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MOODY'S ASSIGNS Aa3 RATING TO THE METROPOLITAN DOMESTIC WATER IMPROVEMENT DISTRICT OF PIMA COUNTY, ARIZONA, WATER SENIOR LIEN WATER REVENUE AND REFUNDING OBLIGATIONS, SERIES 2010

08 Dec 2010

APPROXIMATELY $56.9 MILLION IN PARITY DEBT AFFECTED, INCLUDING CURRENT OFFERING

Water/Sewer
AZ

Moody's Rating

ISSUE

RATING

Senior Lien Water Revenue Obligations, Series 2010 (Bank Qualified)

Aa3

  Sale Amount

$6,485,000

  Expected Sale Date

12/15/10

  Rating Description

Revenue Bonds

 

Senior Lien Water Revenue Refunding Obligations, Series 2010 (Bank Qualified)

Aa3

  Sale Amount

$3,620,000

  Expected Sale Date

12/15/10

  Rating Description

Revenue Bonds

 

Opinion

NEW YORK, Dec 8, 2010 -- Moody's Investors Service has assigned an Aa3 rating to the Metropolitan Domestic Water Improvement District of Pima County, Arizona, Senior Lien Water Revenue Obligations, Series 2010 (Bank Qualified) in the amount of approximately $6.5 million and Senior Lien Water Revenue Refunding Obligations, Series 2010 (Bank Qualified) in the amount of approximately $3.6 million. Moody's has also affirmed the Aa3 rating on the district's $50.3 million in previously issued senior lien bonds and loans (Series 2002, Series 2007, and Series 2009). At this time, Moody's also affirms the A1 rating to the district's subordinate lien obligations outstanding in the amount of approximately $12.7 million. The current offering will fund infrastructure replacement in concert with road improvements within the district, and refund certain maturities of the district's outstanding Water Revenue Bonds, Series 2002. The bonds are secured by a first lien pledge of net revenues of the district's water system.

RATING RATIONALE

The district's Aa3 senior lien rating primarily reflects its above-average quality service area, as well as sound financial management including recent implementation of annual rate increases, adequate water supply, somewhat thin debt service coverage levels, and a somewhat high debt level. The assigned ratings also incorporate the expectation that the utility will continue to meet or exceed debt service coverage projections going forward, including aggressive rate increases as necessary.

The A1 subordinate lien rating reflects the junior pledge of system net revenues

DISTRICT LOCATED NORTHWEST OF TUCSON

Metropolitan Domestic Water Improvement District of Pima County (MDWID) was established in 1992 to purchase a private water company. The boundaries of the nearly 30 square mile district include three non-contiguous areas near the City of Tucson (Aa2 GO), in unincorporated Pima County (Aa2 GO) and small portions of the towns of Marana (Aa3 issuer rating) and Oro Valley. Customer growth has slowed in recent years and averaged only about 2.5% since 2006, growing to 19,709 total customer accounts in 2010 from 18,230 in 2009. This year-to-year growth is related mainly to the acquisition of 1,419 accounts from Diablo Village and Thim Utility districts. Absent the acquisitions, growth slowed to a 0.3% pace. Over 94% of the district's customer accounts are residential in nature and account for about 78.7% of annual revenues. Although local residential construction has slowed significantly, the district's proximity to the Tucson metropolitan area and the presence of available developable land is expected to support modest residential growth in the long term. Further, Moody's believes the district's customer base could accommodate the aggressive future rate increases needed to meet increasing debt service and operating requirements given that resident wealth levels are estimated to be higher than average for the Tucson metropolitan area.

The district's principal source of water is from numerous groundwater wells which are expected to meet the district's water supply needs through buildout in about 10 to 15 years. Additionally, the district retains rights to approximately 13,500 acre feet of water annually from the Central Arizona Project (CAP). Although CAP water purchases for recharge purposes are more expensive than pumping from groundwater wells, the district is well positioned over the long term to eventually transition a sizeable portion of water demand from groundwater to renewable surface water supplies. Currently, average daily system usage is 8.49 MGD, with peak usage of 12.3 MGD, which is below total system capacity of 15.5 MGD.

