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Mesa (City of) AZ Combined Utility Enterprise -- Moody's assigns Aa2 to City of Mesa, AZ's Utility System Revenue Bonds and Aa3 to Utility System Revenue Obligations

Rating Action: Moody's assigns Aa2 to City of Mesa, AZ's Utility System Revenue Bonds and Aa3 to Utility System Revenue Obligations

Global Credit Research - 21 Apr 2021New York, April 21, 2021

 -- Moody's Investors Service has assigned Aa2 ratings to the City of Mesa, AZ's $35.3 million Utility Systems Revenue Bonds, Series 2021 and $42.2 million Utility Systems Revenue Refunding Bonds, Series 2021.

Moody's also assigns an initial Aa3 rating to the city's $14.3 million Utility Systems Revenue Obligations, Series 2021.

Moody's affirms its Aa2 rating on the system's outstanding utility system revenue bonds. With the current offerings, the district will have $1.3 billion in Moody's-rated utility revenue bonds and $14.3 million in utility revenue obligations. The outlook is stable.

RATINGS RATIONALE The Aa2 rating reflects the system's healthy financial position, demonstrated in its strong debt service coverage and healthy liquidity, inclusive of a drawdown in liquidity for capital expenses in fiscal 2020.

The system's solid financial operations are in spite of sizeable transfers to the City of Mesa, Arizona's (Aa2 stable) general government.

Debt is moderate relative to the system's large size and local resident wealth and income levels are below average. Legal provisions supporting the bonds are satisfactory, including a 1.2 times rate covenant and additional bonds test and a springing debt service reserve fund that is engaged if coverage falls below 1.75 times.

The Aa3 rating reflects the subordinate lien status of the Series 2021 Obligations and the fundamental strengths and weaknesses incorporated into the system's priority lien bond rating.

RATING OUTLOOK The stable outlook reflects our expectation that the system will maintain strong liquidity and debt service coverage over the next two years due to management's demonstrated ability to balance operations expected reimbursement to the utility from bond proceeds, which will bolster liquidity.

 

FACTORS THAT COULD LEAD TO AN UPGRADE OF THE RATINGS- Sustained increase in debt service coverage- Reduction of debt burden

FACTORS THAT COULD LEAD TO A DOWNGRADE OF THE RATINGS- Sustained decline in system liquidity- Weakened debt service coverage

LEGAL SECURITY The system's utility revenue bonds are secured by a priority lien pledge of net system revenues of the City of Mesa's water, electrical, natural gas, wastewater and solid waste systems. The system's Obligations are secured by a pledge of net system revenues on a subordinate lien basis.

 Legal features are satisfactory, with a rate covenant of 1.2-times annual debt service and an additional bonds test of 1.2-times maximum annual debt service for the bonds. Bonds issued post-2002 are secured by a common debt service reserve fund, established at the standard lesser of test, but which springs only if net revenue fail to provide at least 1.75 times coverage in a given year. The reserve funding would be triggered if net revenue were below the 1.75 times threshold, but the reserve balance can subsequently be released if net revenue meet or exceed 1.75 times debt service in two consecutive years.

The Obligations are supported by similar 1.2 times rate covenant and additional bonds test, and a 1.75 times springing debt service reserve fund.

USE OF PROCEEDS The new money Series 2021 Obligations and Bonds will be used for various capital upgrades to the systems natural gas, water system, wastewater system and electric system.

The 2021 Refunding Bonds will refund portions of the system's Refunding Series 2011 Bonds.

PROFILE Mesa's combined utility system includes the city's retail water, wastewater, solid waste collection, natural gas and electric distribution enterprises. The systems provide service to residential, commercial and industrial customers in Mesa, Arizona and portions of the surrounding area in central Arizona (Aa1 stable).

 

METHODOLOGY The principal methodology used in these ratings was US Municipal Utility Revenue Debt published in October 2017 and available at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBM_1095545.

Alternatively, please see the Rating Methodologies page on www.moodys.com for a copy of this methodology.

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