Cottonwood water revenue bonds drop to BBB+ rating
Standard & Poor's Ratings Services has lowered its long-term rating on the City of Cottonwood's Municipal Property Corporation's water revenue bonds, from an "A" to a "BBB+" rating, reflecting the city's recent trend of insufficient annual debt service coverage from net revenues while relying on cash reserves to make sufficient coverage. The outlook is negative.
The rating and outlook reflect S&P's view of the water systems:
Inability to meet debt service requirements using net available revenues, which has led to the system using cash reserves to sufficiently cover debt service payments;
Infrequent rate increases to sufficiently support annual debt service payments and future rate increases, which, while projected, have not been approved; Extremely high debt to plant ratios, with the city potentially adding additional debt to support its moderate capital plan; and
Affordable rates in comparison to the city's underlying economic characteristics.
S&P feels the system's financial performance has been weakened due to rates being insufficient to cover operating expenditures and consequently not satisfying the system's rate covenant on the bonds.
The City of Cottonwood, pending the City Council's consideration of proposed rates is expecting to reach 1.35 percent coverage required by the bonds in fiscal 2014 and stay between 1.35 and 1.40 percent for the next five years. To reach this goal the city will need to make one substantial increase in utility rates in fiscal year 2014 and then make smaller annual increases to maintain coverage.
In the almost eight years that the City has owned the water system a rate increase has occurred once in 2010. During the recession, the City Council made every effort to minimize utility expenses for our customers and consequently failed to keep pace with the bond requirement.
The negative outlook reflects S&P's view of the city's historical inability to meet debt service requirements from net available revenues and their opinion is that this trend could continue, if the city does not make timely budget adjustments to meet at least sufficient coverage. If the city still fails to take the necessary budgetary action, whether through the more likely appropriate revenue enhancements or expenditure reductions, to meet its coverage requirements, S&P could again lower the rating during the current two-year outlook.
You can view this report entire report at: http://www.cottonwoodaz.gov/finance/Cottonwood%20MPC%20S&P%20Downgrade%202013.pdf