Fitch Ratings has affirmed its 'AAA' rating on the following bonds issued by the city of Scottsdale, AZ (the city):

--Approximately $29 million water and sewer refunding bonds, series 2004 and 2008.

The Rating Outlook is Stable.

SECURITY

The bonds are secured by net revenues derived from operation of the city's water and sewer utility system (the system).

KEY RATING DRIVERS

FINANCIAL METRICS REMAIN HEALTHY: The system's all-in annual debt service coverage (DSC) remains sound, finishing fiscal 2015 at 2.3x. Liquidity, measured by days of operating cash, also finished fiscal 2015 at a healthy 716 days.

ELEVATED DEBT BURDEN: Long-term debt levels are high in comparison to similarly rated credits but should improve over time given rapid amortization combined with the expectation of little new debt.

ADEQUATE RATE FLEXIBILITY: Above-average wealth levels and moderate rates result in customer charges below Fitch's affordability threshold of 2% of median household income (MHI).

SUFFICIENT WATER SUPPLY: The city has received state approval of a 100-year assured water supply to meet projected demands.

ROBUST SERVICE AREA: The city has a mature and diversified local economic base, low unemployment rates, and income levels that are well above state and national averages.

RATING SENSITIVITIES

CONTINUED STABILITY: Failure to maintain financial and debt metrics at or near Fitch's 'AAA' median levels could put downward pressure on the rating. In Fitch's view, such deterioration in the system's metrics is unlikely.

CREDIT PROFILE

Scottsdale is located adjacent to the city of Phoenix in Maricopa County, the largest population center in the state. The system provides water to approximately 89,000 customers and wastewater services to 80,000 customers over a 185-square mile service area. Approximately 60% of the city's total water supply is provided by the Colorado River via the Central Arizona Project while remaining supply is provided by a combination of the Salt River Project, groundwater and reclaimed water sources.

HEALTHY FINANCIAL PERFORMANCE, STRONG LIQUIDITY

The system's financial margins and liquidity have remained robust over the past several years. Since 2011, all-in DSC has averaged 2.4x, although it fell slightly below Fitch's comparable median in fiscal 2015 due primarily to higher-than-average precipitation (specifically, all-in DSC was 2.3x in 2015 versus Fitch's 'AAA' median of 2.6x). Liquidity finished fiscal 2015 at 716 days cash, which was also its five-year peak and considered to be very strong by Fitch.

Management's forecast shows DSC improving to 2.6x in fiscal 2016 before dropping to the 2.3x-2.4x range in fiscal years 2018-2020. At the same time, cash is expected to remain near historical levels. Management's forecasts have historically tended to be conservative and therefore outperformance is viewed as likely by Fitch.

ELEVATED DEBT BURDEN EXPECTED TO MODERATE

After several years of capital investment (much of it debt-financed), the system is now in asset management mode. The system's capital improvement plan (CIP) for fiscal 2017-2020 identifies a manageable $170 million in projects, all of which are associated with repair and rehabilitation of existing infrastructure.

As a result of the aforementioned debt-financed capital spending, the system's debt levels are now elevated, with debt-per-customer finishing fiscal 2015 at $2,100. Management does not foresee the need for significant additional debt in the near term, thus debt levels are expected to decline over the next five years. This decline will be aided in part by somewhat quick debt amortization of 56% in 10 years and 98% in 20 years.

SUFFICIENT RATE FLEXIBILITY

Water and sewer rates have remained mostly steady since 2013, although minor changes to the rates and tweaks to fee structures have occurred. Assuming Fitch's standard water consumption of 7,500 gallons per month, current combined system charges are about 0.8% of MHI, well below Fitch's threshold of 2%. Although actual average usage is higher, the relatively low rates combined with the city's high MHI should result in sufficient rate flexibility.

SUFFICIENT SUPPLY

The city is required by the Groundwater Management Act (GMA) to assure renewable water resources are sufficient to meet projected annual water demands over the next 100 years. The most recent supply designation was approved in September 2010, at which time the Arizona Department of Water Resources concluded that the city has an assured supply sufficient to provide 129,072 acre-feet (af) of current and projected demand annually over the next 100 years. The assured supply designation is renewed every 15 years. Under the GMA, the city is also required to achieve 'safe-yield' of groundwater, meaning that groundwater withdrawals have to be no more than amounts artificially or naturally recharged.

ROBUST SERVICE AREA

The city has a mature and diversified local economic base, anchored by healthcare, tourism, business and professional services and technology. After spiking in 2009 and 2010, the unemployment rate in Scottsdale has trended downward and it remains well below state and national averages. Income levels measure positively as well, with MHI at a respective 145% and 135% of the state and national averages.

Additional information is available at 'www.fitchratings.com'.

In addition to the sources of information identified in Fitch's Revenue-Supported Rating Criteria, this action was additionally informed by information from Creditscope.

Applicable Criteria

Revenue-Supported Rating Criteria (pub. 16 Jun 2014)

https://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=750012

U.S. Water and Sewer Revenue Bond Rating Criteria (pub. 03 Sep 2015)

https://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=869223

Additional Disclosures

Dodd-Frank Rating Information Disclosure Form

https://www.fitchratings.com/creditdesk/press_releases/content/ridf_frame.cfm?pr_id=998673

Solicitation Status

https://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=998673

Endorsement Policy

https://www.fitchratings.com/jsp/creditdesk/PolicyRegulation.faces?context=2&detail=31

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