The bonds, to be sold as auction rate certificates, are expected to sell the week of Jan. 2 through negotiation with a syndicate led by UBS PaineWebber Inc. Fitch affirms the `A' rating on $1.5 billion in outstanding parity debt. The ARC's are being issued in conjunction with series 2001B and 2001C variable rate bonds.
The `A' rating reflects the Atlanta region's sound and growing economic base, satisfactory financial operations, demonstrated willingness to raise rates when needed and frequent communication with state and federal regulators to resolve environmental issues. The rating also takes into account the massive funding that will be needed to comply with consent decrees, rapidly rising wastewater rates and lower than expected savings from privatizing water system operations.
The City of Atlanta provides water and wastewater service to a broad customer base and sound service area in the city and portions of neighboring counties. The wastewater system has been meeting most milestones associated with extensive court-mandated projects, including completion of projects to significantly reduce phosphorus levels and improve the quality of treated wastewater.
However, future capital costs to comply with consent decrees on currently defined schedules would result in burdensome increases to rates that have already increased substantially. The combined average monthly water and wastewater bill is now above average compared with rates charged by other major cities in the U.S. and about average for residential bills in the region.
Maintenance of the `A' rating assumes continued willingness to raise rates and regulator approval of revised schedules to complete mandated projects affordably.
Regulatory requirements and an aging infrastructure in some portions of the city drive the wastewater system's aggressive capital improvement plan (CIP), which has a projected cost of $2.8 billion through 2014. With water system projects, the total capital plan through 2014 will cost $3.5 billion.
The CIP addresses three consent decrees, one concerning water quality, one concerning combined sewer overflows (CSO) and the third related to wastewater treatment facilities, inter-jurisdictional requirements and the aging wastewater collection and distribution system.
A feasibility report for this bond issue by consulting engineer Black & Veatch Corp. notes that if projects are completed in the timeframes required by the consent decrees, wastewater rates will triple by 2007, an economically infeasible scenario. The city continues to work with regulators to develop a more realistic and affordable schedule.
In January, 1999, the city privatized the operation and management of its water system under a 20-year contract with United Water Services Unlimited Atlanta, L.L.C. (UWA). Contract terms are favorable for the city, although operating cost savings and bill collection rates have been lower than expected. Officials expect the latter to improve significantly with new procedures and technology in place.
Financial operations have been satisfactory, but debt service coverage will decline significantly with $627 million in debt issued this year. Even with city council-approved wastewater rate increases of 10% annually for the next three years, coverage drops from 2.7x in 2000 to 1.3x in 2004. Debt amortization is extremely slow, at only 8% over 10 years.
Credit concerns include the size of upcoming capital needs and regulators' willingness to take affordability into account in re-evaluating consent decree compliance milestones, the impact on rates even with a longer timeframe, and lower-than-anticipated savings from privatizing water system operations.
Also of concern is the reduction in permitted capacity at the largest wastewater treatment plant, currently on appeal, and possible similar reductions to the two other plants. In addition, the city may face significant fines related to unreported wastewater discharges, untimely reporting, and sanitary sewer overflows.
Source: Business Wire
