Fitch Rates Colorado Wtr Res & Pwr Dev Auth Revs 'AA-'; Dwngrs Aurora Sr Lien to 'AA-'.

AUSTIN, Texas -- Fitch assigns an 'AA-' rating to the $100 million water resources revenue bonds (City of Aurora, Colorado utility enterprise project), 2005 series D (the 2005D bonds) issued by the Colorado Water Resources and Power Development Authority (the authority). In addition, Fitch downgrades to 'AA-' from 'AA' the City of Aurora's (the city) outstanding $66.1 million senior debt on parity with the city's obligation to pay the debt service on the authority's 2005D bonds. The 2005D bonds are also expected to be guaranteed as to both principal and interest by a municipal bond insurance policy issued by Financial Security Assurance Inc., which Fitch rates 'AAA'. The Rating Outlook for both the authority's 2005D bonds and the city's outstanding parity debt is Stable.

The 2005D bonds are scheduled to sell competitively on Sept. 13. The authority's 2005D bonds are secured by loan repayments derived from a first lien on and pledge of the net revenues of the city's water system (the system).

The 'AA-' rating reflects the strong financial performance and liquidity margins, sound planning efforts, and an economically diverse service area of the city's system. Drought conditions appear to be waning; however, the city expects to embark on an extensive capital improvement program (CIP) to develop additional supplies in anticipation of growth demands and to ensure adequate capacity during future drought periods. Reliance on connection charges to fund capital costs remains a credit concern.

The downgrade to 'AA-' from 'AA' is due to the rapid increase in the system's capital demands and the expected resulting burden to customers associated with funding the CIP both in terms of increased rates and additional debt.

The city is located adjacent and directly east of Denver, and, with a population close to 300,000 persons, the city is the third largest in the state. Water supply is derived from renewable mountain snowmelt which annually recharges city reservoirs. While drought conditions reduced reservoirs to less than 30% of capacity by the beginning of calendar 2003, leading to restrictive measures, conditions have improved and the city expects storage levels to be at or around normal operation conditions prior to the 2006 outdoor watering season.

Capital needs are extensive, accelerating over the last few years as the city identified water projects aimed at ensuring adequate future supplies during periods of drought. The fiscal 2003-2008 CIP totaled around $500 million, whereas proposed additions to the fiscal 2005-2009 CIP are expected to more than double this amount. In addition, funding of the 2003-2008 CIP was expected at around 50% whereas now, around 75% of the 2005-2009 CIP is anticipated to require debt financing. The primary reason for the increase is related to the South Platte Project, which is designed to increase the city's drought supplies by 20% over the next five years. The project entails $845 million in spending for capital assets and water supply development. Customer debt burden, already above average, will increase dramatically if the additions to the 2005-2009 CIP are approved by the city council. Likewise, Fitch believes the funding of the anticipated debt will require sizeable increases to user charges that will likely exceed Fitch's affordability ratios; user charges are currently competitive with other providers in the state.

Financial performance is strong, resulting in high coverage and liquidity levels. Senior lien annual debt service was 15.7 times (x) and 5.4x in fiscal 2004, with and without connection fees, respectively. Liquidity for the same period was substantial, with unrestricted cash and investments equal to over three years of operating expenses. While expected to remain above average for similarly rated credits, coverage and liquidity margins will decline significantly as the city moves forward with implementing the 2005-2009 CIP.

The most recent national economic downturn has led to sluggish growth in city taxable assessed values and slight declines in sales taxes in fiscal 2002. Job creation remains somewhat volatile, keeping unemployment rates higher than state and national norms. However, as part of the larger Denver metropolitan area, prospects for recovery are favorable as evidenced by the city's strong activity in building permits, which posted record highs for fiscal 2004 and are expected to see additional gains during fiscal 2005.

Fitch's rating definitions and the terms of use of such ratings are available on the agency's public site, www.fitchratings.com. Published ratings, criteria and methodologies are available from this site, at all times. Fitch's code of conduct, confidentiality, conflicts of interest, affiliate firewall, compliance and other relevant policies and procedures are also available from the 'Code of Conduct' section of this site.