S&P Affirms Tacoma,WA Wtr Rev Bnd Rtg;Outlk Positive.
The bonds are secured by net revenues of the water system. The rating reflects: -- Strong system financial performance, -- Low water rates, and -- Reduced operational and financial risk associated with a proposed
second supply water project.
The rating also reflects the fact that the proposal has not yet been finalized.
The utility has been working closely with neighboring utilities to develop a second surface water source. Final agreement had originally been expected by December 1997 or early in 1998. Although the utilities appear to be close to agreement, they have not yet finalized the contracts, leaving room for uncertainty as to the final outcome. Although the utility has received necessary permits to begin construction, it may have to seek extensions on the permits if construction is sufficiently delayed.
The city has no immediate need for the additional supply, as current capacity will be sufficient for the next 10 years. However, the proposed project should provide the system with additional reliability and increased flexibility. The project is expected to cost about $221 million. Negotiations with Seattle Public Utilities and three South King County utilities have led to preliminary agreements to create a regional water supply system, with each participant entering into take-or-pay contracts with the regional supplier. To comply with provisions of the Endangered Species Act, the utility has drafted a plan that will be submitted for public review in November 1998.
The utility has stated that all hurdles can be overcome by early in 1999, when a final decision to go ahead with the project will be made. Financial performance is strong. Historical debt service coverage has been over 3 times (x) since 1992 and was 4.23x in fiscal 1997.
Projected coverage, including the contractual obligation associated with the regional water supply project, should remain high. Liquidity is adequate, with $2.6 million in cash -- equivalent to 50 days' operating expenses -- and about $11.3 million in construction funds. Although Simpson Paper provides 10.8% of operating revenues, concentration risk is mitigated by a take-or-pay contract expiring in 2007.
In addition to the water supply project, the utility has about $75 million in ongoing capital projects through 2002, of which $15 million will be funded by debt and the rest by system revenues. Even with proposed rate increases of 7% in 1999 and 8.5% in 2001, water rates are expected to remain low.
The outlook anticipates the finalizing of project contracts that would maintain competitive rates and strong financial performance. However, a decision not to go ahead with the project would not preclude an upgrade, as long as there is no negative effect on rates and financial performance, Standard & Poor's said. -- CreditWire
Copyright 1998, Standard & Poor's Rating Services
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|Date:||Oct 14, 1998|
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