Fitch Affirms Guam Waterworks Authority Revs at ‘BB’; Outlook Stable

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AUSTIN, Texas–(BUSINESS WIRE)–As part of its continuous surveillance effort, Fitch Ratings affirms the following rating on Guam Waterworks Authority (GWA):

–$212 million in outstanding water and wastewater revenue bonds at ‘BB’.

The Rating Outlook is Stable. 

READ the news release on Business Wire HERE

SECURITY:

The bonds are senior lien bonds secured by GWA’s net system revenues.

KEY RATING DRIVERS

Recent Financial Results Favorable: GWA’s financial performance, while historically weak, has improved as a result of actions by GWA’s ratemaking bodies. Further gains are projected for fiscal 2012.

Elevated Debt and Capital Pressures: Debt levels are high and significant capital needs remain to meet ongoing regulatory requirements and expected military build-up demands. This concern is alleviated somewhat with the nation of Japan recently approving funding in support of relocation of troops from Okinawa to Guam.

Political Willingness to Raise Rates: GWA has raised rates significantly over the last several years to high levels in order to support its capital improvement program (CIP). Additional required rate hikes will further pressure customers and could test the political willingness to raise rates both by the Consolidated Commission on Utilities (CCU, GWA’s governing body), the Public Utility Commission (PUC), and Guam government.

Leadership Actions Positive: Management has made substantial progress to date in addressing remedial actions and improving operating performance.

Limited Economic Profile: The service territory is isolated and limited and has had a historical disposition to natural disasters.

WHAT COULD TRIGGER A RATING ACTION

Positive Financials: Establishment of a trend of positive financial results would be viewed favorably.

Further Clarity on Military Build-Up: Execution of a service agreement with the Department of Defense (DOD) that would allow for pass-through repayment of the Japanese loan to GWA would assist GWA with meeting secondary conversion requirements.

Resolution of Regulatory Spending Needs: Favorable finalization of the expected consent decree between GWA and the U.S. Environmental Protection Agency’s (EPA) would provide greater certainty in GWA’s capital planning.

CREDIT PROFILE

Historically, the system has been plagued with weak financial performance and violations of the federal Clean Water Act (CWA) and Safe Drinking Water Act (SDWA), which necessitated involvement at the federal regulatory level. However, since 2002 when GWA’s governance was changed from an appointed board to an elected governing board, significant strides have been made towards returning the system to regulatory compliance and ensuring stable operations. Nevertheless, significant challenges persist which will pressure utility operations over the long term.

Senior lien annual debt service (ADS) coverage improved to a sound 1.6 times (x) in fiscal 2010 after falling below 1.0x on a cash basis in fiscals 2008 and 2009. Liquidity also increased in fiscal 2010 to 118 days cash, more than doubling results from the prior two years. The financial gains in fiscal 2010 were attributable largely to a double-digit rate hike approved for the year by the CCU and the PUC.

Fiscal 2011 financial performance is expected to be weaker than fiscal 2010 but should still be favorable, with GWA projecting senior lien ADS coverage at 1.3x-1.35x after year-end adjustments are made. The lower coverage in fiscal 2011 is the result of declining usage and certain expenses (including the initial purchase of system general property insurance), which offset an 8% rate hike for the year. To boost coverage, the CCU and PUC recently approved a 13% base rate hike for fiscal 2012. As a result, GWA’s adopted budget forecasts senior lien ADS coverage climbing to GWA’s senior lien ADS target of 1.75x.

Overall, the CCU and PUC have demonstrated a commitment to raising rates over the last several years to enhance system financial performance, approving cumulative increases of over 70% since fiscal 2006. While residential charges are currently high at an estimated 2.4% of median household income, GWA’s ratemaking bodies’ continued commitment to necessary rate hikes should lead to continued favorable financial results.

GWA faces significant capital needs to meet regulatory requirements. In 2003 GWA negotiated a stipulated order (SO) with the EPA as a result of violations to the CWA and SDWA. To date, GWA has completed close to 90% of the deliverables associated with the SO and remaining items are addressed in the fiscal 2011-2015 CIP. However, to cure system-wide deficiencies and ensure ongoing regulatory compliance, a new consent decree between GWA and EPA is expected to be forthcoming over the next several months.

At present, GWA estimates these additional requirements proposed for inclusion in a new consent decree would add $200 million-$300 million to GWA’s capital program. This could effectively double GWA’s current five-year CIP depending on the pace the improvements are required; GWA’ fiscal 2011-2015 CIP currently totals $236 million. While still uncertain, much if not all of these proposed additional capital requirements may ultimately be funded by the DOD as part of an immense military troop build-up that is scheduled to occur on the island over the next several years.

The DOD build-up is expected to ultimately increase the island’s permanent population by around 32,000 people (approximately a 20% increase from the current level) as part of its relocation of troops from the nation of Japan. This will necessitate significant additional capital investment that currently is not included in GWA’s CIP. GWA and the DOD have been working together to identify system needs and funding resources to service this population influx. To facilitate the relocation of troops, Japan has passed legislation approving a $420 million loan to GWA that will assist with GWA’s expansion needs and also provide for upgrades to GWA’s two major wastewater treatment plants, the main component of EPA’s proposed additional consent decree projects. However, before these monies may be obtained, GWA must execute a customer service agreement with DOD that will support the loan, which could prove difficult in light of the nation’s current budget reduction debate.

Additional information is available at ‘www.fitchratings.com’. The ratings above were solicited by, or on behalf of, the issuer, and therefore, Fitch has been compensated for the provision of the ratings.

In addition to the sources of information identified in Fitch’s ‘Revenue-Supported Rating Criteria,’ this action was additionally informed by information from Creditscope.

Applicable Criteria and Related Research:

–‘Revenue-Supported Rating Criteria’, dated June 20, 2011.

–‘Water and Sewer Revenue Bond Rating Guidelines’, dated Aug. 10, 2011.

Applicable Criteria and Related Research:

Revenue-Supported Rating Criteria

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=637130

U.S. Water and Sewer Revenue Bond Rating Criteria

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=647331