Feb 11 - Fitch Ratings affirms the following Albuquerque, NM bonds at 'AA':
--$905,000 in outstanding refuse removal and disposal revenue bonds, series
The Rating Outlook is Stable.
The bonds are secured by the net revenues of the city's refuse and disposal
system (the system). Revenues include all income and revenues derived by the
city from the operation of the system.
KEY RATING DRIVERS
EXCLUSIVE PROVIDER OF SERVICE: The city is the exclusive provider of collection
and disposal service for all residential and commercial refuse in the city,
excluding construction and demolition debris, resulting in greater stability for
its solid waste operating revenues.
RATE INCREASE ENABLES PAY-GO FUNDING: The recent alignment of rates with the
system's cost of service is expected to maintain solid debt service coverage
levels and enable it to meet its most pressing capital need - equipment
AMPLE LANDFILL CAPACITY: The city's landfill capacity is ample, estimated at 66
years, considerably higher than previous calculations.
COMPETITIVE RATES: Residential and commercial rates remain competitive and will
be reviewed annually on a cost of service basis which Fitch considers a credit
COMPREHENSIVE CAPITAL PLAN: The adoption of an integrated waste management plan
includes several medium to large capital projects. However, current debt plans
are manageable as most projects will be funded with current resources.
BROAD ECONOMY RECOVERING SLOWLY: The city's economic base is broad and has been
aided by its development as a high-tech hub. Recent unemployment trends remain
sluggish but should improve in the medium term.
MATERIAL WEAKENING IN FINANCES: A material change in the system's financial
performance could affect the current rating level.
Large Customer Base and Ample Landfill Capacity
Albuquerque's solid waste system is wholly owned and operated by the city,
providing collection and disposal services for all residential and commercial
customers within city limits. The city bills residents a monthly fee (the third
lowest in the region) on the water and sewer bill via an agreement with the
Albuquerque Bernalillo County Water Utility Authority. Commercial customers are
also billed monthly based on collection frequency, and all waste is disposed at
the city's only operating landfill, Cerro Colorado. Residential and commercial
waste represented 35% and 42% of total system tonnage, respectively, in fiscal
2012, while solid waste disposed by private haulers comprised 12%. The city also
operates three convenience centers for customer drop-offs. Fitch notes the
landfill's ample capacity through 2077 as a credit positive.
Solid Financial Performance
System financial operations are strong, reflected in 2x or greater debt service
coverage, a five-year average working capital balance equal to 119 days, and
recently improved operating margins. The city maintains a steady source of
revenue control by collecting and disposing of all residential and commercial
waste within the city. In fiscal 2012, residential and commercial waste
generated 95% of operating revenues - each contributing about 47%. Remaining
revenues consisted of privately hauled waste (3%) and convenience center waste
Tonnage Trends Stalled by Recession
Typical solid revenue growth stalled in fiscal years 2009 - 2010 due to the
recessionary impact on tonnage which resulted in a modest 0.9% revenue gain in
fiscal 2009 and a 1.2% decline in fiscal 2010. In response, previous high rates
of expenditure growth were reversed in fiscal years 2009 and 2010, which posted
1% and 5% declines, respectively. Through mid-fiscal 2013, tonnage trends remain
Rate Realignment Enables Pay-Go Spending
Based on a cost of service study, the city adopted average residential and
commercial rate increases of 20% and 38%, respectively, effective Nov. 1, 2010.
As a result, all-in debt service coverage increased to a strong 3.74x in fiscal
2011. The new rate structure is projected to maintain debt service coverage
above 3.0x through the final maturity of the outstanding bonds in July 2013. The
rate increase is enabling the system to address its most pressing capital need -
equipment replacement - which management plans to boost to about $7 million per
year. Along with other capital needs, the city's capital plan includes $20
million in pay-go spending in fiscal 2013, followed by $10 million in annual
pay-go funding through fiscal 2022.
Integrated Waste Management Plan Implementation
The city's goal is to update its cost of service study annually and present its
findings to the city council for its consideration. The annual update is one
recommendation of the recently completed integrated waste management plan. Other
recommendations include development of a new materials recovery facility (MRF),
implementation of a variable rate structure and cart-based residential recycling
collection, plus construction of a new transfer station. The MRF is under
construction as part of a public-private partnership that obligates a private
operator to design, construct, and operate the facility. In turn, the city will
share in the revenue from the sale of the city's recyclables processed by the
facility. The transfer station, estimated at $25 million, is the only
recommendation to require debt financing. The timing of the project has not yet
State's Population Center
Albuquerque is the largest city in the state, accounting for about one-quarter
of the population. Driven by a notable 22% population gain since the 2000
census, building permits soared before contracting considerably during the
economic recession. However, because the area did not experience rapid home
price appreciation, the local housing market has remained fairly stable through
the economic slowdown, posting only modest reappraisal losses in residential
properties in fiscal years 2011 - 2013.
Employment Base Recovering Slowly
Kirtland Air Force Base, Sandia National Labs, and Intel are among the area's
largest employers, helping transform it into a hub for electronics, aviation and
aerospace and defense-related research and development. Employment trends in the
Albuquerque metropolitan statistical area are stabilizing after posting annual
losses since 2008. A modest increase in employment for the 12 months ending Dec.
2012 helped lower the unemployment rate to 6.7%, on par with the state but still
well below the national average. Numerous large planned projects in the service
sector should improve employment trends over the medium term.
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 informed by information from
CreditScope, University Financial Associates, S&P/Case Shiller Home Price Index,
IHS Global Insight, Zillow.com, and National Association of Realtors.
Applicable Criteria and Related Research:
--'Rating Guidelines For Solid Waste Revenue Bonds' (June 22, 2012);
--'Revenue Supported Rating Criteria' (June 12, 2012).
Applicable Criteria and Related Research:
Rating Guidelines for Solid Waste Revenue Bonds
Revenue-Supported Rating Criteria