LOS ANGELES —Guam Waterworks Authority's water and wastewater revenue bonds got an upgrade to investment grade from Fitch Ratings, which raised the authority's outlook from stable to positive.
The upgrade to BBB-minus from BB affected $373.1 million in debt.
The debt was issued for capital improvements following a court order from the U.S. Environmental Protection Agency in response to water quality violations.
The bonds are secured by a senior lien on the authority's gross water and wastewater system revenues excluding development charges.
The upgrade reflects the authority's sustained positive financial performance and forecast, aided by a five-year rate package, as well as progress in complying with all regulatory requirements, Fitch analysts wrote in a July 10 report.
"The service territory is isolated and limited and has had a geographic disposition to natural disasters," Fitch analysts wrote. "However, tourism has continued to diversify and recover from the economic downturn, reaching near peak levels the last two years."
Located closer to Asia than to the U.S. mainland, the 212-square-mile island has a population of 160,000. Its economy is tied mostly to tourism from Asia and the U.S. military.
About 36% of system revenues come from the commercial/tourism sector, according to Fitch.
The five-year rate package, which extends through fiscal 2018, helps to fund the authority's capital needs and demonstrates continued political willingness to raise rates, Fitch analysts wrote.
"The regulatory approval process through the Guam Public Utility Commission has been supportive of timely cost recovery," Fitch analysts wrote. "Ongoing political and regulatory support for significant additional rate hikes will be necessary, which may ultimately pressure rate affordability."
Debt levels are high and are expected to continue to escalate, Fitch said, since additional debt is the principal funding source for significant capital needs as required in a federal court order. Heavy capital spending extends out beyond the current five-year capital improvement plan.
In 2003, the authority negotiated a stipulated order with the EPA as a result of violations to the Clean Water Act and Safe Drinking Water Act.
The order was amended to cure system-wide deficiencies, and several additional projects were added at a cost of $269 million over the next five years. To date, the authority has completed or has programmed into the fiscal 2014-2018 capital improvement plan all but one of the 100 projects required under the order.
The EPA also issued a notice of Findings of Significant Deficiencies for the water system in 2012 and for the wastewater system in 2013.
The authority has addressed 36 of the 40 items identified for water, and four are long-term continuing actions, according to Fitch. It also has addressed 86 of the 89 items identified for wastewater and is on track to address the remaining within the allowed timeframe, analysts wrote.
"GWA's progress in addressing regulatory requirements is a positive development, but the authority faces significant capital needs to meet remaining requirements," Fitch analysts wrote.
The fiscal 2015-2018 capital improvement plan totals $321 million, with the order accounting for 73% of expected expenditures. Funding will be derived largely from additional debt, consisting of an estimated $161 million in fiscal 2016 and $90 million in fiscal 2018, along with remaining 2013 bond proceeds.
Water supplies in Guam are adequate, though the island has a water loss rate of 60% that reflects aging water distribution lines and presents operational challenges, Fitch wrote. Additional capital projects will ultimately be needed to meet expected military build-up demands, the scope of which has been reduced amid delays, according to analysts.
The authority expects capital costs incurred as a result of the eventual build up will be funded by the U.S. Department of Defense, including a recent $106 million appropriation.
