AUSTIN, Texas--(BUSINESS WIRE)--Fitch Ratings affirms the ratings on the following revenue bonds of the Pima County Metropolitan Domestic Water Improvement District (the district or Metro):
--Approximately $14.3 million in outstanding water revenue bonds at 'AA-';
--Approximately $4.1 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
SATIFACTORY FINANCIAL PROFILE: Despite continued healthy operating margins, debt service coverage (DSC) falls under the 'A' median. Liquidity of over 300 days cash on hand (DCOH) is above the 'A' median of 254 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.
ELEVATED DEBT BURDEN: Debt ratios are somewhat high for the 'A' rating category due to initial acquisitions costs, but have been on the descent after peaking in fiscal 2011. Future planned debt issuance just outside the five year horizon will keep debt levels relatively high for the intermediate term.
RATE FLEXBILITY STRAINED: Rates are considered somewhat high relative to median household income levels (MHI), which may limit future rate flexibility.
RATING SENSITIVITIES
MAINTENANCE OF FINANCIAL POSITION: Deterioration of system financial metrics below currently forecast levels would pressure the rating. The sufficiency and timeliness of future rate increases is a key consideration to maintaining the system's current financial profile and rating.
CREDIT PROFILE
The district was established in 1992 to provide water service to areas outside Tucson. The current boundaries of the district include four 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 20,000 and an estimated population of approximately 50,000. For August 2014, both the Tucson MSA and Pima County both report average unemployment of 6.6% which falls below the state's 7.5%, but is higher than the national 6.3%. County wealth levels are 90% and 84% 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 and its access to groundwater supplies. Additionally, the district is entitled to 13,460 acre-feet of CAP water. The district has seen a consistent decline in water demand (approximately 2% annually) which is a growing trend across the country.
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. When growth was more rapid the district was in discussions with other area water purveyors on constructing a surface water treatment plant to access CAP water. Given the decline in water consumption, there has been a shift in planning by the district away from surface water treatment partnerships towards recharge and recovery, which management views as more affordable and less capital intensive. In April 2014, the Board of Directors approved a timeline to move forward Metro's CAP Water Recharge, Recovery and Delivery System 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. It is anticipated the project will be completed over a 10 year period starting with preliminary design and land acquisitions around 2017.
The district will continue to examine potential partnerships with other local supplier to access its CAP water entitlement through a variety of means.
STABLE FINANCIAL PERFORMANCE
Financial metrics are stable but generally fall below the 'A' medians. Financial performance for fiscal years 2012 through 2014 resulted in senior lien debt service coverage (DSC) of 1.7x and all-in DSC of 1.4x, compared to the 'A' category median of 2.1x and 1.7x, respectively. Liquidity as measured by DCOH com is more favorable at 302 days, just above the 'A' median of 254 days. Overall operating margins remain healthy at over 50% for last five fiscal years and free cash to depreciation at or near 100% over the same period. Management forecasts, which appear somewhat conservative, indicate continued stable operations.
BALANCED DEBT BURDEN
District leverage is high due to prior acquisition of several neighboring systems; however, debt amortization is rapid and all debt ratios are trending downward. The district plans to issue some debt related to the CAP recharge and recovery project, but not until closer to 2021, when several other debt issues and state revolving loans fully mature. Fiscal 2014 debt per customer of $2,718 is 38% higher than the 'A' rating category median but projected debt per customer five year drops to $1,555, falling under the $2,041 'A' median, prior to any CAP related debt issuance.
DECLINING RATE FLEXIBILITY
The average monthly residential water bill registers 1.1% of MHI, which is just above Fitch's affordability threshold of 1% (assuming water consumption of 7,500 gallons per month.) The current rate structure provides for a significant 50% fixed base rate on metered water sales providing stability to the revenue stream, which Fitch view favorably. Management is forecasting modest rate increases of about 2.3% to metered water sales in fiscal year 2015, 2018 and 2020.
The district enacted a 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. The RTA fee which is flat $3.00 for the average residential meter generates over $800,000 in revenues annually and is pledged for debt service for the life of the bonds. In 2012, the board also established a water resource utilization (WRU) fee of $0.10 per 1,000 gallons to fund projects related to the Metro's CAP water and effluent. The board increased the WRU fee by $0.10 in 2013 and another $0.20 increase was approved by the board in 2014. The WRU fee is also pledged to the repayment of bonds. The WRU fee is anticipated to grow annually by $0.10 per 1,000 gallons on water consumed starting in 2016 until it reaches $0.70. 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'
In addition to the sources of information identified in Fitch's U.S. Municipal Revenue-Supported Rating Criteria, this action was additionally informed by information from Creditscope.
Applicable Criteria and Related Research:
--'Revenue-Supported Rating Criteria' (June 2014);
--'U.S. Water and Sewer Revenue Bond Rating Criteria' (July 2013);
--'2014 Water and Sewer Medians' (December 2013);
--'2014 Sector Outlook: Water and Sewer' (December 2013).
Applicable Criteria and Related Research:
Revenue-Supported Rating Criteria
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=750012
U.S. Water and Sewer Revenue Bond Rating Criteria
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=715275
2014 Water and Sewer Medians
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=724358
2014 Outlook: Water and Sewer Sector
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=724357
Additional Disclosure
Solicitation Status
http://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=908974
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