Fitch Affirms Peoria, AZ Water Revs at 'AA'; Outlook Stable
OREANDA-NEWS. Fitch Ratings affirms the 'AA' rating on the following city of Peoria, AZ bonds (the city):
--$23.3 million water and wastewater system revenue refunds bonds.
The Rating Outlook is Stable.
The bonds are secured by a first lien on the net revenues of the city's water and wastewater system (the system), including impact fees.
KEY RATING DRIVERS
REBOUND TO COVERAGE PROJECTED: Debt service coverage (DSC) declined to 1.8x in fiscal 2015 due to weather related water consumption declines and unplanned increases in operating expenses, but is forecast to rebound to 2x by fiscal 2017 as consumption normalizes and growth continues. Liquidity was also lower, in 2015, but should remain healthy at about one year of cash on hand, on par with 'AA' medians.
EXPANDING CAPITAL PLAN: The system has ample water supply and sufficient treatment capacity. However, the city is seeing an uptick in development activity and will expand both water and wastewater treatment capacity in the next 10 years resulting in increased capital spending.
AVAILABLE DEBT CAPACITY: Debt ratios are low, allowing for future debt capacity for planned debt. The system's debt profile has been on the descent due to refundings and rapid debt amortization providing additional capacity to accommodate planned debt issuances in the coming five years to support capital expansion.
AFFORDABLE USER RATES: User charges remain very affordable relative to Fitch's affordability threshold benchmark, due to above-average wealth levels, providing ample flexibility in terms of future rate adjustments. Rates remain affordable, despite modest rate hikes planned through fiscal 2020.
SOUND ECONOMIC PROFILE: Wealth levels are above average, exceeding the state and national median household income and area unemployment is also below state and national averages.
DETERIORATION OF FINANCIAL MARGINS: Although unlikely, a material weakening of financial metrics driven by lower than expected growth could negatively impact the rating of the Peoria, AZ water and wastewater system rating.
Part of the Phoenix metropolitan area, Peoria (rated 'AA+'/Outlook Stable) has an estimated population of approximately 166,000, a gain of more than 50% from the 2000 census. The system is the primary municipal and industrial utility service provider within the city limits. The system provides service to approximately 51,000 and 54,000 water and wastewater customers, respectively. The customer base is comprised primarily of residential accounts, which makes up approximately 95% of connections and the majority of system revenues.
Water for the system is supplied by city owned wells and surface water allocations from the Central Arizona Project and the Salt River Project. Current demand represents about 25% of available water treatment capacity. Wastewater is treated at three city owned and operated wastewater treatment plants. Wastewater treatment capacity exceeded demand by 37% in fiscal 2015.
COVERAGE SLIPS IN FISCAL 2015
DSC, which had been on an upward trend, slipped to 1.8x and 1.4x excluding impact fees in fiscal 2015. This is after DSC had been averaging greater than 2x since 2012. The decline is the result of a 6% drop in water consumption due to above average rainfall and unplanned operating expenses. Fiscal 2016 revenues are rebounding, up $7.3 million over fiscal 2015 due to adopted rate hikes, increased water consumption, acquisition of a private water system and increases in connections.
Management forecasts, which appear reasonable, show continuation of coverage at or above 2x starting in fiscal 2017 through the fiscal 2021 forecast period. Driving the higher DSC are anticipated rate increases that range from about 1% to 3% annually and improved impact fee projections due to returning growth.
Liquidity balances, which include some impact fee revenue, are stout at over $62 million or the equivalent of 649 days of cash on hand (DCOH). DCOH from unrestricted cash is still a very strong 476 days and aligns well with 'AA' median of 485 days. Cash balances, while very strong, are down of the last two years due to cash funding of capital. The city plans to cash fund more than half of its capital improvement plan (CIP), which will diminish cash balances only slightly.
AMPLE RATE FLEXIBILITY
The city has completed two rate studies since 2011. Rate study recommendations, which the city has adopted, have been to change the overall structure of rates to align rates with usage patterns and promote conservation. The most recent study in 2015 resulted in increases to the base rates for both water and sewer systems and a decrease in the volumetric rates on the sewer side. The city adopted a two year rate plan for fiscal years 2016 and 2017 which resulted in a 1.7% water and a 3.4% sewer rate increase on the average residential bill. Modest annual rate adjustments from 1% to 3% are anticipated to continue through fiscal 2020.
Currently, the average monthly combined residential bill (based on 7,500 gallons of water consumption) totals $54 or 1% of median household income (MHI), well below Fitch's affordability threshold of 2% of MHI. Rates are structured to capture over 50% of combined water and wastewater revenues from fixed rates. Fitch views favorably the city's rate structure, which focuses on a larger fixed rate component and alignment with usage patterns.
FAVORABLE DEBT PROFILE
Peoria officials maintain a 10-year capital plan for the utility; this type of long-term planning has been noted historically by Fitch as a positive rating consideration. The current plan totals $278 million, generally on par with the 2014 plan. Included in the CIP are projects to expand water and sewer treatment capacity. Renewed growth has returned projects to the 10 year CIP that had been deferred. Purchases of additional CAP water make up the largest percentage of the plan through 2020.
Debt will be used to finance 62% of the next five years of the plan. The city has about $105 million in existing bond and loan proceeds and plans to issue another $66.9 million between 2017 and 2020. All the debt will be issued in the form of low interest loans though the state's water infrastructure finance authority.
Debt ratios compare favorably to 'AA' medians. System debt to net plant is strong at 17%, compared to the 'AA' median of 47% and debt per customer of $971 is well below the 'AA' median of $2,050. Including the next five years of planned issuances, projected debt to customer ratio grows to just $1,227, indicating ample capacity for the system's future debt.
ABOVE AVERAGE WEALTH, RETURNING GROWTH
Growth has started to pick up in the area following the housing market downturn which significantly impacted Phoenix and surrounding communities. Significant growth potential remains in the city, with just about 50% of the city developed and a projected build out population nearly three times the current population. Permits are up 18% from fiscal 2015 and for fiscal 2016 to date the city has issued over 1,100 permits, or 82% of what was planned for the year. The city anticipates issuing an additional 1,800 single family residential permits annually through fiscal 2021.
Local unemployment rates continue to trend well below regional, state and national averages. The city's February 2016 rate of 4.2% is below the metro (4.6%), state (5.2%) and national (5.1%) averages. In addition, local wealth levels are 35% and 24% above the state and national averages, respectively.