AUSTIN, Texas--(BUSINESS WIRE)--Fitch Ratings upgrades to 'AA' from 'AA-' its underlying rating on the following Gilbert Water Resource Municipal Property Corporation, Arizona (the corporation) bonds issued on behalf of the town of Gilbert, Arizona (the town):
--$104 million in outstanding water system development fee and subordinate lien water utility revenue bonds, series 2007.
The Rating Outlook is revised to Stable from Positive.
The bonds are secured by a first lien on system development fees (SDF) related to the town's water system (the system) as well as a subordinate pledge of surplus system revenues.
KEY RATING DRIVERS
UPGRADE REFLECTS HEALTHY FINANCES: The rating upgrade to 'AA' from 'AA-' and revision in Outlook to Stable reflect the system's favorable financial performance in recent years and prospects for continued positive results. The system continues to report strong debt service coverage (DSC) from all pledged revenue sources as well as robust liquidity. The town's most recent audit points to total DSC of 2.2x and over 1,200 days cash on hand.
TREMENDOUS RATE FLEXIBILITY: User rates are very affordable, registering at less than one-half of Fitch's affordability threshold of 1% of median household income (MHI).
DEMAND-DRIVEN CAPITAL PLAN: The capital improvement program (CIP) includes a 12-million-gallons-per-day (mgd) system demand-driven water treatment plant expansion that will largely be debt financed. System debt levels currently align closely with the 'AA' median but could erode somewhat if the CIP and corresponding debt plans are fully realized.
AMPLE CAPACITY AND SUPPLY: System expansions have provided for ample capacity to meet current demand. Water supplies are provided from a variety of surface water sources and ground water wells and are sufficient to meet supply needs for the intermediate future.
RETURNING GROWTH/SOUND ECONOMY: The service area is experiencing renewed growth following the recessionary contraction and seeing increases in population and system connections. The service area has strong economic underpinnings, with above-average wealth levels registering 50% higher than state and national levels and low unemployment.
STABILITY EXPECTED: The rating is sensitive to fluctuations in various credit fundamentals including financial and operating performance, capital needs and debt levels. The Stable Outlook reflects Fitch's belief that such fluctuations are unlikely to occur.
STRONG FINANCIAL FLEXIBILITY
While pledged SDFs saw significant contraction in recessionary years due to the collapse of the housing market, system net revenues generally have been more than sufficient to pay combined debt service. Total DSC from system net revenues (including SDFs) was 2.2x, with an operating margin of 40% for fiscal 2013. Management projections, which appear reasonable, indicate the continuation of strong all-in coverage of 1.7x in fiscal 2014, rising annually to over 3x through the fiscal 2019 forecast period. The forecast does not take into consideration possible increases in debt service costs associated with planned debt issuance in the later years of the forecast. Nevertheless, Fitch expects DSC would remain satisfactory even with the added carrying costs given the cushion forecast in the current projections.
Reserve levels are impressive, with cash balances aided by a repair and replacement fund. Overall, system liquidity for fiscal 2013 was over $71 million in unrestricted cash plus an additional $7.8 million held for system repair and maintenance, resulting in over 1,200 days cash on hand, well above the 'AA' and 'AAA' category medians. For the same period, surplus revenues relative to depreciation expense was a robust 153%, also well above itch's medians for similarly-rated utility credits.
GROWTH-RELATED CAPITAL PLANS
Capital needs included in the town's fiscal 2014-2018 CIP total $143 million, up more than 50% from the previous fiscal 2012-2016 CIP of $94 million. The increase in expected capital costs poses some concern, but actual expenditures may be lower given the CIP escalation is driven by growth-related projects and at least a portion of these costs may ultimately be deferred or scaled downward. Currently, the CIP includes a 12 mgd expansion to the south water treatment plant (the WTP), acquisition of additional water rights, and various other system-related improvements. The town tentatively plans to issue approximately $100 million in bonds in the 2017 timeframe, which will fund the majority of CIP costs, including the WTP expansion.
The WTP expansion would increase the town's treatment capacity sufficient to handle full build-out of the town - an estimated population of 330,000. The expansion of the WTP will be constructed in partnership with the city of Chandler, Arizona, with each entity paying 50% of the costs. Because growth in the demand has been modest in recent years even with a 10% growth in town population since 2010, it is possible WTP expansion may occur more gradually, which could reduce the size of and/or delay the proposed borrowing.
