Fitch Affirms Pima County Metro Water, (AZ)'s Water Revs at 'AA-'/'A+'; Outlook Stable

AUSTIN, Texas--()--Fitch Ratings has affirmed the ratings on the following revenue bonds of the Pima County Metropolitan Domestic Water Improvement District (the district or Metro):

--Approximately $9.5 million in outstanding water revenue bonds at 'AA-';

--Approximately $1.9 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

SATISFACTORY FINANCIAL PROFILE: The district continues to produce sound operating margins and fiscal 2016 debt service coverage (DSC) aligns closely to Fitch's 'A' category median. Liquidity is robust at 425 days cash on hand (DCOH).

AMPLE WATER SUPPLY: Due to a declining water consumption trends, water supplies are sufficient to meet long-term demand in the service area; however, the utilization of Central Arizona Project (CAP) water supply will be accompanied by additional capital needs.

AVERAGE DEBT BURDEN: Debt ratios continue to decline after peaking in 2011. Debt amortizes rapidly providing capacity for future debt related to CAP water access within the next five to seven years.

RATE FLEXIBILITY STRAINED: Rates are considered somewhat high relative to median household income levels (MHI), which may limit future rate flexibility. However, recent adjustments to the fixed base rate provide additional stability to the revenue stream.

RATING SENSITIVITIES

MAINTENANCE OF FINANCIAL POSITION: Deterioration of system financial metrics below currently forecast levels could pressure the rating.

CREDIT PROFILE

The district was established in 1992 to provide water service to areas outside Tucson. The current boundaries of the district include six non-contiguous areas in the Tucson metropolitan statistical area (MSA). All areas are located in unincorporated Pima County, but the act under which the district was formed permits the district to annex areas within incorporated area cities with the consent of the municipality.

The district's service area encompasses approximately 26 square miles in Pima County, AZ, serving a predominantly residential customer base of approximately 21,000 and an estimated population of approximately 55,000. For August 2016, both the Tucson MSA and Pima County both report average unemployment of 5.4% which falls below the state's 6.7%, but is higher than the national 5%. County wealth levels are somewhat low at 89% and 82% of the state and national averages, respectively.

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, access to groundwater supplies and its entitlement to 13,460 acre-feet of CAP water. The district has seen a consistent decline in water demand (approximately 2% annually), ensuring that the district's current water supply is sufficient to support demand.

RECHARGE AND RECOVERY OF CAP WATER IS FOCUS

The district's CAP water is currently utilized for recharge of the aquifer outside of the district's service area. In 2014, the Board of Directors approved a timeline to move forward Metro's CAP Water Recharge, Recovery and Delivery System (the CAP project) with an estimate cost of $36 million. Recharged water would be recovered via wells and then delivered through 10 miles of transmission lines to be blended with the district's groundwater at a district owned storage reservoir. Portions of the CAP project are included in the district's five-year capital improvement plan as a cost of about $11 million, which include preliminary design and land acquisition. It is anticipated the CAP project will be completed over a 10-year period starting. The district continues to examine partnerships with other local water purveyors in the region to complete the CAP project in a cost effective manner.

STABLE FINANCIAL PERFORMANCE

Financial metrics are stable and have registered some improvement due to rate adjustments. All-in DSC for fiscal 2016 of 1.6x, which is largely on par with Fitch's 'A' category median. Liquidity in fiscal 2016 saw a marked improvement to 462 DCOH, up from 348 in fiscal 2015. Overall, cash flows remain healthy with operating margins at over 50% for last five fiscal years and free cash to depreciation at or near 100% over the same period. Management's forecast, which appears somewhat conservative, points to all-in coverage ranging from 1.4x to 1.3x. Historically, actual results have outpaced projections.

BALANCED DEBT BURDEN

District leverage, which has previously been noted as high due to prior acquisition of several neighboring systems, has moderated. Debt amortization is rapid and all debt ratios are trending downward. The district plans to issue some debt related to the CAP project, but not until closer to 2021, when several other debt issues and state revolving loans fully mature. Fiscal 2016 debt per customer of $2,112 is favorable compared to the $2,351 'A' rating category median and projected debt per customer five year drops to $1,139, falling well under the $2,308 'A' median, prior to any CAP related debt issuance. While debt ratios are anticipated to increase moderately due to the issuance of planned CAP related debt, they are not anticipated to exceed current levels.

STRONG RATE STRUCTURE; DECLINING RATE FLEXIBILITY

The average monthly residential water bill registers 1.2% of MHI, which is just above Fitch's affordability threshold of 1% MHI (assuming water consumption of 7,500 gallons per month.) Despite the thinning rate flexibility, recent rate adjustments have resulted in the district's fixed base rate now providing a significant 61% of the average monthly residential bill (based on Metro Main rates), up from 50% in the prior review. Fitch views favorable this high percentage of fixed rates as it provides stability to the revenue stream. Management is forecasting modest rate increases of about 1.75% to 3.55% in fiscal years 2019 to 2021.

The district enacted a flat $3 regional transportation authority (RTA) waterline relocation fee in June 2009 to pay the costs of relocating water lines in the right-of-way of road projects. In 2012, the board also established a water resource utilization (WRU) fee (pledged to bond repayment) of $0.10 per 1,000 gallons to fund projects related to the Metro's CAP water and effluent. The board has incrementally increased the fee and it now registers $0.50 per 1,000 gallons. The WRU fee is anticipated to continue to grow to $0.60 per 1,000 by fiscal 2019, which is slightly less than previous plans to increase the rate to $0.70 per 1,000 by 2019. While rates are above Fitch's affordability threshold, future rate adjustments are modest and the use of dedicated RTA and WRU fees assist the district in planning for and funding future capital projects.

Additional information is available at 'www.fitchratings.com'.

Applicable Criteria

Revenue-Supported Rating Criteria (pub. 16 Jun 2014)

https://www.fitchratings.com/site/re/750012

U.S. Water and Sewer Revenue Bond Rating Criteria (pub. 03 Sep 2015)

https://www.fitchratings.com/site/re/869223

Additional Disclosures

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https://www.fitchratings.com/creditdesk/press_releases/content/ridf_frame.cfm?pr_id=1012933

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https://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=1012933

Endorsement Policy

https://www.fitchratings.com/regulatory

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Contacts

Fitch Ratings
Primary Analyst
Teri Wenck, CPA
Director
+1-512-215-3742
Fitch Ratings, Inc.
111 Congress Avenue, Suite 2010
Austin, TX 78701
or
Secondary Analyst
Gabriela Gutierrez, CPA
Director
+1-512-215-3731
or
Committee Chairperson
Doug Scott
Managing Director
+1-512-215-3725
or
Media Relations:
Elizabeth Fogerty, New York, +1 212-908-0526
Email: elizabeth.fogerty@fitchratings.com

Contacts

Fitch Ratings
Primary Analyst
Teri Wenck, CPA
Director
+1-512-215-3742
Fitch Ratings, Inc.
111 Congress Avenue, Suite 2010
Austin, TX 78701
or
Secondary Analyst
Gabriela Gutierrez, CPA
Director
+1-512-215-3731
or
Committee Chairperson
Doug Scott
Managing Director
+1-512-215-3725
or
Media Relations:
Elizabeth Fogerty, New York, +1 212-908-0526
Email: elizabeth.fogerty@fitchratings.com