Fitch Affirms Chandler, AZ’s Water & Sewer Bonds at ‘AA+’; Outlook Stable
May 12, 2016 | By Business Wire News
AUSTIN, Texas
Fitch Ratings affirms its ‘AA+’ rating on the following bonds issued by the city of Chandler, Arizona (the city):
–Approximately $24.9 million water and sewer revenue bonds.
The Rating Outlook is Stable.
SECURITY
Revenue bonds are secured by the combined net revenues of the water and wastewater system (the system).
KEY RATING DRIVERS
STABLE FINANCIAL PROFILE: The system’s all-in debt service coverage (DSC), inclusive of general obligation (GO) and excise tax bonds supported by system revenues, has been at or above 1.7x since 2011. Although this falls below Fitch’s 2015 ‘AA’ median (2.0x), senior-lien coverage and liquidity are both very strong, thereby serving to offset some of the lower all-in DSC.
NO ADDITIONAL REVENUE BONDS: The city expects to finance future system capital needs from excise tax bonds. Revenue bonds, which account for only 7% of outstanding system-related debt, are the only bonds with a legal claim on system revenues. Final maturity of the revenue bonds is in 2020.
AFFORDABLE RATES: At just $47 per month, or 0.8% of median household income (MHI), the system’s combined monthly bill is low. Fitch considers combined rates below 2% to be affordable.
AMPLE SYSTEM CAPACITY: Water supplies and wastewater system capacity are adequate to meet current and medium-term needs given the relatively built-out nature of the city.
ABOVE-AVERAGE ECONOMIC METRICS: A highly educated and skilled work force contributes to the city’s low unemployment and attractive growth prospects; income and wealth trends are well above average.
RATING SENSITIVITIES
LOWER OVERALL MARGINS: Declines in the City of Chandler’s all-in debt service coverage of its water and sewer revenue bonds could result in negative rating pressure. However, this is seen as very unlikely by Fitch given historic performance of the system and the short maturity profile of the bonds.
CREDIT PROFILE
The system provides retail water and sewer service to a population of approximately 245,000. Water supplies are derived from surface water via the Salt River Project, the Central Arizona Project, and 29 groundwater production wells. Chandler is located in the southeastern part of the Phoenix metropolitan area.
STABLE FINANCIAL PERFORMANCE
The system’s financial performance has been stable the past several years. The senior lien bonds, which are secured by net revenues of the water and sewer system on a priority basis, have demonstrated strong performance since 2011, with DSC ranging from 3.9x-9.5x. However, the city now primarily uses excise tax and GO bonds (both rated ‘AAA’) to fund water and wastewater system improvements. These bonds are legally secured by tax revenue, but are paid from net system revenues. Inclusive of debt service associated with the GO and excise tax bonds, the system’s all-in DSC has been stable yet somewhat below Fitch’s ‘AA’ median of 2.0x, with all-in debt DSC ranging from 1.7x-2.0x since 2011.
Liquidity, measured by the number of days unrestricted cash can cover operational expenses (days cash), finished fiscal 2015 at 707 days. This level represents a five-year high and is considered to be very strong by Fitch (Fitch’s ‘AA’ median for days cash is 485). Liquidity has been sound over the past several years and is expected to remain so going forward as management expects to preserve its cash balances by funding much of its capital improvement plan (CIP) with excise tax bonds and system development fees, as described below.
Management’s forecasts, which have historically trended on the conservative side, demonstrate new CIP borrowing to result in all-in DSC dropping to just above 1.0x by fiscal 2019, a level considered low by Fitch. However, Fitch believes actual all-in DSC will exceed management’s forecast and be more in-line with historic norms.
MODERATE DEBT PROFILE, CAPITAL IMPROVEMENT PLAN
Debt per customer, again inclusive of the excise tax and GO bonds associated with the system, finished fiscal 2015 at $2,133, which aligns with Fitch’s ‘AA’ median of $2,050. Debt amortization for all outstanding debt is quick with 56% and 100% currently projected to mature in 10 and 20 years, respectively.
The system’s CIP includes approximately $313 million in water and wastewater-related projects through 2020. At about $135 million, the largest project is expansion of the Ocotillo Water Reclamation Facility to meet anticipated city growth. The remaining projects associated with the CIP fall mostly under standard system improvements. Funding for the CIP is split primarily between new excise tax bonds (25% of total) and system development fees (70%), with the remaining expected to be paid on a pay-go basis.
MATURE SERVICE AREA; SOME CONCENTRATION
Chandler’s population has more than doubled since 1990, reflecting regional growth and the city’s success in attracting and retaining technology, manufacturing, advanced business and health services. Anchored by Intel Corporation (rated ‘A+’/Outlook Stable), top employers represent technology, manufacturing, financial, health care, and telecommunication interests.
Chandler’s unemployment rate of 3.8% as of March 2016 remained below regional, state and national averages. The city’s median household income also trends well above state and national averages. New business entrants and expansions continue to grow the city’s employment base. Chandler’s educated work force and strong transportation infrastructure position the city for ongoing growth.
Mostly driven by Intel’s large presence as an employer (including two large campuses in the city) and as a consumer of water and wastewater services, customer concentration is high. The system’s top 10 customers represent 20% of its total operational revenues; Intel alone represents 14% of total revenues and 9% of the city’s total employment. Intel is also a large contributor to system infrastructure upgrades associated with its own growth. While it has made substantial investment in its Chandler operations in recent years, the company recently announced in April 2016 that it will undertake layoffs across its operations, including its Chandler facilities. Fitch will continue to monitor the potential effect the Intel layoffs could have on the system’s financial profile.
Additional information is available at ‘www.fitchratings.com‘.
Applicable Criteria
Revenue-Supported Rating Criteria (pub. 16 Jun 2014)
https://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=750012
U.S. Water and Sewer Revenue Bond Rating Criteria (pub. 03 Sep 2015)
https://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=869223
Additional Disclosures
Dodd-Frank Rating Information Disclosure Form
https://www.fitchratings.com/creditdesk/press_releases/content/ridf_frame.cfm?pr_id=1004376
Solicitation Status
https://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=1004376
Endorsement Policy
https://www.fitchratings.com/jsp/creditdesk/PolicyRegulation.faces?context=2&detail=31
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