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

AUSTIN, Texas--(BUSINESS WIRE)--

As part of its continuous surveillance effort, Fitch Ratings affirms the following ratings on Scottsdale, Arizona's water and sewer revenue bonds:

-- Approximately $42 million water and sewer bonds, series 2004 and series 2008, at 'AAA'.

The Rating Outlook is Stable.

SECURITY

Bonds are secured by net revenues derived from operation of the city's water and sewer utility system.

KEY RATING DRIVERS

SOLID DEBT SERVICE COVERAGE: All-in annual debt service (ADS) coverage remains sound despite thinning in fiscal 2011. Coverage is projected to rebound in the medium-term through reduced planned capital expenditures and proposed rate increases.

LIQUIDITY REMAINS STRONG: Days cash on hand has remained robust through the economic downturn, aided by the city's very modest dependence on development-related fees which has enabled steadily high operating margins despite a significant contraction in home building activity.

ABOVE-AVERAGE DEBT LEVELS: Long-term debt levels per capita are high in comparison to similarly rated credits. However, given the absence of future debt plans, debt levels are forecast to decline over the next five years.

FINANCIAL FLEXIBILITY: Above-average wealth levels result in charges below Fitch's affordability threshold of 2.0% of median household income.

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.

CREDIT PROFILE

Debt Service Coverage and Liquidity

The water and sewer system (the system) experienced a slight reduction in all-in ADS coverage in fiscal 2011 to approximately 2.0 times (x), but was still in line with Fitch's medians for the rating category. Historically, ADS coverage levels have been very strong, ranging from 2.4x to 4.6x over the past five years, with senior lien coverage ranging from 10.0x to over 15.0x. The dip in 2011 was attributable to an increase in capital outlays plus higher debt service costs for the year. Projections show that ADS coverage should rebound in the next year and will continue to improve once planned rate increases are implemented.

Liquidity levels were solid in 2011, totaling about $114 million or 537 days of cash on hand. Similar to coverage, liquidity is expected to improve in coming years due to rate increases and the completion of major capital projects.

Capital Improvement Plan

The system's five-year capital improvement plan (CIP) for fiscal 2011-2015 peaked at approximately $365 million; the current CIP for fiscal years 2012-2016 is lower at $289 million. Future CIP reductions are also expected due to the completion of most major capital projects, such as the advanced water treatment plant expansion, a water reclamation treatment facility. All future capital projects are expected to be funded primarily on a pay-as-you-go basis.

Long-term debt per capita was high but manageable at $2,295 in fiscal 2011. The increase was expected at the time of Fitch's last review in 2009, and was attributed to utility-related municipal property corporation (MPC) excise tax revenue bond issuance in 2010. Fitch views the risks presented by elevated debt levels as manageable given the high wealth levels of the city. Furthermore, given the city has no near-term borrowing plans, debt levels are projected to decline over the next five years. Debt amortization is average at 43% in 10 years and 89% in 20 years.

Rates

Water rates have been held constant since fiscal 2009, with no proposed increases due to take effect until 2014. Holding rates static with little impact to ADS was achieved by a combination of cost savings, increased operating efficiencies, approximately $10.2 million in proceeds received from the sale of the Planet Ranch (a source of surface water), and the completion of several major capital projects (which resulted in lower projected future expenditures). Water rates are proposed to increase by 3% per year from fiscal 2014-2016.

Proposed sewer rate hikes of 3% annually are expected to take effect in 2013-2016. Similar to the water rates, sewer rates have been held steady since 2009. However, due to increasing operating costs associated with electricity and newly expanded treatment facilities, static rates are no longer considered sustainable. Projected monthly charges are anticipated to remain below Fitch's affordability threshold.

Overview of Water and Wastewater System

The city provides water to approximately 87,500 customers over a 185-square mile service area. Approximately 60% of the city's total water supply is provided by the Central Arizona Project (CAP). The CAP was designed to conserve Arizona's water supply by delivering self-replenishing surface water from the Colorado River. Remaining supply is provided by a combination of groundwater and reclaimed water sources.

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 of 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 equal amounts artificially or naturally recharged.

Wastewater is provided to approximately 79,600 residential and 770 commercial customers. The wastewater system consists of approximately 1,350 of sewer lines which process approximately 25 millions of gallons daily (MGD) on average.

Along with the cities of Phoenix, Glendale, Mesa, and Tempe, Scottsdale is governed by a multi-city Sub-Regional Operating Group (SROG). The SROG was formed to oversee areas such as construction, operation, and maintenance of jointly used sewage treatment and transportation facilities. The city of Phoenix acts as lead agency of the SROG including planning, budgeting and construction. In addition, Phoenix provides financing, arrangements, management and personnel to SROG, and accepts federal grants on behalf of all participants.

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.

Applicable Criteria and Related Research:

--'Revenue-Supported Rating Criteria' (June 20, 2011);

--'U.S. Water and Sewer Revenue Bond Rating Criteria' (August 10, 2011);

For information on Build America Bonds, visit www.fitchratings.com/BABs.

Applicable Criteria and Related Research:

U.S. Water and Sewer Revenue Bond Rating Criteria

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=647331

Revenue-Supported Rating Criteria

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=637130

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