Fitch Affirms Scottsdale, AZ's Water & Sewer Revs at 'AA+'; Outlook Stable
Source: Business Wire
--Approximately $48.3 million water and sewer bonds, series 2004 and series 2008, affirmed at 'AA+'.
The Rating Outlook is Stable.
RATING RATIONALE:
--The city's water and wastewater utility system maintains a consistently sound financial profile, characterized by healthy liquidity and debt service coverage levels.
--Capital needs have declined due to slower growth projections, and future debt plans are modest.
--The city's projection of system operations suggests continued sound debt service coverage levels of more than 2.0 times (x) (including system-related excise tax debt).
--Average monthly residential bills are affordable at roughly 1% of median household income, providing rate flexibility to management.
--Development fee revenue - historically a source for ongoing capital outlays - has declined dramatically with the regional construction collapse, although reduced development activity has meant fewer demands for new infrastructure.
KEY RATING DRIVERS:
--A series of planned rate increases over the next five years should enable the system to keep up with ongoing capital replacements and improvements, while maintaining solid liquidity.
--The rating assumes debt service coverage will remain sound.
SECURITY:
The bonds are secured by the net revenues of the city's water and wastewater utility system, after payment of operating and maintenance expenses.
CREDIT SUMMARY:
System financial results over the past five fiscal years have been characterized by positive operating margins and solid debt service coverage. Cash and investments at the end of fiscal year 2009 totaled $110 million, the equivalent of 564 days of expenditures. Working capital for the period was similarly sound at roughly 470 days of expenditures. These totals have trended downward since peaking at around 1,500 days in fiscal 2004, as the city has applied built-up reserves for various capital projects. The system financial forecast anticipates a gradual increase in reserves over the next five fiscal years.
Debt service coverage comfortably exceeds legal requirements; fiscal 2009 net revenues provided annual debt service coverage of 2.2x without development fee revenue. This coverage calculation includes approximately $325 million of outstanding utility-related municipal property corporation (MPC) debt, which has a subordinate claim on system revenues. Debt is amortized at an average pace, with roughly 75% retired within 20 years.
The collapse of the residential construction market in the Phoenix area and accompanying recessionary pressures have sharply reduced growth pressures in Scottsdale and consequently generated fewer future capital needs. The system's CIP, net of moneys spent in prior years, totals roughly $375 million through fiscal 2014 and will be funded primarily with available system resources. Following the issuance of $75 million in MPC excise tax debt in March, 2010 for system improvements, the only additional debt offering scheduled over the next five years is a $26 million sale planned for 2013. Development fee revenues, which historically have paid for a significant portion of capital spending, are expected to contribute only $80 million through fiscal 2014 for capital. Fitch rates the MPC's excise tax revenue bonds 'AA+' (for more information see 'Fitch Rates Scottsdale, AZ GOs, Excise Tax Revs', dated March 5, 2010 available at www.fitchratings.com).
Currently, debt levels are above average at around $1,840 per customer for fiscal 2009. With the addition of the $75 million MPC sale, Fitch expects customer debt levels to increase to around $2,200 per customer in fiscal 2010 and then slowly decline as debt issuance tapers off. The anticipated shift to more of a maintenance mode as the city approaches buildout, coupled with the city's high wealth levels, largely alleviates the concern over elevated customer debt levels.
Scottsdale is located adjacent to Phoenix in Maricopa County, the largest population center in the state. Population in the city has increased more than 80% since the 1990 census to roughly 243,000, accompanied by significant gains in residential and commercial development. The recent sharp decline in residential and commercial construction area-wide has also affected development activity in Scottsdale. While the city did not witness the level of speculative building activity that has occurred in other parts of the Phoenix metropolitan area due to its relatively mature status, Scottsdale housing starts have dropped sharply from a recent peak of 1,722 in fiscal 2007 to less than 200 (est.) in fiscal 2009. Fitch will continue to monitor the fallout from the housing crisis and the recession on the city, particularly as it relates to operating revenues and capital spending.
Unemployment rates in Scottsdale, while up in recent months, remain below state and national averages; the city's December 2009 rate of 6% trailed both the Arizona (8.8%) and U.S. (9.7%). Retail trade is a significant component of the local economy, as evidenced by retail sales per capita levels that are roughly double those of the state and nation. Likewise, wealth levels are well above state and national averages; per capita money income is twice the Arizona average and 185% of the U.S. average, and median household income is roughly 140% of both the Arizona and U.S. averages.
Applicable criteria available on Fitch's web site at www.fitchratings.com include:
'Revenue Supported Rating Criteria,' dated Dec. 29, 2009.
'Water and Wastewater Revenue Bond Rating Guidelines,' dated Aug. 6, 2008.
Additional information is available at www.fitchratings.com.
Contact:
Fitch Ratings, Austin
Steve Murray, +1-512-215-3729
Julie Seebach, +1-512-215-3740
or
Cindy Stoller, +1-212-908-0526
(Media Relations, New York)
cindy.stoller@fitchratings.com
