Fitch Rates Anchorage, Alaska's $50MM Water Rev Refunding Bonds 'AA-'; Affirms Outstanding BondsNov. 20, 2009
SAN FRANCISCO--(BUSINESS WIRE)--Fitch Ratings assigns an 'AA-' rating to the Municipality of Anchorage, Alaska's (MOA) $50 million water revenue refunding bonds series 2009. Concurrently, Fitch affirms the 'AA-' rating on the district's outstanding parity water revenue bonds. The bonds are scheduled to price on Dec. 2, 2009. The Rating Outlook on the bonds is Stable.
The 'AA-' rating reflects the water utility's essentiality serving a primarily residential customer base of 250,000 people which is the economic center of the State of Alaska, sound financial performance, ample water supply and a large but manageable capital plan which will be 75% debt financed. Credit concerns center around a cumbersome rate-setting process which requires approval by the Regulatory Commission of Alaska (RCA).
The bonds are being issued to refund the utility's outstanding priority lien bonds which are senior this issuance. With this refunding, there will be no more priority lien debt allowed. The bonds are secured by net revenues of the water system with operating expenses excluding Municipal Utility Service Assessments (MUSA). Overall legal provisions are permissive with the allowance of rate stabilization fund transfers to meet a 1.15 times (x) rate covenant and projected 1.15x MADS ABT. While MUSA payments are subordinate to debt service on the bonds, they are prudently treated as an operating expense for rate covenant and coverage purposes. Additionally, a fully funded debt service reserve fund is established at issuance.
Anchorage (general obligation rating of 'AA' with a Stable Outlook by Fitch) is the economic center of Alaska with a total population of 285,000 (2008 estimate), equal to 42% of the entire state's population. Median household incomes are 109% of state and 138% of U.S. averages. Unemployment levels are currently 7% (September 2009) compared to 7.7% for Alaska and 9.5% nationally, benefiting from increased activity in the oil and gas industry. Military and government also provide stability to the local area economy.
Water utility financial performance has been sound with debt service coverage levels ranging from 1.4x to 1.9x since 2005. Projected coverage through 2013 is expected to be at least 1.5x. Liquidity measures are good, with days cash over 200 days since 2005 and 2008 ending with $17 million of unrestricted cash equal to 220 days cash. The capital plan is large but manageable at $236 million over six years (2009-14) and will be funded 75% by debt in a combination of parity water revenue debt, state drinking water fund loans (which are subordinate) and other sources.
Rate increases must be approved by the RCA and are granted on an interim basis subject to refund, often taking years to become permanent. Currently there is a continuing dispute with the RCA regarding the utility's ability to recover the full MUSA paid to the municipality through customer rates. In May 2009, the Alaska Supreme Court issued a unanimous decision finding no reasonable basis for the 2005 exclusion of MUSA from the utility's revenue requirement and remanded the case back to the RCA for further proceedings to make a determination on the utility's rate increases. This dispute affects rate increases since 2005 is expected to be resolved by mid 2010 and in light of the Alaska Supreme Court decision, the utility believes it is unlikely that it will be required to refund collected revenue which currently totals about $20 million.
Additional information is available at 'www.fitchratings.com'.
Posted: November 20, 2009