Fitch Affirms Chandler, Arizona's Water & Sewer Revs at 'AA'; Outlook Revised to Negative
Source: Business Wire
--Approximately $62.9 million water and sewer revenue bonds, affirmed at 'AA'.
The Rating Outlook is revised to Negative from Stable.
RATING RATIONALE:
--The Negative Outlook results from weakening debt service coverage levels due to declining system development fees and rising fixed costs.
--Financial performance, while strong overall, has declined in recent years; projections indicate improvement to historical levels over the medium term.
--Rates currently are very affordable, and should remain affordable despite adopted and proposed annual rate increases.
--While debt levels are high, principal amortization is rapid which will reduce system debt levels over time.
--Estimated capital needs are moderate.
--Service area growth has slowed to more moderate levels, though sector and user concentration remains.
WHAT COULD TRIGGER A DOWNGRADE?
--Continued declines in financial performance, including annual debt service coverage and reserves.
--Difficulty or delay in adopting rate increases.
SECURITY:
The bonds are special, limited obligations of the city payable from and secured by a first lien upon the net revenues of the water and sewer system.
CREDIT SUMMARY:
The system provides retail water and sewer service to approximately 257,000 city residents and wastewater treatment service to the Gila River Indian Community. Water supplies are derived from surface water sources and 29 groundwater production wells. Water and sewer customer growth has averaged a rapid 4% annually over the past five years. While growth was a much slower 2.6% and 1.4% from fiscal 2008 to 2009 for water and sewer, respectively, the city does face some ongoing growth pressures. Growth-induced costs are projected to rise at the latter end of the decade for expansion of the city's water reclamation plant, though the size and timing of the capital needs is dependent on the rate of future growth.
Slowed area development activity has pressured system development fee (SDF) revenues. The city has historically relied on SDFs to cover capital costs and boost debt service coverage levels. At the peak of the housing boom in fiscal 2005, SDFs were $33 million and accounted for a high 35% of total revenues, bringing senior annual debt service (ADS) coverage levels to 5.6 times (x). However, with slowed development, SDFs have declined to $7 million or 9% of total revenues in fiscal 2009, bringing senior ADS down to 2.1x; for the same period total ADS (including general obligation and excise tax revenue bonds that are payable from, but not secured by, system revenue) was just 1.2x. Rates were not increased in fiscal 2009, but the city adopted a 6% and 13% water and sewer rate increase, respectively, that became effective in fiscal 2010. Annual rate increases are projected at 6% and 12% for water and sewer, respectively, over the fiscal 2011 to 2014 period. Given the city's recent rate hikes and proposed rate increases, senior ADS is projected to average 4.3x annually over the next five years, while total ADS is expected to average 1.3x. Fitch will continue to monitor system financial performance and adoption of annual rate increases.
The district's five-year capital plan is estimated at $123 million, which is a decline from the city's original $241 million five-year plan. Nevertheless, growth-related projects have been deferred since growth has slowed, so an increase in the CIP is expected over the long term assuming a resumption of historical growth rates. System liquidity is strong with unrestricted cash of $96.4 million or 722 days operating cash. However, with SDFs down and no rate hike in fiscal 2009, the city expects to use a portion of these reserves in fiscal 2010 to cover operations and pay for debt service. Future reserve levels are expected to decline slightly given that 80% of the district's capital projects are anticipated to be cash-funded, though they should remain appropriate for the rating category.
The regional economy has some high-tech concentration. Intel accounted for 17% of system operating revenues in fiscal 2009. Despite the recession, Intel has fared well and is in the process of expanding its fabrication plant facilities. The city's December 2009 unemployment rate at 6.2% is below county (8.1%), MSA (8.2%), state (8.8%) and national (9.7%) levels. Wealth levels are well above state and national averages.
Applicable criteria available on Fitch's website at www.fitchratings.com:
--'Revenue-Supported Rating Criteria, (Dec. 29, 2009);
--'Water and Sewer Revenue Bond Rating Guidelines', (Aug. 6, 2008).
Additional information is available at www.fitchratings.com.
Contact:
Fitch Ratings, Austin
Julie Seebach, 512-215-3740
Steve Murray, 512-215-3729
or
Media Relations:
Cindy Stoller, 212-908-0526, New York
Email: cindy.stoller@fitchratings.com
