SAN FRANCISCO--()--Fitch Ratings downgrades the rating on the following bonds issued by Utah Water Finance Agency, UT (the agency) issued on behalf of the city of St. George, UT (the city):
--$7.51 million outstanding revenue bonds (pooled loan financing program), series 2004A to 'AA-' from 'AA'.
The Rating Outlook is Stable.
The bonds are secured by a first lien on and pledge of revenues of the city's individual water and sewer systems which each pay a portion of the debt service costs on the agency's bonds.
KEY RATING DRIVERS
WEAKENED FINANCIALS DRIVE DOWNGRADE: The downgrade to 'AA-' from 'AA' reflects the deterioration of the city's water system (rated 'A+' by Fitch), which leads to an overall weakening of the pledged security of the agency bonds.
COMBINED FINANCIAL PROFILE HEALTHY: The financial metrics of the sewer system are stronger than those of the water system, and when combined are solid.
RATE AFFORDABILITY REMAINS: Effective fiscal 2013, the city increased the water rates and decreased the sewer rates by a commensurate amount in order to strengthen the finances of the water system. The change has no affect to customer billing on a combined basis and preserves the combined systems' overall rate flexibility.
WATER LIMITED OPERATION RISK: As primarily a distribution system that purchases water from the Washington County Water Conservancy District, UT (WCWCD) according to a take-and-pay contract, the system has limited operational risk.
SEWER SERVES LARGER AREA: The sewer system serves a larger regional service territory that includes both collection and treatment services.
MODERATE DEBT LEVELS: Leverage levels for the combined utilities are moderate but should improve over the near term given capital needs are manageable and are expected to require little, if any, additional borrowing.
IMPROVED WATER FUND MARGINS: Improved financial margins for the water system consistent with forecast levels are important to maintaining the rating.
St. George covers approximately 71 square miles located about 120 miles northeast of Las Vegas and 300 miles south of Salt Lake City. The city serves an estimated population of 74,500 residents. The series 2004A bonds were partially refunded by the water system's series 2012 bonds (not rated by Fitch) and WCWCD's water revenue refunding bonds, series 2012A. The remaining maturities include the debt service secured by water revenues through fiscal 2015 as well as the portion of debt service secured by sewer revenues through fiscal 2017.
SOLID COMBINED FINANCIAL PROFILE
On a combined basis, debt service coverage for fiscal 2012 was 1.6x and reserves totaled 898 days of cash. Water system operating results were weak, including 1.15x coverage (equal to the rate covenant) and 28 days cash on hand. Water system financial results were negatively affected in fiscal 2012 from a combination of rising water purchase costs in light of a decline in available local water and a lag in receipt of annual WCWCD rebate monies. In fiscal 2012 the city took some of its wells offline due to recent stricter federal arsenic regulations. This change led to the city purchasing additional supplies from WCWCD at a higher cost than historical local production costs. However, because of the new regulations, purchased water from WCWCD is more economical than the city treating arsenic present in its own wells.
As a result of its water purchases from WCWCD, the city receives an annual rebate from WCWCD for the amount exceeding what is needed to cover designated fixed costs. However, because the WCWCD has a different fiscal year than the city, there is a one year lag in when the rebates are accounted for on the system's financial statements. The rebate related to fiscal 2012 payments of about $1.2 million is more than double that of the prior year due to more water being purchased and will be received in fiscal 2013; future rebates are expected to be of comparable levels.
Liquidity for the water utility has been consistently low due to significant funding of capital from surplus revenues. However, the sewer utility has regularly posted strong cash flow, reserve levels, and debt service coverage and provides a source of equity for the water utility when needed. In fiscal 2012, the sewer system had coverage of 2.4x and nearly 4,000 days cash.
Water rates were increased in fiscal 2013 by $6.60 while sewer rates were decreased by about the same amount. As a result, revenues will be shifted from the sewer to the water fund while keeping the combined utility bill the same. According to management, the sewer fund had accumulated an abundant amount of unrestricted cash balance as allowed under its service contracts and rates were adjusted to be more in line with forecast needs. While the water system will benefit from the increased rates, sewer system performance will likely moderate from prior strong performance.
LIMITED OPERATIONAL RISK
Operations are limited. The water system is primarily a distribution system, purchasing the majority of its water from WCWCD. Water purchases are made on a take-and-pay basis through a contract with WCWCD that runs into perpetuity. As such, the city pays only for the water it purchases.
MANAGEABLE CAPITAL PLANS
Debt levels are very low on a combined basis at less than $400 per customer and are expected to decline over time given limited capital needs and lack of anticipated borrowing. The water system's expected capital spending over the next five years includes $12.5 million to increase tank capacity and for various repair and replacement projects, while sewer needs include about $7.6 million in spending over the next five years, including $3.4 million for a new line as part of the widening of Riverside Drive and $1 million for a new monitoring system.
Additional information is available at 'www.fitchratings.com'. The ratings above were solicited by, or on behalf of, the issuer, and therefore, Fitch has been compensated for the provision of the ratings.
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 and Related Research:
--'Revenue-Supported Rating Criteria' (June 12, 2012);
--'U.S. Water and Sewer Revenue Bond Rating Criteria' (Aug. 3, 2012);
--'2013 Water and Sewer Medians' (Dec. 5, 2012);
--'2013 Sector Outlook: Water and Sewer' (Dec. 5, 2012).
Applicable Criteria and Related Research
Revenue-Supported Rating Criteria
U.S. Water and Sewer Revenue Bond Rating Criteria
2013 Water and Sewer Medians