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HomeMy WebLinkAbout10/06/2015 08 Standard & Poor's Rating Report for Water/Wastewater UtilityITEM TITLE: SUBMITTED BY: SUMMARY EXPLANATION: '1111111 1, nun 11,1:1141r10 BUSINESS OF THE CITY COUNCIL YAKIMA, WASHINGTON AGENDA STATEMENT Item No. 8. For Meeting of: October 6, 2015 Standard & Poor's Rating Report Affirming "AA -"/Stable Outlook for the Water/Wastewater Utility Tony O'Rourke, City Manager Cindy Epperson, Director of Finance & Budget The City has been using Standard & Poor's (S & P) to rate the credit quality of our bonds. This is always done when we go to issue new debt, but they also do a review periodically to let our bondholders know if the underlying credit -worthiness of their existing investment has changed. Since the Water/Wastewater utility hasn't issued bonded debt since 2012, the City was due for a review by S & P. This is a strong report, whereby S & P affirmed its "AA -"/Stable rating on our outstanding bonds, basic ally indicating that our Water and Wastewater utilities are a good investment risk. If we were going to the market to issue bonds, this rating would result in a lower interest cost than a utility with a lower rating. The following is a quote from the body of the report (attached): "The stable outlook reflects our view of the combined utilities' historically strong financial metrics, with strong coverage and liquidity levels and history of raising rates to maintain these metrics. The outlook further reflects the stable customer base and the city's history of raising rates to maintain strong financial performance that we view as sustainable during the two-year outlook horizon." They also indicated in the report that our current rate structure is affordable for our community Resolution: Ordinance: Other (Specify): Standard & Poor's Water/Wastewater Rating Report Contract: Contract Term: Start Date: End Date: Item Budgeted: NA Amount: Funding Source/Fiscal Impact: Strategic Priority: Public Trust and Accountability Insurance Required? No Mail to: Phone: APPROVED FOR SUBMITTAL: RECOMMENDATION: Accept Report ATTACHMENTS: Description D S & P Ifbtling Report City Manager Upload Date 9/30/2015 Type Omer Memo STANDARD &POOR'S RATINGS SERVICES McGRAW HILL FINANCIAL RatingsDirect® Summary: Yakima, Washington; Water/Sewer Primary Credit Analyst: Aaron Lee, San Francisco (1) 415-371-5066; aaron.lee@standardandpoors.com Secondary Contact: Tim Tung, San Francisco (415) 371-5041; tim.tung@standardandpoors.com Table Of Contents Rationale Outlook Related Criteria And Research WWW.STANDARDANDPOORS.COM/RATINGSDIRECT SEPTEMBER 11, 2015 1 1450222 1 301590491 Summary: Yakima, Washington; Water/Sewer Credit Profile Yakima wtr and swr rev rfdg bnds Long Term Rating Yakima wtr/swr (ASSURED GTY) Unenhanced Rating Many issues are enhanced by bond insurance. Rationale AA -/Stable AA-(SPUR)/Stable Affirmed Affirmed Standard & Poor's Ratings Services affirmed its 'AA-' rating on Yaldma, Wash.'s series 2012 water and sewer revenue refunding bonds. At the same time, we affirmed our 'AA-' underlying rating (SPUR) on the systems' parity -lien obligations. The outlook is stable. The ratings reflect our view of the combined utilities': • Strong fixed -charge coverage (FCC) during the past three years, with FCC consistently above 2.5x; • Strong liquidity position, with an estimated 270 days of operating expenses at the end of fiscal 2014; • Ample water supply and wastewater treatment capacity and stable customer base; and • Historical practice of setting multiyear rate increases based on long-term capital and operational needs. In our view, these credit strengths are partly tempered by the shallow local economy, which serves as a market and processing center for the surrounding agricultural area and is characterized by adequate income levels and above-average unemployment rates. The bonds are secured by the net revenues of the water and wastewater utilities. Legal provisions are adequate, in our view, and include a rate covenant and additional bonds test of 1.25x coverage of average annual debt service. A debt service reserve fund further secures bond payments and is funded at the least of maximum annual debt services on all parity bonds, 1.25x average annual debt service on all parity bonds, or 10% of par. Yakima is located approximately 142 miles southeast of Seattle, in central Washington, and has a population of about 93,975. The local economy is centered largely on agriculture and food processing, with a focus on fruits and grains. The city's unemployment rate has historically been higher than the state and national levels, and last stood at 6.5%, compared to the state rate (5.4%) and the national rate (5.6%). In 2014, the median household effective buying income (MHHEBI) was 81.1% of the national median, which we view as adequate. The customer base is stable and primarily residential, with 19,558 water accounts and 29,957 sewer accounts as of 2014. We view the customer base as very diverse, with the 10 leading water and wastewater customers representing about 8.3% of total revenues. Management does not expect any significant changes to the local economy or customer base in the near term. Water and wastewater system capacities are currently sufficient. The water supply comes from the Naches River, and