Fitch Rates Tucson, Arizona's $35.8MM Water Revenue Bonds 'AA'.

AUSTIN, Texas -- Fitch Ratings has assigned an 'AA' rating to the City of Tucson, Arizona's (the city) $35.8 million water system revenue bonds, series 2005-B (2007). In addition, Fitch has affirmed the 'AA' rating for the city's $347.7 million of outstanding parity water system revenue bonds. The bonds are scheduled for a competitive sale on June 5, 2007. The city's financial advisor is Piper Jaffray & Co. in Phoenix. The Rating Outlook is Stable.

The bonds are payable solely from net revenues from the city's water system (the system), after payment of operations and maintenance expenses. Bond proceeds will be used to finance various system improvements.

The 'AA' rating reflects the strong financial management of the system, sufficient long-term supplies to meet customer demands, and a manageable capital improvement plan (CIP). Extensive water planning has helped produce a diverse mix of water supplies, and these planning efforts and customer outreach have led to strong community support for the city's bond program. The existing debt load per customer is moderate. Since more than 40% of the five-year CIP is expected to be derived from pay-as-you-go sources, forecasted debt levels are expected to remain manageable. Service area wealth levels are below average, but Fitch believes the effect is largely offset both by the diversity and stability of the economy and a relatively affordable cost of living.

The system provides potable water to around 720,000 residents (80% of the population) within the Tucson metropolitan area. Potable water supplies are derived from groundwater and renewable Colorado River water that is delivered via the Central Arizona Project (CAP). The city's Clearwater Renewable Resource Facility (Clearwater) diverts all of the city's purchased CAP water to recharge basins and then recovers a blend of CAP and native groundwater for treatment and distribution. Clearwater, which began operations in 2001, is a critical component of the city's future water supplies. Officials anticipate that the system will provide the vast majority of potable supplies by 2009, thereby allowing the city to minimize its groundwater pumping. The city also maintains sizeable recycled water distribution capabilities.

Financial performance has been sound, reflective of the city's conservative management and prudent fiscal policies. From fiscal years 2001-2006 annual debt service (ADS) coverage on water system revenue bonds has been 1.8 times (x) or higher (when calculated per city ordinance) and projections indicate similar performance through fiscal 2011. Liquidity levels, while down marginally from the prior year total, still were a healthy 132 days of operating expenditures in cash on hand for fiscal 2006.

Capital demands for the fiscal 2008-2012 period are moderate at roughly $290 million. The CIP focuses on transmission and distribution, resource development, and storage and pumping; more than 95% of the CIP is dedicated for potable system improvements. Funding is expected to be derived from debt sources (59%) and cash on hand (41%). Outstanding debt per customer of more than $1,700 is slightly above average for the 'AA' category. However, Fitch believes the relatively low monthly charges to customers, as well as moderate anticipated future rate increases and manageable future borrowing needs mitigate debt burden concerns to a large degree.

Tucson, located in southern-central Arizona, is the second largest city in the state. The economy is anchored by military, government, higher education, medical, and tourism enterprises. Primarily as a result of most of these sectors, income levels within the city are on balance, 20%-25% lower than those of the state and nation. City unemployment rates, which were slow to drop following the 2002-2003 recession, have trended downward in recent months and now approximate the statewide and national averages.

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