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TEXT - Fitch affirms Fort Collins, Colorado sewer revs
January 29, 2013 / 3:02 PM / 5 years ago

TEXT - Fitch affirms Fort Collins, Colorado sewer revs

Jan 29 - Fitch Ratings has affirmed its 'AA+' rating on the following Fort
Collins, CO (the city) bonds:

--Approximately $33 million wastewater utility enterprise sewer revenue bonds.

The Rating Outlook is Stable.

SECURITY 

The bonds are secured by and payable from a first lien on the net revenues of 
the wastewater utility (the utility). Revenues include connection charges.

KEY RATING DRIVERS

SOLID FINANCIAL PERFORMANCE:  The system has consistently produced debt service 
coverage (DSC) at or above 2.0x over the past several years. 

ABUNDANT LIQUIDITY: Management has maintained high cash balances with more than 
900 days cash on hand in fiscal 2011 from all available sources.

LOW DEBT BURDEN: Limited capital needs which have primarily been cash funded 
have helped to keep debt levels low. 

PROACTIVE MANAGEMENT: Management has been swift in raising rates to combat 
revenue declines driven by events such as the loss of a major customer.

SOMEWHAT WEAK LEGAL COVENANTS: The rate covenant, which requires 1.15x coverage 
of debt service obligations, is considered by Fitch to be somewhat weak.

CREDIT PROFILE

CONSISTENTLY SOUND OPERATING RESULTS 

The financial profile of the utility continues to be strong, highlighted by 
solid DSC levels and high cash balances. This is in spite of projected revenue 
declines related to the recent loss of the system's largest customer. Management
has been proactive in implementing a series of rate increases to mitigate this 
expected revenue loss. The most recent increases of 9% and 8% in 2011 and 2012 
respectively have sustained DSC at above 2.0x through the same period and 
enabled the city to pay for capital projects from current revenues rather than 
from existing reserves. As a result of these actions, the city has produced 
increasingly stronger financial margins and preserved robust reserve levels. 

Largely due to the loss of revenue driven by the largest customer leaving the 
system, coverage is conservatively forecast to dip to a low of 1.6x in 2013 
prior to rebounding to above 2.0x the following year. Management historically 
has been conservative in their projections; actual results have outperformed 
forecasts for the previous few years, which Fitch views favorably.

Despite pay-as-you-go funding for the majority of the utility's capital 
spending, liquidity levels are expected to remain very strong over the forecast 
period. Fiscal 2011 results showed an extremely healthy 915 days cash on hand 
and unaudited 2012 results are even higher. 

MANAGEABLE CAPITAL PROGRAM 

Capital costs through fiscal 2017 are manageable, totalling slightly more than 
$34 million. The focus of the five-year capital improvement plan (CIP) is 
primarily on renewal and replacement of infrastructure and is expected to be 
funded from rate revenue and cash reserves. Although rates have risen in recent 
years and are expected to continue to rise, monthly wastewater rates should 
remain below Fitch's affordability threshold of 1% of median household income. 

The city is in the process of planning and budgeting for new projects related to
phosphorous and nitrogen removal, in anticipation of potential forthcoming EPA 
and state requirements. The city has estimated that such removal projects, which
are expected to begin in 2018, will cost the utility approximately $27 million 
and $25 million for each project, respectively. Debt will be issued for the 
projects once the new requirements are passed and the compliance date is known. 
In addition, future rate increases are expected to partially cover associated 
increases in debt service.

LOW DEBT LEVELS 

Outstanding debt per customer is currently low at $1,100 but could climb 
slightly over the next few years based on a planned small $1.9 million bond 
issue in 2014. Additionally, debt amortization is rapid with principal pay-out 
at 60% and 100% in 10 and 20 years, respectively. 

STABLE SERVICE TERRITORY 

The city is located approximately 60 miles north of Denver and has a 2011 
population of around 147,000. The city is home to Colorado State University and 
is part of the broader Fort Collins-Loveland metropolitan area. The system 
serves most of the city and one area sanitation district. Customer accounts 
total around 33,000, and growth has been modest at just over 1% over the past 
five years. The customer base is fairly diverse but includes some technology 
sector concentration.

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