Fitch Ratings takes the following rating action on the Gilbert, Arizona Water Resource Municipal Property Corporation (the corporation) bonds as part of its continuous surveillance effort:
--$119 million in outstanding water development impact fee and subordinate lien water utility revenue bonds, series 2007 upgraded to 'AA-' from 'A+'.
The Rating Outlook is Stable.
SECURITY
The bonds are payable from lease payments from the Town of Gilbert, AZ (the town) to the corporation. The lease payments are secured by a senior pledge of the revenues from the collection of the water system development fees (SDFs) and by a subordinate lien and pledge of revenues derived from the operation of the town's water system.
KEY RATING DRIVERS
Healthy Financial Metrics: The town's finances are characterized by a trend of strong combined debt service coverage and robust liquidity levels, which register at over two years of days cash on hand. This strong financial performance supports the rating upgrade.
Declining Development Fees: SDFs (senior pledge) have seen significant contraction in recent years due to the collapse of the housing market, but system reserves and net revenues provide more than sufficient resources to pay combined debt payments while still generating solid surplus cash flows.
Ample Capacity and Supply: Recent system expansions provide for ample capacity to meet demand. Water supplies are provided from both surface and ground water sources and are sufficient to meet supply needs for the intermediate future.
Additional Rate Flexibility: User rates are very affordable, registering at less than half of Fitch's affordability threshold of 1% of median household income (MHI).
Declining Debt Levels: Debt levels declined by 10% in one year as a result of the town proactively paying down principal on the bonds. As a result and because of no immediate plans to issue additional bonds, debt levels which are currently above average are expected to fall below other comparably rated credits over the next five years.
Sound Economy: The town's economy has remained healthy despite the economic weakness affecting the region and nation. Wealth levels are well above average, registering 50% higher than state and national levels. Unemployment in the area has remained very low as well.
CREDIT PROFILE
The rating upgrade reflects the system's continued strong financial performance, tremendous rate flexibility and declining debt levels. Debt service coverage on all debt from net system revenues was 2.2 times (x), with an operating margin of 47% for fiscal 2010. While management is projecting total debt service coverage to tighten somewhat to the 1.5x-1.7x range through fiscal 2015, coverage should remain adequate. Of the $146.2 million water SDF bonds issued in 2007, $119 million remains outstanding with management paying down an additional $5.3 million and $8.8 million on Oct. 1 of 2010 and 2011, respectively. Debt levels for fiscal 2010 are somewhat high at $2,201 per customer, when compared to the 'AA' category median of $1,502. However, taking into account the prepayment of principal and lack of future borrowing plans, debt levels are projected to be below the 'AA' category median within five years.
Located in the Phoenix metropolitan area, Gilbert witnessed dramatic growth over the past 15-20 years, with the population climbing from less than 30,000 in 1990 to more than 208,000 currently. It also witnessed an equally dramatic decline in the residential construction sector over the past several years as the housing collapse occurred. Evidence of the housing weakness is provided by the trend in water SDF revenue collections over the last several years. After peaking at 111% of operating revenues in fiscal 2006, SDF revenues have declined to less than 17% of operating revenues for unaudited fiscal 2011. The system has additional SDFs assist in paying bonds if SDF revenues decline in any given year and if system net revenues were insufficient to make bond payments.
System liquidity is robust and equaled over 800 days of cash on hand for fiscal 2010, well over the 'AA' category median. System liquidity is aided by repair and replacement funds established with the previous issuance of utility system revenue bonds. Town officials report that for unaudited fiscal 2011, these monies remain robust at over $36 million.
The system implemented three years of moderate rate increases for fiscals 2007-2009. However, user rates still retain ample rate flexibility and currently amount to just 0.4% of MHI. Fitch believes the significant rate affordability, combined with system reserve levels, provide more than sufficient financial flexibility.
The 2007 bond sale financed expansion to the system's water treatment facilities and other infrastructure improvements, with the expansion providing sufficient capacity for at least the near term. The current five-year capital improvement plan for the system is manageable at $94 million or $1,742 per customer. The system provides retail service to over 71,000 connections, the majority of those being residential customers. The majority of water supplies are obtained from renewable surface water sources, which include the Central Arizona Project and the Salt River Project; the system also utilizes ground water and reclaimed water sources.
Gilbert is located in the southeastern portion of the greater Phoenix area. The area has transitioned from an agricultural to suburban economy with a strong commercial and industrial presence. The town's economy has faired far better than some of its neighboring communities through the current economic cycle. The town's population is relatively young and highly educated. Unemployment levels at June 2011 were 4.9%, far below the state and national averages of over 9%. Wealth levels in the area are also more than 50% higher than state and national averages.
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 Fitch's Revenue-Supported Rating Criteria, this action was additionally informed by information from Creditscope.
Applicable Criteria and Related Research:
--'Revenue-Supported Rating Criteria', dated June 20, 2011;
--'Water and Sewer Revenue Bond Rating Guidelines', dated Aug. 10, 2011;
--'2011 Water and Wastewater Medians', dated Jan. 18, 2011;
--'2011 Outlook: Water and Wastewater Sector', dated Jan. 18, 2011.
Applicable Criteria and Related Research:
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
Revenue-Supported Rating Criteria
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=637130
U.S. Water and Sewer Revenue Bond Rating Criteria
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=647331
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