New York’s Suffolk County Water Authority plans to sell $100 million in highly rated bond anticipation notes on Wednesday.
The sale will be split into Series 2013A of $50 million bond anticipation renewal notes and Series 2013B of $50 million bond anticipation notes.
Series A will mature on Jan. 15, 2016. Series B will mature on Jan. 15, 2015, and may be renewed up to a maturity of Jan. 15, 2018, according to Larry Kulick, the authority’s chief financial officer.
The notes will be sold on a competitive basis.
Goldman, Sachs & Co. is serving as the SCWA’s financial advisor. Harris Beach PLLC of New York City is bond counsel.
The notes will be sold with a fixed interest rate. The authority has $50 million of variable-rate debt outstanding, about 8% of its outstanding debt before the two 2013 notes are sold.
Standard & Poor’s gives the notes an SP-1-plus rating. Fitch Ratings rates the notes AAA with a stable outlook. The authority is the highest rated utility in New York State.
While Suffolk County is in a fiscal emergency, the Long Island authority is independent of the government. The two bodies’ finances are completely separate.
The notes are being sold without insurance or a letter of credit. They cannot be called before the maturity date.
The 2013A and 2013B notes’ principals are expected to be paid with senior- lien bonds, according to the preliminary official statement.
While the authority “may legally make payments of principal” on the 2013 notes from other sources than a bond sale, the SCWA “makes no representation as to the availability of any such funds,” the POS notes.
“Interest on the 2013 notes is payable from moneys in the general fund of the authority,” according to the statement. “Revenues of the authority are transferred from the revenue fund to the general fund only after the required payments to the operating fund, to the holders of the original water works revenue bonds, to the bond fund and to the secondary bond fund.”
Harris Beach found that the notes’ interest will be exempt from federal, New York State and New York City income taxes. The Water Authority will pay the notes’ interest on Jan. 15 and July 15 of each year.
The SCWA’s sale of fairly short-term debt rather than long-term debt “gives us the flexibility in timing the market to save our customers a considerable amount of interest,” Kulick said.
The Series 2013A notes replace Series 2012A renewal notes that were issued on March 20, 2012, and will mature on Jan. 15. The 2012A notes replaced Series 2011A notes that were issued on April 6, 2011, and matured on April 1, 2012.
The authority has been paying 15 to 25 basis points on the notes, Kulick noted, which is is better than what the SCWA would pay if it sold 25-year bonds. It would have to pay 4.3% or 4.4% interest on these bonds, he said.
Goldman Sachs expects the authority to have to pay about a half percent interest annually for the 2013 notes, according to Gregory Carey, chairman of Goldman’s public finance department. That is very affordable, he said. Carey has worked as the authority’s financial advisor since 1987.
The water utility has been issuing notes of a few years duration since the mid-1990s.
Carey said he expects a great deal of interest in the notes when they are sold on Wednesday. The last time the authority’s Bans came to market there were nine bidders. “One of the reasons we’re selling next week is that the calendar is very light,” he said.
The authority always has enough cash on hand to pay off its short-term debt, a source close to the authority said. The authority has over $215 million in cash. The authority’s notes are staggered so the authority can always pay a note off.
The authority successfully sold $80 million in 25 year bond this past September. The bond sale was because the authority had notes issued in 2008 coming due in January 2013.
The SCWA is barred from renewing short-term notes with new short-term notes beyond five years from the initial sale. So it had the choice of either paying the notes off or issuing long-term debt. It chose the latter route, Kulick said.
There were 10 bidders for the bonds, Kulick said. Wells Fargo put in the winning bid of 3.37% true interest cost.
The authority plans to use the proceeds from the 2013 notes to finance acquisition and construction costs related to improvements to the water system. There is an approved $58.6 million capital budget for the current fiscal year.
The authority anticipates capital expenditures from $57.8 million to $60.7 million in fiscal years 2014 to 2018. The capital expenditures consist of water main installations; meters, services, and hydrants; treatment and remediation; plant facilities, and miscellaneous equipment and facilities.
S&P rates the authority’s senior- and subordinate-lien water system revenue bonds at AA-plus. The rating is based on a “broad and diverse service-area economy predominantly residential, with high wealth and incomes; sound system operations, with a virtually unlimited water supply; and historically strong debt service coverage,” according to S&P credit analyst Joseph Pezzimenti.
The agency’s rating of the 2013 notes at SP-1-plus “reflects our long-term rating on the revenue bonds. It also reflects a low market-risk profile, because the SCWA has adequate authority to take out the temporary bonds with proceeds from senior-lien revenue bonds before maturity, strong market access, and information disclosure.”
“Securing the 2013 notes is a lien on the system’s net revenues junior to the SCWA’s senior and subordinate water system revenue bonds,” Pezzimenti wrote.
“The county’s economy is well-diversified, in our view, with significant public and private-sector employers,” he added. “We consider wealth and incomes very strong, with median household effective buying income at 148% of the national level of 2011.”
The utility has 379,000 accounts serving 1.2 million people, Kulick said.
“The SCWA benefits from the geological makeup of Long Island, with three major aquifers providing the system with a virtually unlimited water supply,” Pezzimenti wrote.
The authority currently plans on up to four annual 3.75% customer-rate increases from 2012 to 2015, Pezzimenti noted. “Excluding Build America Bond subsidy payments, debt service coverage for all debt for fiscal 2013 … is 1.6 times, which we consider strong,” the analyst wrote.
“As of Oct. 31, 2012, management reported an unaudited unrestricted cash and investments balance of approximately $224 million, which equates to 700 days of cash on hand.”
Fitch pointed to some of the same factors in explaining its triple-A rating of the notes. Fitch senior director Christopher Hessenthaler, director Andrew DeStafano and managing director Doug Scott prepared Fitch’s report on the notes.
They wrote that the key rating drivers were: “An abundant source of high quality water that requires minimal treatment and cost to produce; favorable operating results are demonstrated by consistently robust debt-service coverage levels and strong liquidity; independent rate-setting authority and affordable user rates provide significant flexibility; borrowing plans over the medium term are not expected to result in a meaningful increase in leverage; the rate covenant, which essentially requires just sum-sufficient coverage of debt service obligations, is considered weak.”
In addition Fitch noted that the authority’s “financial forecast through fiscal 2017 shows satisfactory annual debt service coverage on an all-in basis at 1.7 times.”