Albuquerque’s metro area water utility will likely need additional rate increases in the coming decade to fund upgrades to its decaying infrastructure, the utility’s chief executive said Tuesday.
The comments from Mark Sanchez, head of the Albuquerque Bernalillo County Water Utility Authority, came days after the rating firm Standard and Poor’s downgraded the utility’s bond rating, expressing concerns about the utility’s cash flow in recent years in relation to its debt service.
While a two-step rate increase passed last year will help shore up the water authority’s finances in the short term, Standard and Poor’s said it should have come sooner.
The recently approved rate hike increased revenue this year by 10 percent, and a similar increase will take effect in 2014.
But in the long term, the utility needs to spend $250 million to upgrade its sewage treatment plant. A study last year also showed an additional $36 million per year shortfall in funding to cover the costs of routine replacement of aging pipes, pumps and other infrastructure.
“To get all of that done over time, there will certainly need to be rate adjustments,” Sanchez said.
The Standard and Poor’s downgrade from AAA to AA+ echoes issues raised last summer by Fitch Ratings. Investors use the findings to help guide their decisions about whether to buy the utility’s bonds.
The rating downgrade comes as the water utility has just finished running up about $500 million in debt to build a new water treatment and distribution system. With that work completed, the agency recently acknowledged it now needs to spend about $250 million to upgrade Albuquerque’s sewage treatment plant, which recently has been tagged with Clean Water Act violations when equipment failures resulted in contaminated water being dumped into the Rio Grande.
The utility’s debt at the end of the last fiscal year was $687 million, up from $259 million in 2004. That averages out to $1,239 per person in its service area, according to the agency’s most recently financial statement.
Overall, the agency acknowledges it should be spending $76 million annually to keep up with repair and replacement of its aging infrastructure, according to a recent study, but is only spending $40 million per year.
At AA+, the Standard and Poor’s rating still positions the water utility ahead of most similar government agencies in the United States and should have minimal effect on its borrowing ability, Sanchez said in an interview Monday.
“I don’t really think it has an impact on our ratepayers and cost of funds,” Sanchez said.
One key problem for the utility, according to both Sanchez and the Standard and Poor’s analysts, is the slow flow of needed financial data from the city of Albuquerque’s computerized accounting system.
The water utility, once a part of city government, was split off in 2005 to create a stand-alone agency to provide water and sewer service for the metro area. But financial accounting stayed with the city, and a changeover to a new city accounting system has made it more difficult to get the necessary financial data, according to both Standard and Poor’s and water utility managers.
Because of that, the utility was late to realize in 2009 and 2010 how low ratepayer revenue had dropped relative to cash flow needed to meet debt payments. While the utility never came close to defaulting, the revenue fell below the levels suggested by good accounting practices, according to the Standard and Poor’s ratings report.
In response, the utility’s board last year approved a rate hike that Stan Allred, the utility’s fiscal manager, said will bring a 10 percent increase in revenue this year. A second rate increase also has been approved, to take effect in 2014.
This year’s rate increase varies widely for different types of customers, with some commercial customers seeing their bills rise as much as 15 percent. A typical low-use household saw rates increase from $32.65 to $35.52 per month. Overall, the 2014 rate increase calls for a 7 percent increase in the money spent by ratepayers.
More timely financial information from the city accounting system could have led to an earlier and therefore more useful rate hike, the Standard and Poor’s analysts concluded. In response to the problem, the water utility has gone out to bid for a new accounting system of its own.
— This article appeared on page A1 of the Albuquerque Journal