Fitch Assigns an 'AA+' to Tacoma, WA's Sewer Revs; Outlook Stable

Fitch Ratings has assigned an 'AA+' rating to the following Tacoma, Washington (the city) sewer revenue bonds:

--$99.9 million sewer revenue and refunding bonds, 2015.

The bonds are scheduled to price via negotiated sale during the week of Feb. 9.

In addition, Fitch affirms its 'AA+' rating on the following outstanding debt:

--$89.3 million sewer revenue refunding bonds, series 2006 and 2011.

The Rating Outlook is Stable.

SECURITY

The bonds are secured by net revenues of the city's sewer utility system, which consists of two separate utilities, the sewer utility and the surface water utility. The bonds are additionally secured by a debt service reserve fund sized to the maximum allowed by the Internal Revenue Service.

KEY RATING DRIVERS

STRONG FINANCIAL PERFORMANCE: Senior lien and all-in debt service coverage are strong and Fitch expects them to remain strong over the next five years.

REVENUE STABILITY: The utility's revenue stream has remained steady during a period of persistent economic weakness in the local economy. Roughly half of total combined revenues are provided by fixed fees and not subject to wastewater flow or usage, which Fitch views positively.

SOLID BUT DECLINING LIQUIDITY: The system enjoys high reserve levels at $60.7 million or 359 days cash on hand (DCOH) for fiscal 2013. However, liquidity has steadily declined over the last several years, and management anticipates continued yet measured drawdowns moving forward. Fitch anticipates the system will retain liquidity at sufficient levels to support the 'AA+' rating.

ADEQUATE SYSTEM CAPACITY: Existing wastewater treatment plant capacity is ample to meet current and expected flow demands of the system. Some of the excess capacity is used to treat wastewater flows of wholesale customers.

ELEVATED DEBT BURDEN: Debt levels will rise to above average after this issuance and debt amortizes moderately. Management expects to issue additional debt in fiscal 2019, which could further increase the debt burden.

GOOD RATE FLEXIBILITY: The city has kept pace with rising operating costs through annual moderate rate increases over the past several years. Rates remain affordable and the system appears to have capacity to absorb annual planned rate adjustments in a similar range.

RATING SENSITIVITIES

STABLE OUTLOOK: The rating is sensitive to shifts in fundamental credit characteristics including continued adherence to the system's prudent financial management practices, strong financial operations, and stable revenue framework. The Stable Outlook reflects Fitch's expectation that material changes to these factors are unlikely.

CREDIT PROFILE

The wastewater and surface water systems serve nearly 75,000 customers in and around the city of Tacoma. The city is located about 33 miles south of Seattle in Pierce County and is the second largest city in the Puget Sound region.

STRONG FINANCIAL PERFORMANCE

The combined system generated strong senior annual debt service (ADS) coverage of 3.5 times (x) in fiscal 2013. All-in ADS coverage, including the subordinate lien state revolving fund loans and subordinate transfers to the city's general fund, was sound at 2.1x. Management's five-year forecast, which Fitch views as reasonable, shows all-in coverage falling to a trough of 1.6x in fiscal 2016 due to rising debt service and rising thereafter.

Management's financial forecast assumes no customer growth and continued annual rate increases consistent with previous rate hikes. The projections conservatively include a portion of a lease obligation that is expected, in practice, to be paid from the city's solid waste utility. A transfer to the city's general fund, authorized per the city's charter, is subordinate to debt service but has been included as an ongoing expense as the payment is made on a monthly basis. Given the frequency of payments, Fitch questions management's ability to claw back payments already transferred in the unlikely event that the system's finances became stressed.

Fiscal 2013 cash levels were solid at $60.7 million (359 DCOH), despite at least four consecutive years of draw-downs. In prior years the system had accumulated a sizeable cash cushion in anticipation of major pay-as-you-go outlays to expand the system's Central wastewater treatment plant. Instead, the system received a low cost state revolving fund loan to finance the expansion, and has been spending down the excess cash by accelerating its capital improvement plan. Management expects further draw-downs of operating cash, but not below 120 DCOH.

SEGREGATED COLLECTION SYSTEMS

The city provides wastewater and surface water collection services to 74,376 and 70,459 customers, respectively. This includes the wastewater customers ultimately serviced through wholesale agreements with the cities of Fife, Ruston, Fircrest, and portions of Pierce County. The collection systems are separate, which has benefited the city over time as increasing operational efficiencies and necessary treatment levels can be focused on the distinct needs of each system.

SUFFICIENT TREATMENT CAPACITY

The city has ample treatment capacity for its wastewater flows, such that additional investment will not be needed for some time. In recent years the city completed a large $100 million investment in its Central wastewater treatment plant. The plant is permitted to provide secondary treatment to up to 60 million gallons per day (mgd) in dry conditions and may treat up to 150 mgd in the peak wet season. Flows are currently well below such levels with an average flow of 19 mgd and peak flow of 53 mgd in wet weather.

REVENUE STABILITY AND RATE INCREASES

Revenue stability is provided by the fixed nature of the surface water charges and a portion of wastewater charges and by City Council's adoption of regular annual rate increases. The Council adopted rate increases of 6% and 5.5% for the wastewater and surface water systems, respectively in fiscal years 2015 and 2016. Rates are billed bi-monthly on a combined basis with power, water, and solid waste. Rates for both the wastewater and surface water utility are competitive with regional providers and multi-year projections assume rate increases in line with historical levels.

CAPTIAL NEEDS CONCENTRATED IN PIPE REPLACEMENT

Capital needs for both systems are related largely to replacement of the aging collection systems. The city has an extensive asset management program and is moving towards greater funding of capital from pay-as-you-go sources, given the nature of the capital needs. The series 2015 bond issuance reflects an acceleration of the system's capital plan, with no further debt issuances contemplated until fiscal 2019, when management expects to issue $70 million of sewer revenue bonds.

The systems have a five year capital plan with an estimated combined cost of $188.7 million. The largest component, making up 43% of the capital plan, relates to repair and replacement of the system's aging collection system. About 40% of the needs will be funded on a pay-go basis, while 56% will be paid from bond proceeds.

Debt levels of around $2,400 per customer are above Fitch's median of $1,900 for the 'AA' category but also reflect strong system investment in recent years and limited future needs. Outstanding debt to net plant is 36%, which is below Fitch's median of 48%. Amortization of principal is average.

Additional information is available at 'www.fitchratings.com'.

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:

Revenue-Supported Rating Criteria

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

U.S. Water and Sewer Revenue Bond Rating Criteria

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=715275

2015 Water and Sewer Medians

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=818409

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=978986

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