TEXT-Fitch affirms Arvada, Colo. water revs at 'AAA'
March 1 - Fitch Ratings affirms the following revenue bonds issued by the city of Arvada, CO (the city) at 'AAA': --$15.3 million water enterprise revenue refunding bonds, series 2009. The Rating Outlook is Stable. SECURITY The bonds are secured and payable from a first lien on the net revenues of the water system (the system). Pledged revenues include tap fees. KEY RATING DRIVERS STRONG FINANCIAL PROFILE: Fiscal 2011 audited financials show that the system's debt service coverage (DSC) has rebounded to a level consistent with Fitch's 'AAA' categorical rating median. Liquidity has remained especially strong over the past five fiscal years, with unrestricted cash balances consistently over 1,400 days cash on hand. LOW DEBT LEVELS: Key debt ratios are very low and debt amortization is very rapid with principal payout at 100% in 10 years. Debt levels are anticipated to remain low, as medium-term capital needs are expected to be met largely by pay-go financing. SOLID MANAGEMENT: Management has been proactive about gradually increasing rates to meet future operating expenditures and funding capital needs on a pay-go basis. STABLE LOCAL ECONOMY: The city's local economy is healthy and improving, characterized by median household income (MHI) at 128% of the national average and a decreasing unemployment rate that is slightly below that of the state and nation. RATING SENSITIVITY MAINTENANCE OF FINANCIAL METRICS: Expected draws on liquidity could leave less of a cushion to offset potential volatility in revenues and DSC, given the system's heavy revenue weighting in volumetric charges. While failure to maintain DSC at levels consistent with Fitch's 'AAA' median could put downward pressure on the rating, Fitch's expectation is that such a marked deterioration is unlikely to occur. CREDIT PROFILE STRONG, IMPROVING FINANCIAL PROFILE After experiencing some weakening in fiscal 2009, operating performance improved in subsequent years and the unaudited fiscal 2012 financials show debt service coverage back at pre-2009 levels. Over the same timeframe, the system's liquidity position has remained exemplary at over 1,400 days cash on hand, easily exceeding Fitch's 'AAA' rating category median of 420. Approximately 90% of the system's operating revenues from water sales are derived from water usage. Consistent with other systems heavily reliant on volume-based sales, operating revenues are subject to volatility depending on weather conditions. In fiscal 2009, a wet summer led to a reduction in operating revenues from water charges, and the housing downturn resulted in less new connections, and thus, fewer revenues generated from tap fees. As a result, DSC dropped below 1.2x. Weather patterns were more normal in the following years and revenues increased. Fiscal 2011 results included a 6% revenue gain, and the fiscal 2012 unaudited financials show that dry weather combined with a rebound in housing led to a 14% increase in water revenue over the previous year. This turnaround produced DSC of more than 4.0x in fiscal 2012. While currently extremely high, liquidity margins are expected to decrease by more than half in fiscal 2013 due to pay-go capital funding as the city participates in Denver Water's Moffat Collection System Project (Moffat project). Even with this planned reduction, the system's liquidity levels are projected to remain above Fitch's 'AAA' median. VERY LOW DEBT WITH PAY-GO CAPITAL FUNDING Total outstanding long-term debt per customer was a very low $504 for fiscal 2011 (down from $608 in fiscal 2009), and is decreasing as current debt amortizes. Given the rapid principal amortization of outstanding debt at 100% in 10 years and no new leverage planned, debt levels are expected to remain low. Capital needs for fiscal years 2013-2017 total about $69 million, with the vast majority of expenditures related to the system's participation in the Moffat project to meet long-term supply goals. The city's portion of the project costs are expected to total $47 million through the current capital improvement plan (CIP) period and $80 million overall. All CIP needs are expected to be funded from surplus revenues and cash balances that have been built up over the last few years for this purpose. PROACTIVE MANAGEMENT TEAM WITH RATE FLEXIBILITY Management has been very forward looking in terms of setting aside money for the Moffatt project, likely eliminating the need to finance via borrowing. The five-year financial model for fiscal 2013 through 2018 includes annual rate hikes of 3% to 4%. Nevertheless, at 0.6% of median household income (MHI), rates are below Fitch's affordability threshold of 1% and are some of the lowest rates in the state--providing significant rate flexibility over the near term. IMPROVING LOCAL ECONOMY Arvada benefits from its location within the Denver metropolitan area. The city's economic profile includes strong MHI at 128% of the national average and a decreasing unemployment rate of 7.3% in December 2012, which was slightly lower than that of the state (7.5%) and nation (7.6%). Located approximately 20 miles northwest of Denver, the system serves a population of approximately 108,000 within the city as well as certain outlying areas through three wholesale contracts. Raw water is derived from two sources: Denver Board of Water Commissioners' Ralston Reservoir through a perpetual contract, and water rights in both Ralston and Clear Creeks. Current supplies reportedly are sufficient to meet demands through mid-2030. 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 the 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', dated Dec. 5, 2012; --'2013 Outlook: Water and Sewer Sector', dated Dec. 5, 2012. Applicable Criteria and Related Research Revenue-Supported Rating Criteria U.S. Water and Sewer Revenue Bond Rating Criteria 2013 Water and Sewer Medians 2013 Outlook: Water and Sewer Sector
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