During the course of routine surveillance, Fitch Ratings affirms the following Yuma Municipal Property Corporation, AZ (the corporation) rating:
--$120.1 million in outstanding senior lien utility system revenue bonds, series 2007 at 'AA-'.
The Rating Outlook is revised to Negative from Stable.
RATING RATIONALE:
--The change in Outlook to Negative reflects a weakening in debt service coverage (DSC) beyond previous expectations.
--Debt levels are high for the rating level but are somewhat offset by faster than average amortization and limited expected borrowing plans.
--Coverage has declined in recent years from historical highs as a result of increased debt service costs, but liquidity remains strong.
--Rates are slightly higher than surrounding communities but retain a modest amount of flexibility when compared to median household income.
--While unemployment remains high and wealth levels are below the state and national averages, the local economy shows promising signs of growth with planned expansion of military facilities announced in 2010.
WHAT COULD TRIGGER A DOWNGRADE?
--Failure to improve DSC to be more commensurate with the rating level.
--Changes to the city's wastewater permit (renewal expected at the end of 2012) leading to significant near-term capital needs.
SECURITY:
The bonds are special, limited revenue obligations of the corporation, payable solely from purchase payments made by the city of Yuma, Arizona (the city) to the corporation. The purchase payments made by the city are payable solely from and secured by a senior lien pledge of the net revenues of the city's water and wastewater system (the system).
CREDIT SUMMARY:
The system is the primary municipal and industrial utility service provider in the area, serving approximately 28,000 and 23,000 water and sewer customers, respectively, on a retail basis. The city's primary water source is the Colorado River, which is provided through allocations from the United States Bureau of Reclamation (USBR). The USBR allocation plus additional purchased water rights provides the city with 65,000 acre feet of water a year, sufficient to meet demands for the foreseeable future. Water is treated at two city-owned treatment plants, which have ample room for potential growth. Wastewater is treated at three city-owned wastewater treatment plants, which also have a good deal of excess capacity.
DSC declined to 1.3 times (x) in fiscal 2010 from a high of 3.5x in fiscal 2006. This decline was largely expected with the increase in debt service costs associated with the series 2007 bonds. However, previous forecasts had expected slightly better results in the 1.4x-1.7x range. Fitch's concern regarding the erosion between projected and actual DSC is heightened by the minimal margin of DSC provided from recurring revenues. For fiscal 2010, DSC without one-time connection fee revenues was just 1.0x. Improvement in DSC, both with and without consideration of connection fee revenues, will be critical in maintaining the current rating level.
Despite these concerns, Fitch notes that the system maintains sufficient operating flexibility. For fiscal 2010, liquidity balances were sizeable, including nearly 600 days cash and over 560 days of working capital. In addition, management has demonstrated a history of raising rates to enhance financial performance, including passing significant double-digit rate hikes in fiscals 2007 and 2008 to support the series 2007 bonds; additional 5% annual sewer increases were also enacted for fiscals 2009-2011. Even with these increases, rates remain affordable at 1.8% of median household income.
The city just completed an expansion to its Agua Viva treatment plant, which increased the system's water treatment capacity by over 50%. The system's current five-year capital plan totals a manageable $81 million, with nearly 90% of funding derived from system operations. As a result of the 2007 debt issuance, the system's debt profile is elevated. But given the system's relatively quick amortization of debt (88% of principal is retired in 10 years) and limited future borrowing, the debt profile should improve. Having said this, the system's wastewater discharge permit is up for renewal in December 2012, and there is a possibility that additional treatment requirements may be included in the permit renewal which would effectively reduce the overall wastewater treatment capacity. If this occurs, capital costs to expand treatment capacity could be dramatic and likely would apply downward pressure to the rating.
Yuma is located in southwestern Arizona at the confluence of the Colorado and Gila Rivers. Established in 1854, the city serves as the county seat for Yuma County. The current population estimate is roughly 93,000, up more than 20% from 77,515 reported for the 2000 census. The principal economic activities in Yuma are agriculture, government, light industry and tourism. The area boasts two major military bases - the U.S. Marine Corps Air Station and the U.S. Army Yuma Proving Ground. The Marine Air Station was recently selected to support the Joint Striker Fighter. This designation promises to enhance the city's growth in the near future. The desirable climate has fostered a significant agricultural base and attracts tourists from both the U.S. and Mexico. Local unemployment rates historically have been significantly higher than state and national averages, but these figures have been inflated by the large number of seasonal agricultural workers in the area.
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', dated Oct. 8, 2010;
--'Water and Sewer Revenue Bond Rating Guidelines', dated Aug. 6, 2008.
--'2011 Water and Wastewater Medians', dated Jan. 18, 2011.
--'2011 Outlook: Water and Wastewater Sector', dated Jan. 18, 2011.
For information on Build America Bonds, visit 'www.fitchratings.com/BABs'.
Applicable Criteria and Related Research:
Revenue-Supported Rating Criteria
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=637130
Water and Sewer Revenue Bond Rating Guidelines
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=395918
2011 Water and Wastewater Medians
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=593285
2011 Outlook: Water and Wastewater Sector
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=593286
ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: HTTP://FITCHRATINGS.COM/UNDERSTANDINGCREDITRATINGS. IN ADDITION, RATING DEFINITIONS AND THE TERMS OF USE OF SUCH RATINGS ARE AVAILABLE ON THE AGENCY'S PUBLIC WEBSITE 'WWW.FITCHRATINGS.COM'. PUBLISHED RATINGS, CRITERIA AND METHODOLOGIES ARE AVAILABLE FROM THIS SITE AT ALL TIMES. FITCH'S CODE OF CONDUCT, CONFIDENTIALITY, CONFLICTS OF INTEREST, AFFILIATE FIREWALL, COMPLIANCE AND OTHER RELEVANT POLICIES AND PROCEDURES ARE ALSO AVAILABLE FROM THE 'CODE OF CONDUCT' SECTION OF THIS SITE.
Contacts:
Fitch Ratings
Primary Analyst
Teri Wenck, CPA, +1-512-215-3742
Associate
Director
Fitch, Inc.
111 Congress Avenue
Suite 2010
Austin,
TX 78701
or
Secondary Analyst
Gabriela Gutierrez,
+1-512-215-3731
Director
or
Committee Chairperson
Doug
Scott, +1-512-215-3725
Managing Director
or
Media
Relations:
Cindy Stoller, +1-212-908-0526
Email: cindy.stoller@fitchratings.com