Fitch Affirms Scottsdale, AZ's Water & Sewer Revs at 'AAA'; Outlook Stable

AUSTIN, Texas--()--Fitch Ratings has affirmed its 'AAA' rating on the following bonds issued by the city of Scottsdale, AZ (the city):

--Approximately $35 million water and sewer refunding bonds, series 2004 and 2008.

The Rating Outlook is Stable.

SECURITY

The bonds are secured by net revenues derived from operation of the city's water and sewer utility system (the system).

KEY RATING DRIVERS

STRONG FINANCIAL PERFORMANCE: All-in annual debt service (ADS) coverage for the system has been strong over the past five years, averaging a healthy 2.3x. Liquidity, measured by days of operating cash, has averaged a very strong 508 days.

ELEVATED DEBT BURDEN: Long-term debt levels are high in comparison to similarly-rated credits. However, given minimal future debt plans, debt levels are forecast to decline over the next five years.

ADEQUATE RATE FLEXIBILITY: Above-average wealth levels and moderate rates result in charges below Fitch's affordability threshold of 2.0% of median household income (MHI).

AMPLE WATER SUPPLY: The city recently received state approval of a 100-year assured water supply to meet projected demands. The assured water supply is renewed every 15 years.

ROBUST SERVICE AREA: The city has a mature and diversified local economic base, low unemployment rates, and income levels that are well above state and national averages.

RATING SENSITIVITIES

CONTINUED STABILITY: Failure to maintain financial and debt metrics at or near Fitch's 'AAA' median levels could put downward pressure on the rating. In Fitch's view, such deterioration in the system's credit is unlikely.

CREDIT PROFILE

Scottsdale is located adjacent to Phoenix in Maricopa County, the largest population center in the state. The city provides water to approximately 87,500 customers and wastewater services to 79,600 customers over a 185-square mile service area. Approximately 60% of the city's total water supply is provided by the Colorado River via the Central Arizona Project while remaining supply is provided by a combination of the Salt River Project, groundwater and reclaimed water sources.

STRONG FINANCIAL PERFORMANCE AND CASH BALANCES

The system has exhibited solid financial performance over the past five years. During this period, ADS coverage averaged 2.3x and has remained at or above 2.0x each year since at least fiscal 2009. Fiscal 2013 finished with ADS coverage of 2.7x, which was in line with Fitch's 'AAA' median. The coverage improvement in fiscal 2013 was due to revenue increases largely driven by capital contributions from large irrigation customers.

Liquidity, measured by days of operating cash held in unrestricted reserves, finished fiscal 2013 at a very strong 483 days, which was mostly consistent with the system's five-year average and consistent with Fitch's 'AAA' median. Projections provided by management demonstrate continued stability in ADS coverage and cash balances.

ELEVATED DEBT BURDEN

Long-term debt per customer was elevated but manageable at $2,131 in fiscal 2013. Debt levels have declined slightly since Fitch's last review in 2012 and are expected to continue to decline over at least the next several years given the shrinking capital needs of the system. Additionally, debt amortization is somewhat quick at 51% in 10 years and 93% in 20 years.

The system's five-year capital improvement plan (CIP) for fiscal 2014-2018 includes approximately $240 million in capital projects. CIP spending is down notably from a recent peak of $365 million in the 2011 CIP. Management anticipates future spending to be funded primarily with current year cash flows and reserves which should keep debt levels shrinking.

ADEQUATE RATE FLEXIBILITY

Water and sewer rates have were held flat from fiscal 2009 through 2013, when sewer rates were increased by 4%. Assuming Fitch's standard consumption of 7,500 gallons per month, current combined system charges are about 0.8% of MHI, well below Fitch's threshold of 2.0%. Taking into account higher actual usage for city residents, combined charges should still allow some rate flexibility. Rates are projected to increase by 1.5%-2% per year from fiscal 2015-2018.

AMPLE SUPPLY

The city is required by the Groundwater Management Act (GMA) to assure renewable water resources are sufficient to meet projected annual water demands over the next 100 years. The most recent supply designation was approved in September 2010, at which time the Arizona Department of Water Resources concluded that the city has an assured supply sufficient to provide 129,072 acre-feet (af) of current and projected demand annually over the next 100 years. The assured supply designation is renewed every 15 years. Under the GMA, the city is also required to achieve 'safe-yield' of groundwater, meaning that groundwater withdrawals have to be no more than amounts artificially or naturally recharged.

ROBUST SERVICE AREA

The city has a mature and diversified local economic base, anchored by healthcare, tourism, business and professional services and technology. The unemployment rate in Scottsdale has trended downward after spiking in 2009 and 2010 and it remains below state and national averages; the city's November 2013 rate of 4.8% was well below both the state (7.1%) and national (6.6%) averages for the month. Income levels are also well above state and national averages; median household income was 142% and 136% of the state and national average is 2012.

Additional information is available at 'www.fitchratings.com'.

In addition to the sources of information identified in Fitch's Revenue-Supported Rating Criteria, this action was additionally informed by information from Creditscope.

Applicable Criteria and Related Research:

--'Revenue-Supported Rating Criteria' (June 3, 2013);

--'U.S. Water and Sewer Revenue Bond Rating Criteria' (July 31, 2013);

--'2014 Water and Sewer Medians' (Dec. 12, 2013);

--'2014 Outlook: Water and Sewer Sector' (Dec. 12, 2013).

Applicable Criteria and Related Research:

Revenue-Supported Rating Criteria

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=709499

U.S. Water and Sewer Revenue Bond Rating Criteria

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=715275

2014 Water and Sewer Medians

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=724358

2014 Outlook: Water and Sewer Sector

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=724357

Additional Disclosure

Solicitation Status

http://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=820253

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Contacts

Fitch Ratings
Primary Analyst
Major Parkhurst, +1-512-215-3724
Director
Fitch Ratings, Inc.
111 Congress Ave. Suite 2010
Austin, TX 78701
or
Secondary Analyst
Julie Seebach, +1-512-215-3740
Director
or
Committee Chairperson
Doug Scott, +1-512-215-3725
Managing Director
or
Media Relations
Elizabeth Fogerty, +1-212-908-0526 (New York)
elizabeth.fogerty@fitchratings.com

Sharing

Contacts

Fitch Ratings
Primary Analyst
Major Parkhurst, +1-512-215-3724
Director
Fitch Ratings, Inc.
111 Congress Ave. Suite 2010
Austin, TX 78701
or
Secondary Analyst
Julie Seebach, +1-512-215-3740
Director
or
Committee Chairperson
Doug Scott, +1-512-215-3725
Managing Director
or
Media Relations
Elizabeth Fogerty, +1-212-908-0526 (New York)
elizabeth.fogerty@fitchratings.com