SATISFACTORY FINANCIAL OPERATIONS REQUIRING NEAR-TERM RATE INCREASES

Annual coverage of senior lien and junior lien debt by net revenues is projected to continue to meet legal coverage requirements. Moody's analysis of net revenue coverage on a combined basis indicates higher coverage in fiscal year 2010 followed by a subsequent decrease and stabilization in coverage levels through 2015. In fiscal 2010 senior lien coverage rose to 2.12 from 1.32 due to increases in customer water sales from acquisition of new water systems, a 6.75% rate increase effective November 2010, and implementation of a Waterline Relocation Fee in conjunction with major infrastructure work performed by Pima County's Regional Transportation Authority ("RTA"). After deducting system development charges, annual senior lien coverage declined slightly to 2.08 times. On a combined basis, fiscal 2010 coverage of senior and subordinate debt service was 1.65 times; net of development charges, combined coverage was 1.61 times.

Effective July 1, 2009, RTA Waterline Relocation Fees of $36 - $1,800 per year based on meter size will sunset at the end of fiscal 2011, although district officials indicate a willingness to continue the fees in order to pay debt service for the $6.5 million new money portion of the current offering through its 2021 final maturity. Per the Master Resolution calculation of MADS satisfies the additional bonds test of 1.20 times, given additional amounts may be added to the net revenues of the preceding year if additional water properties are acquired and if rates have been increased. Fiscal 2010 coverage of senior lien MADS is at 1.72 times, but expected to be a lean 1.25 times in 2011, when debt service from the current transaction is layered in.

For fiscal year 2011, senior lien coverage net of development charges is budgeted at a satisfactory 1.59 times and coverage of combined senior and subordinate debt service is budgeted at a somewhat thin 1.31 times; net of system development charges combined fiscal 2011 is 1.00 times. Going forward, combined senior and subordinate debt service coverage levels are projected to decline slightly to 1.11 times in fiscal 2012 then range between 1.15 - 1.19 times until fiscal 2015 as debt service payments increase and new customer growth slows in line with the district's conservative budgeting practices. Though Moody's expects that the district should achieve satisfactory financial performance, the current Aa3 senior and A1 subordinate ratings could be under some pressure if future revenues and combined debt service coverage levels fall significantly short of projections. Positively, the district began implementing annual rate increases in fiscal 2006 with the most recent rate increase of 8.50% implemented in fiscal 2011. To continue meeting covenanted coverage levels, the district has projected aggressive rate increases of 8.5% annually in fiscal 2011 and fiscal 2012, followed by 4.5% annual increases in each fiscal year from 2013 - 2015, and finally 3.5% annual increases in each fiscal year from 2017 - 2020.

In fiscal 2010, the system had approximately $2.4 million of cash, with somewhat low net working capital of 17.3% of gross revenue and down slightly from fiscal 2009's $2.9 million. Although available cash remains above the district's policy of maintaining $1.5 million, it is not projected to increase materially in the near term given slowed new customer growth and moderate increases in annual costs. Positively, the district maintains a modest amount of available cash in the Repair and Replacement Reserve which could be used to mitigate unanticipated capital needs, as well as provide a financial cushion for O&M purposes. Over the last ten years, management has steadily built up the Repair and Replacement Fund to approximately $1.3 million, with an informal fund goal of $1.5 million. Per the amended Master Resolution, the district is required to maintain a minimum of $800,000 in the Repair and Replacement reserve to be used for repairs, replacements, or may be used to aid in the restoring of the reserve fund. In the event the Repair and Replacement Fund is drawn below the minimum amount, the district will transfer at least $8,500 per month into the Fund until it reaches the minimum required amount. Management indicates available funds above the required minimum may be used for O&M purposes.

HIGH DEBT PROFILE; SATISFACTORY LEGAL COVENANTS

Moody's believes the district's debt profile is manageable, though somewhat high, relative to similarly rated water enterprise systems. The district's fiscal 2010 debt ratio was 63.2%. This ratio is expected to moderate gradually in the medium term given an above average payout of 77.2% in ten years. Future borrowing plans include possibly going out to voters in the next five years for approximately $45 - $50 million in borrowing authorization to achieve full utilization of its stored CAP water supply. District officials indicate they are seeking to pool resources with other local districts to achieve cost-sharing for the CAP access project.

