AUSTIN, Texas--(BUSINESS WIRE)--Fitch Ratings affirms the 'A+' rating on the following outstanding Rio Rancho, New Mexico (the city) water and wastewater system (the system) bonds:
--$43.27 million water and wastewater system bonds, series 2007 and 2008,
--$46.78 million water and wastewater system refunding bonds, series 2009
The Rating Outlook is Stable.
SECURITY
The bonds are special limited obligations of the city, payable solely from and secured by a first lien on the net revenues of the system.
KEY RATING DRIVERS
RATE INCREASE TO IMPROVE MARGINS: The city adopted a multi-year 8% rate increase following two years of declining debt service coverage levels and a sharp drop in liquidity. The increase in user charges is anticipated to stabilize the system's declining coverage levels and support system maintenance.
ELEVATED DEBT BURDEN: The debt burden is elevated and is anticipated to grow with additional planned financings.
DEMAND-DRIVEN CAPITAL PLAN: The capital improvement plan (CIP) is large but appears manageable and largely demand driven.
DIMINISHING RATE FLEXIBILITY: User charges are considered affordable compared to Fitch's affordability threshold. However, planned increases would push rates above the threshold within two years, reducing future rate-raising flexibility.
STRONG SERVICE AREA: The service area economics are strong and include above-average wealth levels, although there is some concentration among the top water users.
RATING SENSITIVITIES
IMPROVING FINANCIAL METRICS: Improvement in the system's cash position, coupled with stable debt service coverage in-line with forecasts, would be viewed positively.
CREDIT PROFILE
The city, located immediately north and west of Albuquerque, is relatively young, having begun as a development in the mid-1960s. The city is now the third largest in New Mexico and among the fastest growing in the nation. The 2012 population estimate is just over 89,000, up more than 70% since the 2000 census. The city's rapid population growth was fueled by an abundance of affordable housing and the subsequent relocation of high-tech companies to Rio Rancho, led by Intel, which added a $2.5 billion chip plant in 2002. With the expansion of its high-tech base, about one-third of Rio Rancho residents are employed in the manufacturing sector. Wealth levels in the city are well above the state and national averages at 131% and 111%, respectively. Unemployment, at 6.6% in April 2013, routinely trends below that of the nation, driven by above-average employment growth.
RETAIL SYSTEM WITH SOME CONCENTRATION AMONG TOP USERS
The system provides retail service to approximately 31,300 and 25,000 water and wastewater customers, respectively, within the city. The customer base consists primarily of residential accounts, which make up the majority of connections and system revenues. Intel, the city's largest employer with 4,600 permanent and contract employees, is also the largest water user, accounting for 11% of the total water revenues for fiscal 2012.
SUFFICIENT CAPACITY BUT NEED FOR ADDITIONAL WATER RIGHTS
The city's water system relies entirely on groundwater pumped through 16 active wells from the Middle Rio Grande Basin aquifer. Additional well sites are permitted but undrilled. The city's permitted pumping capacity totals 26,439.77 acre feet (af) and total well-field capacity is about 21,180 gallons per minute (gpm). In 2012 the city pumped 14,676 gpm or 69% of total well field capacity. Wastewater is treated at four wastewater treatment plants with combined treatment capacity of 8.3 million gallons daily (mgd). System flows for fiscal 2012 were 4.7mgd, leaving a sufficient 43% of capacity remaining.
In 1979, the city was granted rights to divert 12,000 af from the Rio Grande Underground Basin and in 2003 an additional right to divert 12,000 af per year was granted. The city is actively pursuing water rights with the purpose of complying with the 2003 permit conditions requiring acquisition of offsetting water rights upon reaching certain pumping levels. To date, the city has fully satisfied its obligations to purchase additional rights as required through 2017. Ongoing acquisition of water rights will be necessary to support rising consumption levels, which is expected to require significant funding over the long term. Additional financing of water rights acquisition has come in the form of a state finance authority loan, which is secured by a $6 monthly customer water rights acquisition fee.
RATE INCREASES ADOPTED TO OFFSET DECLINING FINANCIAL METRICS
Historically, financial performance posted favorable results, characterized by solid annual debt service (ADS) coverage and very robust liquidity margins. However, financial performance has deteriorated in recent years, resulting in falling ADS coverage and liquidity. Total ADS coverage fell to under 1.2x in fiscal 2011, after being at 2.0x or higher through fiscal 2009. Fiscal results for 2012 posted ADS coverage of 1.7x on senior lien debt and 1.6x on all system debt, although this improvement was largely due to the reclassification of uncollectible reimbursements from the federal government.
Equally concerning as ADS coverage declines is the rapid deterioration in liquidity balances over the last few years. For fiscal 2009 days cash was an impressive 895 days. However, days cash has fallen annually, reaching a low of 173 days in fiscal 2012 after significant drawdowns for capital purposes.
In early 2013 the city council took the step to improve financial performance and provide additional funding for needed system maintenance by adopting a five-year, 8.8% annual rate increase for both water and wastewater charges starting February 2013. City financial projections through fiscal 2017, which include reasonable assumptions taking into account planned rate increases and 3%-4% inflationary increases in expenses, indicate senior lien ADS coverage averaging 1.7x and 1.6x ADS on all system debt. Given the system's rather large capital plan and use of surplus monies for pay-go purposes, cash balances will be slower to recover.
RAPID GROWTH LEADS TO HIGH DEBT BURDEN
The system was purchased from private ownership in 1995, which, in conjunction with the rapid growth experienced since that time, has kept debt levels relatively high. The fiscal 2013-2018 CIP totals $114 million for water and $175 million for wastewater improvements, a 16% reduction from the fiscal 2011-2016 CIP plan. Growth related projects account for 80% and 62% of the water and wastewater projects, respectively, with maintenance projects making up the remaining 20% and 38%.
The CIP will be funded from a variety of sources, including bonds, state loans, user rates, impact fees, and environmental gross receipts. A large percentage of the CIP funding is still to be determined. However, with the slowdown in the pace of development, the city may not undertake expansion projects as quickly as anticipated. Debt levels are high for the rating category at $1,489 per capita for fiscal 2012, compared to the 'A' median level of $521. Amortization is rapid but, with additional financing planned, debt levels are expected to remain elevated for the near-to-intermediate term.
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.
Applicable Criteria and Related Research:
--'Revenue-Supported Rating Criteria' (June 3, 2013);
--'U.S. Water and Sewer Revenue Bond Rating Criteria' (Aug. 3, 2012);
--'2013 Water and Sewer Medians' (Dec. 5, 2012);
--'2013 Sector Outlook: Water and Sewer' (Dec. 5, 2012).
Applicable Criteria and Related Research:
2013 Outlook: Water and Sewer Sector
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=695755
2013 Water and Sewer Medians
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=695756
U.S. Water and Sewer Revenue Bond Rating Criteria - Effective Aug. 10, 2011 to Aug. 3, 2012
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=647331
Additional Disclosure
Solicitation Status
http://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=795189
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