Fitch Rates Austin's (TX) Water and Wastewater Rev Rfdg Bonds 'AA-'; Outlook Negative

Fitch Ratings assigns an 'AA-' rating to the following Austin, Texas (the city) revenue bonds:

--Approximately $253,090,000 water and wastewater system revenue refunding bonds, series 2015A;

--Approximately $36,405,000 water and wastewater system revenue refunding bonds, taxable series 2015B.

The series 2015A and 2015B bonds are scheduled for a negotiated sale the week of July 8. Both series of bonds will be used to refund portions of outstanding parity bonds for interest savings with no extension of bond maturity dates.

In addition, Fitch affirms the following rating for the city's remaining revenue bonds:

--$30.5 million combined utility systems (prior first lien) revenue bonds at 'AA';

--$148.1 million combined utility systems (prior subordinate lien) revenue bonds at 'AA-';

--$2.3 billion water and wastewater system revenue bonds at 'AA-'.

The Rating Outlook for the series 2015A and 2015B bonds and outstanding parity water and wastewater revenue bonds is Negative.

The Rating Outlook is Stable for outstanding combined utility system prior and subordinate lien bonds based on the strength of the joint and several pledge of net revenues of the combined utility systems, consisting of AWU and Austin Energy (AE; 'AA-'/Outlook Stable).

SECURITY

The series 2015A and 2015B bonds are secured by net revenues of AWU, after provision for the prior first lien obligations of the combined utility systems. The bonds are on parity with the prior subordinate lien obligations of the combined utility systems and all outstanding water and wastewater revenue bonds. The series 2015A and 2015B bonds will not carry a debt service reserve.

The prior first- and subordinate-lien obligations are secured by a joint and several pledge of net revenues of the combined utility systems, consisting of AWU and AE (electric revenue bonds rated 'AA-' with a Stable Outlook by Fitch). The issuance of additional bonds secured by a joint and several pledge of net revenues of AWU and AE is no longer permitted by the master bond ordinance, effectively closing both liens. A default on the prior subordinate lien obligations and water and wastewater bonds would not trigger a default on the prior first lien bonds.

KEY RATING DRIVERS

WEAKENED FINANCIAL PERFORMANCE: Maintenance of the Negative Rating Outlook reflects the increasingly weak trend in financial performance over the last three fiscal years, resulting in cash flow and liquidity metrics that are increasingly inconsistent with the current rating.

EASED DROUGHT CONDITIONS: Significant rainfall in recent months has lessened drought conditions, which could ultimately allow AWU to lift water use restrictions and avoid further declines in consumption. Easing of the drought, coupled with ongoing rate increases, improved cost recovery through rate structure changes, efforts to cut costs and more conservative financial forecasting should help reverse the recent slide and bolster the utility's financial performance going forward.

STRONG SERVICE AREA: AWU provides water and wastewater treatment service to a sizable service territory that includes the city (GOs rated 'AAA' with a Stable Outlook by Fitch) and neighboring areas beyond the city limits. Austin has a broad and diverse economy, as reflected by exceptionally low unemployment, above-average wealth levels, and a highly diversified customer base.

LEVERAGED SYSTEM: The system's debt levels are high for the rating category, although capital needs have begun declining to a more manageable level and borrowing plans are not expected to result in a meaningful increase in current leverage.

SUFFICIENT RESOURCES: Water supply and treatment capacity of the overall system are anticipated to be sufficient for the foreseeable future.

HIGHER RATING ON PRIOR LIEN DEBT: The 'AA' rating on the prior first lien bonds reflects the closed nature of the lien, the very modest portion the bonds that make up AWU's and Austin Energy's overall debt profile and the strong debt service coverage provided by the pledge of the combined utilities. Coverage of prior first lien obligations should continue to strengthen given the decreasing annual debt service requirements.

RATING SENSITIVITIES

IMPROVED FINANCIAL METRICS: Additional negative rating action is likely absent notable near-term improvement in AWU's financial profile, particularly its unrestricted cash balances, to a level more consistent with the current rating category.

CREDIT PROFILE

WEAK TREND IN FINANCIAL PERFORMANCE

A recent trend of falling consumption levels prompted all-in debt service coverage to deteriorate from a peak of 1.6x in fiscal 2011 to just 1.2x in fiscal 2014, well below Fitch's rating category median of 1.8x. Conversely, liquidity--which includes cash in a water revenue stability reserve fund-- improved over the same period, albeit incrementally. At fiscal-year end 2014, available cash and investments provided about 55 days of cash on hand (DCOH), up from a low of 11 days in fiscal 2011 but still far below the category median of nearly 450 days.

