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