WWW.STANDARDANDPOORS.COM/RATINGSDIRECT SEPTEMBER 11, 2015 2 1450222 1 301590491 Summary: Yakima, Washington; Water/Sewer the system can provide 25 million gallons per day (mgd) with four emergency wells providing an additional 11.6 mgd. The average water demand is 10.5 mgd while peak water demand is 17.7 mgd. Management indicated that it is in the planning phases of the aquifer storage and recovery project (ASR), which should provide enough water supply through 2030. The wastewater treatment plant has capacity to treat 21.5 mgd, compared with average daily flows over the past three years at 9.1 mgd and maximum flows at 12.3 mgd. Management does not expect any new regulatory requirements that may drive additional capital projects, but the city is working on some major improvements, including a new lift station, outfall, and bar screen upgrades. In addition, management also indicated some planning work on biosolids handling. Rate studies were completed for the water and wastewater systems in 2013 and 2014, respectively. Combined water and wastewater rates have increased during the past two years, by 6.5% in 2013 and 3.6% in 2014. However, although recommended in the rate studies, there has not been an increase for 2015, and future rate increases will be dependent on the outcome of the council elections in response to the voter right act lawsuit resulting in a comprehensive redistricting. Using our baseline of 1,000 cubic feet of monthly water use, we calculate a combined monthly charge of $63.78, which represents approximately 2.2% of MHHEBI when annualized. We view these rates as affordable. Management indicated that there are not any rate increases anticipated for the 2016 budget and that delinquency issues are minimal. Financial performance has been historically strong, with total debt service coverage consistently above 4.0x during the past three years and most recently at 4.8x, based on unaudited 2014 data. When considering the municipal in -lieu taxes as a fixed charge, we calculate FCC to be consistently above 2.5x during the past three years and most recently at 3.2x for 2014, which we consider strong. Forecast data assuming continued rate increases show continued strong levels of coverage and with any anticipated debt issuance, we would still expect coverage levels to remain good to strong. Liquidity for the combined system has been strong, in our opinion, ranging from 279 to 324 days of operating expenses during the past three years, with unrestricted cash and investments totaling $19.9 million from unaudited 2014 data. Management project the cash balance to increase for 2015, largely because many of the capital projects are currently in design phase. Some drawdown in cash is expected in 2016 as projects are being constructed. We do not expect the combined system's cash position to materially change in the near term. The current rate studies have identified total capital expenditures of approximately $33 million during the next three years, which does not include the ASR project. Management indicated that there may be additional debt required for the lift station project in 2016 and for the water system in 2017 depending on the outcome of the planning phase. Any additional funding needs would come from rate revenues and potentially state loans. O tlnnk The stable outlook reflects our view of the combined utilities' historically strong financial metrics, with strong coverage and liquidity levels and history of raising rates to maintain these metrics. The outlook further reflects the stable customer base and the city's history of raising rates to maintain strong financial performance that we view has WWW.STANDARDANDPOORS.COM/RATINGSDIRECT SEPTEMBER 11, 2015 3 1450222 1 301590491 Summary: Yakima, Washington; Water/Sewer sustainable during the two-year outlook horizon. Upside scenario Although not anticipated at this time, we could raise the rating if the local service economy were to materially improve such that economic indicators are commensurate with peers at a higher rating level. Downside scenario We could lower the rating if the additional debt issuance or an unwillingness to raise rates results in a material decline of the combined system's financial metrics during the outlook horizon. Related Criteria And Research Related Criteria • USPF Criteria: Water And Sewer Ratings, June 25, 2007 • USPF Criteria: Key Water And Sewer Utility Credit Ratio Ranges, Sept. 15, 2008 • USPF Criteria: Standard & Poor's Revises Criteria For Rating Water, Sewer, And Drainage Utility Revenue Bonds, Sept. 15, 2008 • USPF Criteria: Methodology: Definitions And Related Analytic Practices For Covenant And Payment Provisions In U.S. Public Finance Revenue Obligations, Nov. 29, 2011 • USPF Criteria: Assigning Issue Credit Ratings Of Operating Entities, May 20, 2015 • Criteria: Use of CreditWatch And Outlooks, Sept. 14, 2009 Related Research • U.S. State And Local Government Credit Conditions Forecast, July 22, 2015 • U.S. Municipal Water And Sewer Utilities 2014 Sector Outlook: Learning To Do More With Less, Jan. 9, 2014 • 2014 Review Of U.S. Municipal Water And Sewer Ratings: How They Correlate With Key Economic And Financial Ratios, May 12, 2014 Complete ratings information is available to subscribers of RatingsDirect at www.globalcreditportal.com. 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