Fitch Affirms De Pere, Wisconsin’s Water Utility Revs at ‘AA-‘; Outlook Stable

AUSTIN, Texas

Fitch Ratings affirms its ‘AA-‘ rating on the following bonds issued by De Pere, WI (the city):

–$2 million water utility revenue bonds, series 2007.

The Rating Outlook is Stable.

SECURITY

The bonds are secured by net revenues of the city’s water system (the system).

KEY RATING DRIVERS

STRONG FINANCIAL MARGINS: The system’s financial margins continue to be strong, with all-in debt service coverage (DSC) finishing fiscal 2014 at a robust 3.8x.

LIQUIDITY REMAINS A CONCERN: Fitch remains concerned with the system’s low liquidity levels exhibited over the past few years and the likelihood that reserve levels will continue to be low.

SUFFICIENT WATER SUPPLY: The city purchases all of its water from the Central Brown County Water Authority (CBCWA), which has sufficient supply to meet the city’s anticipated needs. Contract obligations with CBCWA continue through 2040.

HEALTHY UNDERLYING ECONOMY: The city’s central location and close proximity to Green Bay, along with its highly regarded school districts and strong transportation network, has resulted in stable and healthy economic indicators.

RATING SENSITIVITIES

MAINTENANCE OF LIQUIDITY: Failure to manage positive unrestricted cash positions could pressure the rating. Implementation of a cash reserve policy and sustained improvement of reserves would be viewed favorably by Fitch.

CREDIT PROFILE

The city is a suburban community located five miles south of Green Bay along the Fox River in Brown County. The system serves a population of around 24,000. Since 2007, the city has received 100% of its water supply through a contract with the CBCWA.

OTHERWISE STRONG FINANCIAL PEFORMANCE NEGATED BY LOW LIQUIDITY

The city’s financial margins have been strong over the past several years due in part to a 12% rate increase implemented in fiscal 2011. Inclusive of a $400,000 annual PILOT transfer to the city’s general fund, all-in DSC has averaged 3.4x since 2011; this compares favorably to Fitch’s ‘AA’ category median DSC level of 1.8x (also net of transfers). At above 100% each year, free cash-to-depreciation has also been strong since the 2011 rate increase.

Largely due to cash funding of capital needs, the system’s reserve levels have historically been managed to very low levels, with unrestricted cash averaging a very low 22 days of operational costs since 2010. Unrestricted cash at year-end fiscal 2014 dropped to just $46,000, or four days cash, from $791,000 the year prior, again because of capital spending. Reserves are reportedly somewhat higher for most of the year but may appear low at year-end given the revenue cyclicality that results from quarterly billing. Regardless, the system’s low liquidity has been an ongoing concern. The city reportedly expects to issue debt in 2016, a portion of which will reimburse the system for capital expenditures and would provide some additional cushion.

SUFFICIENT SUPPLY PROVIDED BY CBCWA

Prior to completion of the CBCWA distribution system, De Pere relied exclusively on city-owned groundwater wells for water production. In response to the state requiring communities to mitigate water quality concerns related to radium and other contaminants, the city, along with five other communities, formed the CBCWA to act as a wholesaler of Lake Michigan surface water.

Under the water supply contract, the CBCWA bills members for operations and maintenance costs, fixed costs (including the payment of debt service and capital costs), and security fund deposits. The contract is an absolute and unconditional take-or-pay obligation which requires members to pay regardless of whether or not any water is delivered. The contract expires in 2040. In addition to the supply provided by the CBCWA, the city owns four groundwater wells that are maintained as an emergency back-up supply.

RATES REGULATED BY THE PSC

Rates are regulated by the Public Service Commission of Wisconsin (PSC), which allows for automatic adjustments to rates resulting from changes in purchased water costs from CBCWA. Rates have been flat since the 2011 increase, although management indicates that an increase is possible in 2016. Based on consumption of 7,500 gallons per month, De Pere’s residential rates equal about 1.1% of median household income which is considered somewhat elevated by Fitch but consistent with the other CBCWA member rates. Actual consumption is reported to be lower, which would translate into lower monthly costs.

MIXED DEBT PROFILE, LIMITED CAPITAL NEEDS

The system’s direct debt profile is favorable with only $2.5 million in 2007 water utility revenue bonds outstanding at the end of fiscal 2014. This direct debt translates to very low debt-per-customer levels of only $276. However, taking into account the system’s allocable share of CBCWA debt, which currently stands at approximately $120 million, combined direct and indirect debt obligations are elevated. The system is indirectly responsible for around 30% of CBCWA’s total debt.

Given that treated water is provided by the CBCWA, system capital needs are fairly modest and focus on upgrades to a ‘smart’ meter system. The total capital improvement plan (CIP) over the next five years is estimated to be $8.2 million. An estimated $1.5 million in new borrowing is expected to occur in 2016 to finance a portion of the CIP and reimburse prior capital expenditures. CBCWA’s CIP has also been very manageable in recent years.

MOSTLY HEALTHY UNDERLYING ECONOMY

The system’s customers are primarily residential, although De Pere continues to have a strong manufacturing base with a core centered on paper product manufacturing. There is some customer concentration with the top 10 customers accounting for 13% of revenues. Unemployment rates are not available for the city, but Brown County and Green Bay’s unemployment rates have historically been below state and national rates. City median household income levels are higher at 108% and 107% of the state and nation, respectively.

For more information on CBCWA see “Fitch Rates Central Brown County Water Auth (WI) Water System Revs, 2014A ‘AA-‘; Outlook Stable”, dated July 17, 2014.

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

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. 03 Sep 2015)
https://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=869223

Additional Disclosures

Dodd-Frank Rating Information Disclosure Form
https://www.fitchratings.com/creditdesk/press_releases/content/ridf_frame.cfm?pr_id=992084

Solicitation Status
https://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=992084

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

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