Fitch Rates Scottsdale, Arizona Water/Sewer Revs 'AA+'
Source: Business Wire
The bonds are payable from and secured by a first lien on the net revenues of the city's water and sewer system (the system). Bond proceeds will be used to refund certain outstanding system revenue bond maturities for debt service savings and to pay issuance costs.
The high 'AA+' rating of the system reflects continuation of a positive operating performance record, characterized by solid debt service coverage levels, as well as an historically sound and diverse local economy. While liquidity is down from recent peaks due to planned capital outlays, reserve levels remain very healthy.
Offsetting rating drivers include reliance on development fees to fund a sizeable portion of a large, albeit manageable, capital improvement program (CIP) in what has been a decelerating growth environment. Debt levels are currently above the median of comparably rated credits and are expected to remain so over the next few years. But as the city continues to approach build-out and completes several of the larger projects contained in the CIP, Fitch expects debt levels, and corresponding credit concerns, to likely ease.
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 2007 totaled over $110 million, the equivalent of 640 days of expenditures. Working capital for the period was similarly sound at nearly 630 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 2007 net revenues provided annual debt service coverage of 3.7 times, without development fee revenue. This coverage calculation includes outstanding utility-supported general obligation debt as well as municipal property corporation (MPC) debt, which has a subordinate claim on system revenues. Debt is amortized fairly quickly, with roughly 90% retired within 20 years.
The city's growing population and subsequent efforts to secure additional water supplies and expand system facilities have generated sizeable future capital needs. The system's CIP, net of moneys spent in prior years, totals more than $500 million through fiscal 2012 and will be funded through a combination of debt, available cash and development fees charged to new customers. Although annual development fee revenue is down from previous years due to the housing slowdown, city officials still anticipate that these fees will finance a significant portion of total capital needs through the CIP period.
Currently, debt levels are above average at around $2,500 per customer for fiscal 2007. With anticipated issuances to fund the CIP (the next being a planned $110 MPC offering in spring, 2008), Fitch expects customer debt levels to remain relatively high through fiscal 2012. However, the anticipated shift to more of a maintenance mode as the city approaches buildout, coupled with the city's high wealth levels and rapid debt amortization, is likely to alleviate the concerns 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 15% since the 2000 census to roughly 237,000, accompanied by significant gains in residential and commercial development. Major employment sectors in Scottsdale include technology, health care, tourism, and corporate/regional headquarters.
The recent sharp decline in residential construction area-wide has slowed development activity in Scottsdale. However, because of the city's relatively mature status it has not witnessed the level of speculative building activity that has occurred in other parts of the Phoenix metropolitan area. Fitch will continue to monitor the fallout from the housing crisis on the system, particularly as it relates to development fee revenues and capital spending.
Fitch's rating definitions and the terms of use of such ratings are available on the agency's public site, www.fitchratings.com. Published ratings, criteria and methodologies are available from this site, at all times. Fitch's code of conduct, confidentiality, conflicts of interest, affiliate firewall, compliance and other relevant policies and procedures are also available from the 'Code of Conduct' section of this site.
Contact:
Cindy Stoller
212-908-0526
Steve Murray
512-215-3729
Doug Scott
512-215-3725
