TEXT-Fitch affirms Pima Cty Metro Water, Ariz. revs at 'AA-'

Tue Nov 13, 2012 2:08pm EST

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Nov 13 () - Fitch affirms the ratings on the following revenue 
bonds of the Pima County Metropolitan Domestic Water Improvement District (the 
district):

--Approximately $25.6 million in outstanding water revenue bonds at 'AA-';

--Approximately $12.7 million outstanding water revenue refunding subordinate 
lien bonds at 'A+'.

The Rating Outlook is Stable.

SECURITY

The bonds are secured by a first lien on and pledge of the net revenues of the 
district's water system. The subordinate lien bonds are payable from and secured
by the net revenues of the district's water system after payment of all amounts 
required by the senior lien bond resolution

KEY RATING DRIVERS

ADEQUATE FINANCIAL PROFILE:  Despite continued strong operating margins, 
coverage levels have narrowed due to increased debt levels and are now 
marginally adequate at the current rating level. 

AMPLE WATER SUPPLY: Water supplies are sufficient to meet long-term demand in 
the service area; however the utilization of Central Arizona Project water 
supply will be accompanied by additional capital needs.

ELEVATED DEBT BURDEN: Debt ratios are high for the rating category due to 
initial acquisitions costs; rapid debt amortization somewhat offset the 
district's high debt load.  

ABOVE-AVERAGE RATES: Rates are high relative to median household income levels 
(MHI), which may limit future rate flexibility. 

WHAT COULD TRIGGER A RATING ACTION

DETERIORATION OF FINANCIAL POSITION: The sufficiency and timeliness of future 
rate increases is a key consideration to maintaining the system's current 
financial profile and rating.

CREDIT PROFILE

SOUND FINANCIAL METRICS 

Financial performance has been sound, with senior lien annual debt service (ADS)
coverage levels at 2.1 times (x) and all-in coverage of 1.6x in fiscal 2011. 
Unaudited results for fiscal 2012 show senior lien ADS coverage at 1.6x and 
all-in coverage of 1.3x. The weakening of coverage is due to continued decline 
in water consumption, contributing to a 5.9% or $1 million decline in operating 
revenue, combined with an increase in debt service costs of more than $920,000. 
Fiscal 2012 all-in coverage is below the 'AA' category median of 1.9x.  

Fiscal 2012 unaudited results show improvement in the district's cash position 
with cash balances over $4 million, equating to over 270 DCOH. Given modest 
anticipated use of pay-go for district capital projects, Fitch expects reserves 
to remain at comparable, if not slightly higher levels over the next five years.


PARTNERING TO ACCESS CENTRAL ARIZONA PROJECT (CAP) WATER

The district currently relies on groundwater resources, but the water table is 
declining, necessitating treatment and use of the district's CAP water for 
consumptive purposes. The district is looking to partner with another other 
local supplier to construct a CAP distribution/treatment facility, though 
implementation has been delayed as a result of the decline in growth and reduced
water consumption.   

A $3340 million debt issuance would be needed to finance the district's portion 
of the CAP facility costs, though the project could get further delayed if water
consumption and revenues do not rebound. Without the $33 million debt issuance 
for the CAP project, capital needs are $6 million through fiscal 2015 as the 
district is holding off on most capital projects due to the decline in area 
development. Most of the capital funding is provided from the previously issued 
bonds and state revolving loan proceeds. 

GROWING DEBT BURDEN

District leverage ratios are high due to prior acquisition of several 
neighboring systems and are expected to remain so given the current and possible
future debt issuance plans. However debt amortization is rapid with over 90% of 
all debt being paid off in 20 years.  

DECLINING RATE FLEXIBILITY

The average monthly residential water bill is currently above Fitch's 
affordability threshold at 1.1% of MHI (assuming usage of 10,000 gallons per 
month), and annual rate increases ranging from 3% to 8% are currently being 
forecast. Fitch will closely monitor what - if any - impact the CAP water 
project will have on rate affordability and the district's financial metrics. 

The district enacted an RTA fee in June 2009 to pay the costs of relocating 
water lines in the right-of-way of road projects. The fee generated just over 
$800,000 in revenues in fiscal 2010 and is pledged for debt service. The fee was
up for renewal by the Board of Directors in June 2011, at which time it was 
extended for the life of the bonds.  

The district successfully acquired water system assets and service areas of 
Diablo Village Water Company and Thim Utility Company in December 2009. The 
acquisitions added approximately 1,400 connections to the system, helping to 
offset the modest number of new connections to the existing system in fiscal 
2010. 

AMPLE WATER SUPPLY 

Raw water is currently provided exclusively through groundwater pumped from 36 
wells. The district is certified by the state regulatory agency to have an 
assured water supply for 100 years in order to meet district consumptive demands
based upon the district's available groundwater rights and its access to 
groundwater supplies. 

Additionally, the district is entitled to 13,460 acre-feet of CAP water. The CAP
water is currently utilized for recharge of the aquifer outside of the district 
service area, but plans are to convey it directly to the system in the next few 
years.

The district's service area encompasses approximately 26 square miles in Pima 
County, AZ, serving a predominantly residential customer base of approximately 
19,700 and an estimated population of over 50,000. Pima county wealth levels, as
measured by MHI, are roughly 90% of the state and 88% of the national averages. 
The most recent county unemployment rate for July 2012 improved to 7.7%, 
compared to 9.0% the prior year.  Local unemployment figures compare favorably 
to the state average of 8.7% and the national average of 8.6% for July 2012. 
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
FILED UNDER:
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