Fitch Rates Pima County, AZ's $130MM Sewer System Revenue Obligations 'AA-'; Outlook Stable
Fitch Ratings assigns an 'AA-' rating to the following Pima County, Arizona (the county) revenue obligations:
--$131.7 million sewer system revenue obligations, series 2012A.
The bonds are expected to sell via negotiation the week of Nov. 15, 2012. Proceeds will be used to finance improvements and extensions to the county sewer system (the system) and pay costs of issuance.
In addition, Fitch affirms the following ratings:
--$378.8 million in outstanding subordinate lien sewer system revenue obligations at 'AA-';
--$135.5 million in outstanding senior lien revenue bonds at 'AA'.
The Rating Outlook is Stable.
The series 2012A obligations are payable from installment payments made by the county to the trustee. The county's obligation to pay the installment payments is secured by pledged revenues (net revenues, including unrestricted cash balances) of the county's sewer system (the system); such lien on, pledge of, and security interest in the pledged revenues is subordinate to the prior pledge and lien on outstanding senior lien debt. The senior lien is closed.
KEY RATING DRIVERS:
SOUND FINANCIAL PROFILE: Financial performance is sound and is expected to remain good through the forecast period.
AUTOMATIC RATE INCREASES: The county prudently adopted a series of automatic annual rate increases to counter the anticipated rise in fixed costs over the next few years; user charges remain affordable, though have increased rapidly as a result of the rate hikes, somewhat limiting future rate flexibility.
INCREASING DEBT BURDEN: Capital needs are large and relate primarily to meeting regulatory requirements. Debt levels will more than double upon completion of the sizeable capital plan. Nevertheless, capital costs are expected to drop considerably beyond fiscal 2016, and debt is retired rapidly.
STABLE ECONOMY: The service area is anchored by the presence of the military and defense industry, which provides some stability; county unemployment rates are below state and national levels.
Financial operations are sound, with all-in annual debt service (ADS) coverage at 2.3 times (x) in fiscal year 2011. Including planned issuances totaling $460 million over the next four years, all-in coverage is forecast to drop to a low of 1.3x by fiscal 2016. However, given the county's history of enacting rate increases, in some cases even up to three rate hikes within one fiscal year, Fitch believes management will take the necessary steps to maintain the system's good financial performance. Furthermore, it should be noted that the aforementioned projections do not include unrestricted cash balances which are legally pledged and can only be used to pay debt service or provide rate relief. When projected unrestricted cash balances are included, all-in coverage estimates are 2.0x or better in each year throughout the forecast period.
Liquidity has been healthy, and was solid at 255 days cash on hand and 547 days working capital in fiscal 2011. The county recently increased both its emergency and operating reserves, and constitutional expenditure limitations restrict the amount of cash from revenues or fees that can be used for capital expenditures. The increase in the reserve amounts, combined with the spending limitations, should help maintain strong to improved liquidity levels going forward and/or facilitate the acceleration of debt payments. The county plans to use some of its excess cash reserves to retire debt early. Amounts received from the issuance of bonds are excluded from the expenditure limitation.
The county completed a regional master plan in November 2007 that identified capital needs at an estimated $974 million over a 10 year period. The extensive capital improvement plan (CIP) focuses on addressing regulatory wastewater de-nitrification requirements at two of its facilities. The 50-year old Roger Road facility will be replaced by a new water reclamation campus and improvements will be made at the Ina Road plant. The new plant is scheduled to be in operation by January 2014, and rehabilitation and capacity needs at the Ina Road plant are scheduled to be completed by January 2015. Thus far, the projects are scheduled to be completed on time and costs have come in below budget.
DEBT LEVELS TEMPERED BY RAPID AMORTIZATION
Given the constitutional limitations on cash spending for capital, the county plans to primarily debt-fund its CIP over the next five years. Debt levels currently are average, but will more than double with the $460 million of planned debt to peak at around $3,400 per customer in fiscal 2016. However, due to the rapid amortization of debt, debt levels are projected to descend at a moderately rapid pace in the following five years assuming future capital needs are low. Amortization of debt, including the current issuance, is rapid with principal payout at 59% and 98% in 10 and 15 years, respectively.
GROWING DEBT SERVICE REQUIREMENTS PRESSURE RATES
To cover the anticipated rise in debt service costs, the county enacted automatic annual rate hikes over the fiscal 2011-2014 period. Volumetric user fees and standard service fees are being increased annually by 10% and 6.5%, respectively. The final approved rate increase will become effective on July 1, 2013 (fiscal 2014). The county will provide an annual review of the adequacy of its rates as part of the annual budget process. Rates are currently affordable at 0.8% of median household income (MHI).
SERVICE AREA BENEFITS FROM STABLE ECONOMY
The county provides wastewater service to the Tucson metropolitan statistical area (MSA) as well as separate outlying areas in eastern Pima County. The system serves a population of approximately 1 million through more than 265,000 sewer connections. Together the wastewater facilities have a combined capacity of 97.1 million gallons per day (MGD) with sewer flows averaging 69.3 MGD.
Tucson is southern Arizona's largest city and the Pima County seat. Fitch rates the county's general obligation bonds 'AA' with a Stable Outlook. The area's economy is diverse, featuring military and defense, higher education, healthcare, government, and manufacturing as primary anchors. County unemployment levels at 7.6% as of August 2012 are below state (8.5%) and national (8.2%) averages. County wealth levels are slightly below state and national levels.
Additional information is available at 'www.fitchratings.com'. The ratings above were solicited by, or on behalf of, the issuer, and therefore, Fitch has been compensated for the provision of the ratings.
In addition to the sources of information identified in the Revenue-Supported Rating Criteria, this action was additionally informed by information from Creditscope.
Applicable Criteria and Related Research:
--'Revenue-Supported Rating Criteria', dated June 12, 2012;
--'Water and Sewer Revenue Bond Rating Criteria', dated Aug. 3, 2012;
--'2012 Water and Sewer Medians', dated Dec. 8, 2011;
--'2012 Outlook: Water and Sewer Sector', dated Dec. 8, 2011.
For information on Build America Bonds, visit www.fitchratings.com/BABs.
Applicable Criteria and Related Research:
Revenue-Supported Rating Criteria
U.S. Water and Sewer Revenue Bond Rating Criteria
2012 Water and Sewer Medians
2012 Outlook: Water and Sewer Sector
Gabriela Gutierrez, +1-512-215-3731
111 Congress Ave., Suite 2010
Austin, TX 78701
Doug Scott, +1-512-215-3725
Steve Murray, +1-512-215-3729
Elizabeth Fogerty, New York, +1 212-908-0526