The current issuance is secured by a senior lien pledge of net revenues of the district's water system. Legal covenants are standard, with the bond resolution requiring the district to maintain rates which will result in net revenues equal to at least 1.20 times annual debt service, on a waterfall measurement basis, first of senior lien, then of junior lien bonds. The reserve requirement will be cash funded at the lesser of MADS requirements, 125% of average annual debt service or 10% of par over the next five years. Additional debt obligations may be issued only if net revenues are 120% of senior lien MADS for any succeeding fiscal year.

Moody's notes that debt service for the $6.5 million new money portion of the current offering is structured to be funded by RTA Waterline Relocation Fees through its 2021 final maturity. Since the fees have yet to be renewed prior to their June 2011 sunset, Moody's bases the current rating on the RTA's renewal by district directors, or in the event of non-renewal, the increase in normal water rates by an amount sufficient to ensure covenanted coverage levels.

What could move the rating-UP

- Sustained trend of significantly improved coverage levels

- Trend of significant growth and maintenance of cash reserves

- Moderation of debt levels

What could move the rating-DOWN

- Significant deterioration in cash reserves

-Trend of weakening debt service coverage

- Significant and frequent borrowing

KEY STATISTICS:

Estimated population: 51,400

Customer accounts: 19,709

Payout of principal (10 years): 77.2%

Fiscal 2010 Ratios:

Operating ratio: 46.2%

Debt ratio: 63.2%

Net working capital as a % of gross revenue, 2009: 17.3% ($2.6 million)

Senior lien debt service coverage: 2.12 times

Senior lien debt service coverage (net of development charges): 1.26 times

Combined senior and subordinate debt service coverage: 1.65 times

Combined debt service coverage (net of development charges): 1.61 times

PRINCIPAL METHODOLOGY AND LAST RATING ACTION

The principal methodology used in this rating was "Analytical Framework For Water And Sewer System Ratings" published in August 1999.

The last rating action with respect to Metropolitan Domestic Improvement District, Arizona was on December 15, 2009, when an A2 senior lien revenue bond rating and the A3 subordinate lien revenue bond rating was assigned to Water Revenue Refunding Bonds, Series 2009. The senior lien revenue bond rating was subsequently recalibrated to Aa3, and the subordinate lien revenue rating recalibrated to A1, on May 01, 2010.

REGULATORY DISCLOSURES

Information sources used to prepare the credit rating are the following: parties involved in the ratings, parties not involved in the ratings, public information, confidential and proprietary Moody's Investors Service information, and confidential and proprietary Moody's Analytics information.

Moody's Investors Service considers the quality of information available on the credit satisfactory for the purposes of assigning a credit rating.

Moody's adopts all necessary measures so that the information it uses in assigning a credit rating is of sufficient quality and from sources Moody's considers to be reliable including, when appropriate, independent third-party sources. However, Moody's is not an auditor and cannot in every instance independently verify or validate information received in the rating process.

Please see ratings tab on the issuer/entity page on Moodys.com for the last rating action and the rating history.

The date on which some Credit Ratings were first released goes back to a time before Moody's Investors Service's Credit Ratings were fully digitized and accurate data may not be available. Consequently, Moody's Investors Service provides a date that it believes is the most reliable and accurate based on the information that is available to it. Please see the ratings disclosure page on our website www.moodys.com for further information.

Please see the Credit Policy page on Moodys.com for the methodologies used in determining ratings, further information on the meaning of each rating category and the definition of default and recovery.

Analysts

Bryan A. Quevedo
Analyst
Public Finance Group
Moody's Investors Service

Dan Steed
Backup Analyst
Public Finance Group
Moody's Investors Service

Matthew A. Jones
Senior Credit Officer
Public Finance Group
Moody's Investors Service

Contacts

Journalists: (212) 553-0376
Research Clients: (212) 553-1653


Moody's Investors Service
250 Greenwich Street
New York, NY 10007
USA

MOODY'S ASSIGNS Aa3 RATING TO THE METROPOLITAN DOMESTIC WATER IMPROVEMENT DISTRICT OF PIMA COUNTY, ARIZONA, WATER SENIOR LIEN WATER REVENUE AND REFUNDING OBLIGATIONS, SERIES 2010
No Related Data.
© 2021 Moody’s Corporation, Moody’s Investors Service, Inc., Moody’s Analytics, Inc. and/or their licensors and affiliates (collectively, “MOODY’S”). All rights reserved.

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