Fitch expects modest improvement by fiscal 2015 year-end based on current financial projections. Debt service coverage is forecast to climb to a more acceptable 1.6x and liquidity to strengthen to near 90 DCOH; the expected gains are largely the result of an 8.1% rate increase implemented at the outset of the fiscal year. Longer-term projections suggest continued improvement in the overall health of AWU's financial profile. With annual rate increases averaging about 4%, debt service coverage is expected to approximate 1.7x over the forecast period while liquidity grows to well beyond 120 days of cash on hand. Any lifting of water use restrictions due to moderating weather patterns would also boost revenues and contribute to a strengthening financial profile.

AMPLE SUPPLY AND TREATMENT CAPACITY

AWU provides water and wastewater service almost entirely on a retail basis. The system's 10 largest customers accounted for just 6% of total revenues in fiscal 2014, evidencing the utility's highly diverse customer base and related revenues. AWU has an ample, long-term water supply, pursuant to an agreement with the Lower Colorado River Authority (LCRA, revenue bonds rated 'A', Stable Outlook by Fitch) that runs through 2050 and is extendable through 2100 at AWU's option. Existing water and wastewater treatment capacity is reportedly sufficient for the foreseeable future, which should limit near term capital demands.

Water sales have fallen in five out of the last six years. Drought conditions resulted in reduced consumption, countering continued growth in the customer base and resulting in a steadily declining trend of per capita consumption. Positively, the city's current financial forecast assumes no growth in demand through 2019, marking a favorable departure from more aggressive growth assumptions incorporated into previous projections.

STRONG SERVICE AREA

The strength and diversity in both AWU's customer base and the city's economy underpin the utility's overall credit profile. The city's role as the state capital and home to seven colleges and universities, including the University of Texas (the University of Texas System rated revenue bonds rated 'AAA' with a Stable Outlook by Fitch), anchors the region's economy and provides a solid buffer from economic downturns. Wealth indicators for the area are comparatively high, and the city's April 2015 unemployment rate of 2.6% is exceptionally low relative to state and national averages. Accordingly, customer delinquencies are minimal and revenue collection is consistently strong.

MANAGEABLE CAPITAL NEEDS

Fitch expects capital needs through 2020 to remain manageable, despite a modest increase in the overall size of the AWU's capital program compared to the prior year plan. The five-year capital spending plan is up by approximately $23 million, or 3%, over the prior year to accommodate expansion of the utility's reclaimed water program (which Fitch views as a constructive development).

The nominal increase in planned spending follows a favorable trend of six consecutive years of declining five-year spending levels, from a peak of almost $1.5 billion for the 2009-2013 period to the current $863 million program. The city expects to fund about two-thirds of its capital program with annual borrowings through 2020. Excess cash flow is projected to cover the balance of expenditures. AWU's debt levels and related leverage metrics are high for the rating category but are not likely to increase materially over the medium term given the scope of borrowing plans.

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

In addition to the sources of information identified in the Revenue-Supported Rating Criteria, this action was informed by information from CreditScope and IHS Global Insights.

Applicable Criteria

Revenue-Supported Rating Criteria (pub. 16 Jun 2014)
https://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=750012

U.S. Water and Sewer Revenue Bond Rating Criteria (pub. 31 Jul 2013)
https://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=715275

Additional Disclosures

Dodd-Frank Rating Information Disclosure Form
https://www.fitchratings.com/creditdesk/press_releases/content/ridf_frame.cfm?pr_id=987150

Solicitation Status
https://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=987150

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

ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: HTTP://FITCHRATINGS.COM/UNDERSTANDINGCREDITRATINGS. IN ADDITION, RATING DEFINITIONS AND THE TERMS OF USE OF SUCH RATINGS ARE AVAILABLE ON THE AGENCY'S PUBLIC WEBSITE 'WWW.FITCHRATINGS.COM'. PUBLISHED RATINGS, CRITERIA AND METHODOLOGIES ARE AVAILABLE FROM THIS SITE AT ALL TIMES. FITCH'S CODE OF CONDUCT, CONFIDENTIALITY, CONFLICTS OF INTEREST, AFFILIATE FIREWALL, COMPLIANCE AND OTHER RELEVANT POLICIES AND PROCEDURES ARE ALSO AVAILABLE FROM THE 'CODE OF CONDUCT' SECTION OF THIS SITE. FITCH MAY HAVE PROVIDED ANOTHER PERMISSIBLE SERVICE TO THE RATED ENTITY OR ITS RELATED THIRD PARTIES. DETAILS OF THIS SERVICE FOR RATINGS FOR WHICH THE LEAD ANALYST IS BASED IN AN EU-REGISTERED ENTITY CAN BE FOUND ON THE ENTITY SUMMARY PAGE FOR THIS ISSUER ON THE FITCH WEBSITE.

View source version on businesswire.com: http://www.businesswire.com/news/home/20150629006201/en/