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.
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
SOLID MANAGEMENT: Management has been proactive about gradually increasing rates
to meet future operating expenditures and funding capital needs on a pay-go
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
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.
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