Fitch Ratings assigns an 'AA' rating to the following bonds issued by the city of Tucson, AZ (the city):

--Approximately $46.2 million water system revenue refunding bonds series 2015A.

Proceeds will be used to refund portions of outstanding water system revenue bonds and to pay for the cost of issuance. The bonds are scheduled to sell via negotiation on January 28th.

In addition, Fitch affirms the rating on the city's outstanding bonds as follows:

--$469.7 million in outstanding water system revenue bonds and obligations at 'AA'.

The Rating Outlook is Stable.

SECURITY

The bonds and obligations are payable from a first lien pledge on the net revenues of the system on parity with the outstanding water revenue bonds and obligations.

KEY RATING DRIVERS

ADEQUATE FINANCIAL PROFILE: The financial profile of the city's water system (the system) has improved since 2009. Management's forecasts demonstrate that these improvements should be sustained.

AFFORDABLE RATES: At about 0.8% of median household income (MHI), system rates are considered affordable by Fitch.

ELEVATED DEBT PROFILE: Sizeable debt plans will keep the system's debt profile high over the next five years despite rapid amortization.

SUFFICIENT WATER SUPPLIES: Extensive planning has resulted in sufficient water supply for long-term needs.

RATING SENSITIVITIES

MAINTENANCE OF FINANCIAL PROFILE: Failure to maintain all-in debt service coverage (DSC) and liquidity near the minimum forecast levels may result in a rating downgrade.

INCREASED DEBT BURDEN: Increased debt beyond current levels could pressure the rating given the already below-average debt profile.

CREDIT PROFILE

Tucson, located in south central Arizona, is the second largest city in the state. Tucson's water system provides potable water to about 713,000 area residents via 230,000 metered connections, or 85% of the population within the metropolitan area. Potable water supplies are derived from both groundwater and Colorado River water delivered via the Central Arizona Project (CAP).

SATISFACTORY FINANCIAL PROFILE

The system continues to regain its financial footing after recessionary pressures and high capital costs in 2008 through 2010, which resulted in below-average DSC and liquidity. Fiscal 2014 financial results finished with senior and all-in DSC at satisfactory levels of 2.0x and 1.8x, respectively. Liquidity, measured by the number of days that unrestricted cash can cover operational expenses, finished at 155 days (up from 145 in fiscal 2013). Fiscal 2014 DSC and liquidity were at six-year highs while still slightly below Fitch's median levels for the rating category.

Previous rate increases and surcharges are contributing to improved revenue but operational costs are also increasing due to the rising cost of water purchased from the CAP. Management's conservative forecast shows a 7.1% annual rate increase in each of the next five years with resulting minimum DSC of 1.9x on a senior-lien and 1.7x on a junior-lien basis. Over the same period, the city is targeting liquidity balances at a minimum of 100 days of cash on hand. These forecasts are mostly in-line with forecasts provided to Fitch last year. Fitch notes that the city has a policy of maintaining a minimum of 1.75x senior lien DSC calculated on a cash basis, in accordance with the master indenture.

RATES TO REMAIN AFFORDABLE

The system will need to implement the planned rate increases to maintain adequate DSC and liquidity since further declines in water consumption are anticipated and capital expenditures are expected to remain high. Nevertheless, at 0.8% of median household income (MHI), current rates are low for the area and are below Fitch's affordability threshold of 1% of MHI. Fitch expects rates to remain affordable over the intermediate term.

MANAGEABLE DEBT BURDEN

The system's CIP for fiscal years 2015 - 2019 totals $317 million, roughly the same as the previous three years, and focuses primarily on repair and rehabilitation of existing facilities. Funding for the CIP is expected to be split between surplus cash (40%) and debt (60%). Debt per customer is somewhat elevated at $2,454, but amortization is fairly quick at 66% in 10 years and 100% in 20. Partial cash funding of capital should result in the system's debt profile slightly improving over the next five years.

SUFFICIENT WATER SUPPLY

The large majority of the city's potable water supply is derived from Tucson's Clearwater Renewable Resource Facility, which 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. The city also maintains sizable recycled water distribution capabilities.

The city is currently purchasing its maximum annual allotment (145k acre-feet) of CAP water and using surplus amounts, which amounted to about 45k acre feet in 2014, to replenish groundwater that has been depleted over many decades. Additionally, nationally-recognized conservation efforts have resulted in a net decrease in per capita water utilization over the last decade. Proactive water supply management practices such as these should keep water supply sufficient over the long term.

MIXED ECONOMIC PROFILE

At 6.3% in November 2014, the city's unemployment rate was consistent with the state average but above the national average (5.5%). City wealth levels are below state and national averages and poverty rates are elevated. However, the economy is fairly diverse, anchored by government (including military), higher education, medical, and tourism enterprises.

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

Applicable Criteria and Related Research:

--'Revenue-Supported Rating Criteria' (June 2014);

--'U.S. Water and Sewer Revenue Bond Rating Criteria' (July 2013);

--'2015 Water and Sewer Medians' (December 2014);

--'2015 Outlook: Water and Sewer Sector' (December 2014).

Applicable Criteria and Related Research:

Revenue-Supported Rating Criteria

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

U.S. Water and Sewer Revenue Bond Rating Criteria

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=715275

2015 Water and Sewer Medians

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=818409

2015 Outlook: Water and Sewer Sector

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=818410

Additional Disclosure

Solicitation Status

http://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=974855

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