almost
entirely from long-term debt issuance and an extensive commercial
paper program. NYW's current forecast shows additional bond issues
through fiscal 2019 totaling $6.6 billion, or an annual average of
approximately $1.3 billion. Projected debt issuance, while sizable,
is a marked decline from the amount of debt incurred over the
previous five years.
Debt levels are high and escalation beyond what is currently
forecast could pressure NYW's rating over the medium term.
Debt-to-net plant now stands at about 106%, and, measured on a per
capita basis, leverage approximates slightly more than $3,000. By
comparison, Fitch's 'AA' category median ratios for debt-to-net
plant and debt per capita are 50% and $521, respectively. Fitch
believes the demonstrated commitment to raising rates as well as
management's conservative budgeting will be key to preserving
operating margins and meeting the continued growth in debt service
costs included in NYW's financial forecast.
Additional information is available at
'www.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 and Related Research:
--'Revenue-Supported Rating Criteria' (June 2014);
--'U.S. Water and Sewer Revenue Bond Rating Criteria' (July
2013);
--'2015 Water and Sewer Medians' (December 2014);
--'2015 Outlook: Water and Sewer Sector' (December 2014).
Applicable Criteria and Related Research:
2015 Water and Sewer Medians
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=818409
U.S. Water and Sewer Revenue Bond Rating Criteria
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=715275
Revenue-Supported Rating Criteria
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=750012
2015 Outlook: Water and Sewer Sector
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=818410
Additional Disclosure
Solicitation Status
http://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=982054
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Fitch RatingsPrimary AnalystChristopher HessenthalerSenior
Director+1-212-908-0773Fitch Ratings, Inc.33 Whitehall StreetNew
York, NY 10004orSecondary AnalystAndrew
DeStefanoDirector+1-212-908-0284orCommittee ChairpersonDoug
ScottManaging Director+1-512-215-3725orMedia Relations:Elizabeth
Fogerty, +1-212-908-0526elizabeth.fogerty@fitchratings.com