In the course of ongoing surveillance, Fitch Ratings affirms its 'A+' rating to the Town of Oro Valley Municipal Property Corporation, AZ's approximately $25.4 million outstanding senior lien water project revenue bonds, series 2003. The Rating Outlook is Stable.
The 'A+' rating is based on the water system's historically strong coverage levels, high liquidity and its highly leveraged position with additional capital needs. The service area has increased steadily over the last several years and while long-term supplies are sufficient to meet anticipated growth needs for the foreseeable future, the area needs to provide significant investment to access the system's allocated Central Arizona Project (CAP) water. Current system supported debt levels are high and are anticipated to rise with near-term capital needs. Moderate rate increases will be required over the next several years to maintain the system's financial position, but Fitch believes the system maintains rate flexibility given that local wealth levels are above-average and historical rate adjustments have been consistent.
The system provides potable water to over 18,000 customers within the town limits as well as a small number of customers within the unincorporated area of Pima County. All potable water is derived entirely from groundwater sources. Based on available groundwater resources, the town has received a designation as having an assured water supply for 100 years but requires additional investment to provide direct delivery of CAP water. In July 2008, the town completed construction of its reclaimed water system which has alleviated groundwater extraction and currently provides water to five golf courses, one school, and municipal irrigation accounts including parks, medians, and other landscaped areas.
The current five year capital improvement program (CIP) totals $81.5 million. Approximately $60 million of this amount is the town's investment for the first phase of the CAP water project. The town has entered into agreements with three neighboring water suppliers to share in the costs for design, construction, and operations of the water mains. The town's allocation of the total CAP water project is about 33%. About 15% of the CIP will be funded from system cash flow and the remaining 85% from debt proceeds. The majority of the debt will be issued in fiscal years 2013 and 2014, as such; near to mid term debt levels will remain elevated.
Financial performance has been favorable, marked by sound coverage and high liquidity ratios. Since fiscal 1998, both cash on hand and working capital have exceeded one year of operating expenditures. These balances will likely be drawn down somewhat in the future, but should remain at healthy levels.
Historical coverage levels on an all-in basis have been strong, ranging from 1.8 times (x) to 2.8x between fiscals 2005 and 2009. Projections for fiscals 2010 to 2014 points to a minimum coverage of 1.4x in fiscal 2014. These projections include the issuance of a $7.4 million loan during the current fiscal year and interest payments on an estimated $48 million bond issuance in fiscal 2013 and 2014 for the CAP water project. To maintain these coverage levels, the town anticipates annual rate increases ranging from 4% to 5.6%. System rates remain comparable to other regional providers.
The town is located six miles north of Tucson in southern Arizona. Population has grown from 581 persons in 1970 to nearly 44,000 in 2009. Build-out is expected around 2023 at roughly 69,000 people. The local economy is composed of the hotel/motel, retail trade, and government sectors, and is part of the larger Tucson area economy, which is anchored by higher education, defense spending, and high-tech employment.
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