DEMAND-DRIVEN CAPITAL/INCREASING DEBT LOAD
Of the $146.2 million water SDF bonds issued in 2007, $104 million remain outstanding, with management cash defeasing a significant portion of the bonds over the course of several years from excess SDF revenues. Debt per customer of $1,634 for fiscal 2013 is favorable compared to the 'AA' category median of $1,812. The town's debt profile benefits from rapid amortization (100% is retired in 20 years) and management's plan to continue paying down the SDF bonds prior to issuing the additional expansion related bonds. Nevertheless, if the full $100 million in bonds anticipated to fund the CIP were issued, the debt per customer would grow to around $2,250 in five years and be considered elevated for the rating category.
RAPID GROWTH, VOLATILE IMPACT FEE REVENUES
Gilbert, located in the Phoenix metropolitan area, witnessed dramatic growth over the past 15-20 years, with the population climbing from less than 30,000 in 1990 to more than 229,000 presently. However, the area also witnessed a swift decline in residential construction during the recession consistent with other Arizona credits, which also led to corresponding declines in SDF revenues. In fiscal 2008 SDF revenues accounted for a significant 36% of operating revenues, but dropped to just 17% for fiscal 2011.
Renewed growth and economic recovery has resulted in a rebound of SDF. SDF revenues represented 33%-35% of operating revenues for fiscal years 2012 and 2013, with unaudited fiscal 2014 results pointing to $10.9 million, or 28% of revenues. The rise in SDF collection has resulted in 1.3x DSC on the bonds over the last three fiscal years from SDF revenues alone. For fiscal 2013, the system had over $18 million in SDF balances that can be utilized to pay the bonds after all SDFs collected in that year are used. Fitch believes the amount of SDF monies available to pay debt service largely mitigates the risk associated with potential declining SDF collections and reduces the reliance on the system net revenues for repayment of the bonds.
SUBSTANTIAL RATE FLEXIBILITY
The system implemented three years of rate increases, from fiscals 2007-2009, which averaged just over 7% a year. Rates have remained unchanged since 2009, but the town anticipates four years of modest 2% annual increases starting in fiscal 2016. User rates include a significant fixed base charge, which accounts for 64% of the average residential bill (based on average monthly water consumption of 7,500 gallons). This level of fixed charges provides stability to the system's revenues stream as growth returns and connections are added. User rates retain ample rate flexibility, with the average residential bill currently amounting to a very low 0.3% of MHI, well below Fitch's affordability threshold of 1% of MHI.
SOUND SERVICE TERRITORY AND SUFFICIENT SUPPLIES
The system provides retail service to over 75,000 connections, the majority of those being residential customers. For fiscal 2013 the majority of water supplies were obtained from surface water sources which include the Central Arizona Project and the Salt River Project. Ground water is also utilized and the system includes reclaimed water facilities. Existing and proposed supplies included in the CIP are expected to be adequate to meet customer demands for the foreseeable future.
Gilbert is located in the southeastern portion of the greater Phoenix area. The area has transitioned from an agricultural to suburban economy with a strong commercial and industrial presence. The town's economy faired far better than some of its neighboring communities during the recent recession. The town's population is relatively young and highly educated. Unemployment levels at April 2014 were 4.2%, below the state (6.2%) and national (5.9%) averages. Wealth levels in the area are also over 50% higher than state and national averages.
Additional information is available at 'www.fitchratings.com'
In addition to the sources of information identified in Fitch's U.S. Municipal Revenue-Supported Rating Criteria, this action was additionally informed by information from Creditscope, Tischler Bise (Planning Consultants) and Burton & Associates (Rate Consultants).
Applicable Criteria and Related Research:
--'Revenue-Supported Rating Criteria' (June 2014);
--'U.S. Water and Sewer Revenue Bond Rating Criteria' (July 2013);
--'2014 Water and Sewer Medians' (December 2013);
--'2014 Outlook: Water and Sewer Sector' (December 2013).
Applicable Criteria and Related Research:
Revenue-Supported Rating Criteria
2014 Outlook: Water and Sewer Sector
2014 Water and Sewer Medians
U.S. Water and Sewer Revenue Bond Rating Criteria