Fitch Rates Denver City & County Board of Water Comm., CO at 'AAA'; Outlook Stable

Fitch Ratings has assigned an 'AAA' rating to the following bonds issued by the City and County of Denver, Colorado Board of Water Commissioner's (the board):

--Approximately $44.5 million master resolution water revenue bonds, series 2014A.

The bonds are scheduled to sell on September 16 via competitive bid. Proceeds will be used to fund capital improvements to the water system (the system), to refund previously issued water revenue bonds (series 2005) and the board's subordinate line of credit, and to pay costs of issuance.

In addition, Fitch has affirmed the following bonds issued by the board:

--$13.1 million in outstanding senior lien water revenue bonds;

--$363.9 million in outstanding master resolution water revenue bonds.

The Rating Outlook is Stable.

SECURITY

An irrevocable and nonexclusive pledge of and a lien upon the system's net revenues on a basis subordinate to the outstanding senior lien bonds; the senior lien is closed.

KEY RATING DRIVERS

SOLID FINANCIAL PROFILE: The board maintains very favorable financial operating results with total debt service coverage (DSC) above Fitch's 'AAA' median and sound liquidity balances.

REVENUE VOLATILITY WELL-MANAGED: Management has responded swiftly to revenue volatility due to changing weather patterns with expenditure cuts and rate increases when needed to keep DSC robust.

AFFORDABLE RATES: User charges are expected to remain at or below Fitch's affordability threshold of 1% of median household income (MHI), even with likely rate increases to service additional debt over the intermediate term.

FAVORABLE BUT RISING DEBT BURDEN: Current debt-per-customer and per capita ratios are near the average for the rating category. However, the board's 10-year capital improvement program (CIP) is substantial and will likely worsen debt ratios over the next few years. Fitch believes that as long as other measures of the systems' financial profile remain sound the current rating of the system should not be pressured.

BROAD AND DEEP ECONOMY: The system serves a sizeable, diverse and relatively stable economy.

RATING SENSITIVITIES

MAINTENANCE OF FINANCIAL PROFILE: Maintenance of healthy DSC and liquidity balances will be necessary to balance expected increases in debt levels.

CREDIT PROFILE

Denver serves as the hub of commerce for a large 10-county metropolitan statistical area (MSA) and as the seat of state government. Denver's water system provides water service to approximately 1.3 million residents of Denver and much of the surrounding MSA. Areas outside the city are served through approximately 66 treated water distributors that purchase water primarily based on long-term contracts.

FINANCIALS REMAIN STRONG AMID WEATHER-DRIVEN VOLATILITY

The system's financial performance proved steadfast in fiscal 2013, with all-in DSC finishing at 2.8x (versus Fitch's 'AAA' median of 2.6x) despite a year-over-year revenue decline of 15%. The revenue decrease was attributable to drought conditions in 2012 forcing the implementation of watering restrictions through part of 2013 which then led to a decline in water sales. The 2012 drought was then followed by a wet 2013 which, although such restrictions had been lifted, further exacerbated sales declines as customers had lessened irrigation needs.

The board's five-year financial forecast demonstrates all-in DSC remaining strong at 2.2x in fiscal 2014 and then improving to approximately 3.5x in fiscal 2017 and 2018. Assumptions utilized, which appear reasonable to Fitch, include a 3.5% rate-driven revenue increase approved for fiscal 2014 and 2% revenue increases thereafter. Capital expenditures, which will be funded in part by bond proceeds, are expected to increase while operations and maintenance costs are projected to remain relatively flat.

Liquidity over the past five years has also been good with available cash averaging 322 days of operational costs over this period. However liquidity did decrease to 245 day's cash in fiscal 2013 as revenue declines required more cash spending for capital.

LARGE CAPITAL PROGRAM WILL INCREASE DEBT PROFILE

The fiscal 2014-2018 CIP is large at about $944 million. Capital costs have increased from earlier CIPs largely to shore up supply. The largest capital project is enlarging the Gross Reservoir, the primary storage facility for the Moffat System in the northern part of the service area. Adding capacity in this reservoir will help address the projected long-term supply shortage, assist in dealing with future droughts, and serve as a safety net if the south end of the water system faces unexpected challenges such as those caused by wildfires in Denver Water's watersheds. Recent approval by the Army Corps of Engineers should help this project move forward after a long period of coordination and analysis. Efforts to increase capacity in the northern portion of the service area also include treatment plant upgrades and rehabilitation. At $1,326, fiscal 2013 debt-per-customer is slightly above the 'AAA' category median and is projected to increase a bit further over the next five years due to the capital spending described above.

RATE FLEXIBILITY

Despite frequent and ongoing rate hikes, the board maintains financial flexibility through its competitive rates in comparison to other Colorado water distributors. At 0.7% of MHI, the average monthly bill for in-city residents at $28 (assuming usage of 7,500 gallons per month) is below Fitch's 1% affordability threshold. Taking into account projected increases through fiscal 2018, system rates should remain affordable.

SUFFICIENT INTERMEDIATE-TERM WATER SUPPLY

Water supply is derived from renewable mountain snowmelt from an extensive 4,000-square-mile watershed, which replenishes the system's 12 raw water reservoirs annually. Unpredictable weather in the service area over the past several years has led to periods of drought followed by stretches of heavy snow and rain. Most recently, reservoir levels began 2013 below normal, leading to watering restrictions, but were followed by multiple snowstorms and flooding later in the year. This activity resulted in storage reservoirs reaching peak levels in September of 2013 and the subsequent removal of watering restrictions. Based on the 5-year average daily usage of 182 million gallons per day, water supplies are more than adequate to meet customer demands.

ROBUST SERVICE AREA

As both a regional and economic center and the state capital, Denver's economic base is diverse. The Denver-Aurora-Broomfield MSA's unemployment rate of 6.4% in March 2014 was slightly better than the state (6.6%) and national averages (6.8%). Wealth levels for the MSA are slightly below that of the state and nation. Fitch rates Denver's unlimited tax general obligation bonds 'AAA' with a Stable Outlook.

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

In addition to the sources of information identified in Fitch's U.S. Municipal Revenue-Supported Rating Criteria, this action was additionally informed by information from Creditscope and the Municipal Advisory Council of Texas.

Applicable Criteria and Related Research:

--'Revenue-Supported Rating Criteria' (June 3, 2013);

--'U.S. Water and Sewer Revenue Bond Rating Criteria' (July 31, 2013);

--'2014 Water and Sewer Medians' (Dec. 12, 2013);

--'2014 Outlook: Water and Sewer Sector' (Dec. 12, 2013).

Applicable Criteria and Related Research:

Revenue-Supported Rating Criteria -- Effective Date 6/3/13 to 6/16/14.

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=709499

U.S. Water and Sewer Revenue Bond Rating Criteria

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

2014 Water and Sewer Medians

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=724358

2014 Outlook: Water and Sewer Sector

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=724357

Additional Disclosure

Solicitation Status

http://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=861734

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