AUSTIN, Texas--(BUSINESS WIRE)--Fitch Ratings assigns the following rating to the city of Tucson, Arizona's (the city) bonds:
--Approximately $34.3 million water system (the system) revenue refunding bonds, series 2013A 'AA';
--Approximately $18.8 million water system revenue refunding bonds, federally taxable series 2013B 'AA'.
The bonds are scheduled to sell via negotiated sale the week of May 20. Bond proceeds will be used to refund certain outstanding bonds of the city for interest savings without extension of maturity and pay costs of issuance.
In addition, Fitch affirms the rating on the city's outstanding bonds as follows:
--$452 million in outstanding water system revenue bonds and obligations at 'AA'.
The Rating Outlook is Stable.
SECURITY
The bonds are payable from a pledge of and first lien on the net revenues of the system on parity with the outstanding water revenue bonds and obligations.
KEY RATING DRIVERS
ADEQUATE FINANCIAL METRICS: The financial profile of the city's water system has shown some improvement in the last three fiscal years, particularly in terms of liquidity. Although still below Fitch's category 'AA' rating median levels, liquidity is projected to gradually improve over the forecast period. Total DSC is projected to remain above 1.4x.
RISING DEBT PROFILE: Despite rapid amortization, sizeable debt plans will weaken the system's debt profile over the next five years, although system leveraging is expected to remain acceptable for the rating level.
SUFFICIENT WATER SUPPLIES: Extensive planning has ensured water supply is adequate to meet long-term needs.
AFFORDABLE RATES: System rates are affordable at 0.8% of median household income (MHI).
LOW AREA WEALTH LEVELS: Service area wealth levels are below average, but are offset in part by the diversity of the economy and relatively affordable cost of living.
RATING SENSITIVITIES
MAINTENANCE OF FINANCIAL PROFILE: Pressure on DSC or liquidity would likely lead to negative rating action given that margins are already relatively thin for the rating level.
INCREASED DEBT BURDEN: Increased debt beyond expected levels could pressure the rating given the already weak debt profile.
CREDIT PROFILE
ADEQUATE FINANCIAL PROFILE
Financial performance came under pressure in fiscal years 2008 and 2009 as a result of modest rate hikes that did not keep pace with rising operating costs and a steep decline in impact fee collections. Large outlays of working cash and debt issuance for capital projects also exerted pressure on the system. As a result, fiscal 2009 ended with just $2.5 million in cash on hand, or 11 days, down from 132 days in fiscal 2006.
In response, the city imposed rates hikes that averaged 8.6% annually from fiscal 2009 through 2013 to help ultimately boost coverage levels to 1.6 times (x) on a senior lien basis and 1.5x on an all-in basis in fiscal 2012. Fitch notes that the city has a policy of maintaining 1.75x senior-lien DSC on a cash basis, in accordance with the master indenture. Using this calculation method, senior lien DSC was 1.9x in fiscal 2012 and the city has consistently adhered to this policy.
Reserves, though still low for the rating level, also improved to 90 days cash on hand in fiscal 2011 and to 127 days cash on hand in fiscal 2012. An 8.3% rate increase is in effect for fiscal 2013 and annual rate hikes of 8.3% are projected for the following five fiscal years.
Given the annual declines in water consumption since fiscal 2008, the rate increases are forecast to just maintain DSC at similar levels through the forecast period. Fitch estimates reserves will gradually increase to over 200 days cash on hand by fiscal 2016 as the city plans to debt-finance a substantial portion of its capital plan.
INCREASING DEBT BURDEN
The debt load per customer continues to increase as the system implements its comprehensive capital improvement plan (CIP) to ensure ample water supply and treatment capacity for its service area. For fiscal years 2013 - 2017, the CIP totals $340 million, favorably a decrease from the $410 million CIP put forth in 2009. The city expects to issue debt for 58% of the CIP which will help to somewhat preserve working capital and liquidity. Outstanding debt per customer is projected to remain above Fitch's category 'AA' rating medians given anticipated future debt plans.
ADEQUATE WATER SUPPLY
The water system provides potable water to about 709,000 residents, or 85% of the population within the Tucson metropolitan area. Potable water supplies are derived from groundwater and renewable Colorado River water delivered via the Central Arizona Project (CAP).
Tucson's Clearwater Renewable Resource Facility (Clearwater) diverts all of the city's purchased CAP water to recharge basins and then recovers a blend of CAP and native groundwater for treatment and distribution.
Clearwater, which began operations in 2001, is a critical component of Tucson's future water supply plans. With completion of phase 2, which is under way, officials anticipate that the system will provide the vast majority of potable supplies, allowing the city to minimize its groundwater pumping. The city also maintains sizable recycled water distribution capabilities.
SERVICE AREA
Tucson, located in south central Arizona, is the second largest city in the state. The economy is anchored by military, government, higher education, medical, and tourism enterprises. The city's unemployment rate, measured at 7.3% in March 2013, ranked slightly above the county (6.8%), although below state (7.8%) and national (7.6%) levels.
City wealth levels are 25% - 30% lower than those of the state and nation, but Fitch believes the credit risk is largely offset by the diversity of the economy and relatively affordable cost of living. Furthermore, despite the low area wealth levels and recent housing market downturn, collections for the system remain satisfactory, with approximately 5% of accounts in delinquent status at any one time and less than 1.0% reaching the point of service shut-off.
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 12, 2012);
--'U.S. Water and Sewer Revenue Bond Rating Criteria' (Aug. 3, 2012);
--'2013 Water and Sewer Medians' (Dec. 5, 2012);
--'2013 Outlook: Water and Sewer Sector' (Dec. 5, 2012).
Applicable Criteria and Related Research
Revenue-Supported Rating Criteria
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=681015
U.S. Water and Sewer Revenue Bond Rating Criteria
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=684901
2013 Water and Sewer Medians
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=695756
2013 Outlook: Water and Sewer Sector
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=695755
Additional Disclosure
Solicitation Status
http://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=791241
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