AUSTIN, Texas--(BUSINESS WIRE)--Fitch Ratings affirms the 'AA+' rating on the following bonds issued by the Metropolitan Water District of Salt Lake & Sandy, Utah (the district):
--$188.4 million water system revenue bonds, series 2004, 2005A, 2009A, 2012A and 2012B.
The Rating Outlook is Stable.
The bonds are secured by the district's net system revenues. Property taxes are not pledged to bondholders but are available to pay operating expenses of the district.
KEY RATING DRIVERS
ADEQUATE MARGINS BUT PRESSURE EXISTS: Debt service coverage levels are modest for the rating but in line with other wholesale entities with limited risk profiles. The district's financial forecast shows some pressure in the next few years resulting from lower sales levels. Rate increases are expected to maintain adequate reserves and reasonable debt service coverage.
REVENUE DIVERSITY AND STABILITY: Revenue diversity provided by water sales, property taxes, and special assessments provides stability during times of demand variability.
REGIONAL WHOLESALE SUPPLIER: The district is a major supplier of wholesale water to the cities of Salt Lake City and Sandy, servicing a combined population base of around 390,000. The service area economy is strong, growing, and diverse.
STRONG CAPITAL INVESTMENT: Water supplies and delivery reliability have been improved as a result of significant capital investments made in the last decade, which are supported in some cases by direct special assessments paid unconditionally by the two retailers.
LOWER FINANCIAL RESULTS: The district typically outperforms its targeted debt service coverage level of 1.25x, with actual coverage at or above 1.5x. Consistently lower debt service coverage than the typical 1.5x in the future, combined with declining liquidity, could place pressure on the rating.
The district serves as the supplemental wholesale provider of water to Salt Lake City and Sandy. The district typically provides 50% of the treated water used by Salt Lake City and 50%-75% of the treated water used by Sandy. The two cities account for nearly all the district's revenues. The district's seven-member board of directors is appointed by the two cities - five from Salt Lake City and two from Sandy.
MODERATE BUT CONSISTENT FINANCIAL PERFORMANCE
Debt service coverage in fiscal 2013 was 1.69x, up slightly from 1.57x in fiscal 2012. Lower debt service coverage levels are projected in management's forecast as a result of increasing debt service payments in fiscal 2014. Coverage is expected to remain at or above the district's targeted minimum of 1.25x. The district has historically outperformed its cash flow projections and Fitch believes this will continue.
Liquidity levels remain strong at 694 days operating cash. Unrestricted cash was at $19.8 million at the end of fiscal 2013. This includes the three-month operations and maintenance (O&M) reserve required by the bond indenture and $10 million in unrestricted investments. Management projects liquidity levels could come down to closer to a still-healthy six months of O&M.
REVENUE DIVERSITY AND STABILITY
The district has a diverse revenue stream that provides insulation from variable water demand. Water revenues accounted for 42% of revenues in fiscal 2013, with special assessments and property taxes representing approximately 31% and 27%, respectively. The special assessments are structured to satisfy the district's fixed obligations for specific projects. Based on the cities' differing needs for additional capacity, each city pays special assessments on a pro rata basis.
The district also levies property taxes for O&M. The district maintains flexibility in its tax rate, which is below the maximum permitted, despite recent automatic adjustments in the rate required by Utah's truth-in-taxation law. The adjustments are designed to hold tax revenues neutral in the event of assessed valuation movements (which in most recent years have been declines). However, future availability of additional tax revenue is limited by a legislative change that becomes effective in 2014. At that time, any increase (other than those permitted by truth-in-taxation resulting from a decline in assessed value) in the tax rate will require approval by elected officials, or the city councils of Salt Lake City and Sandy, which the district is unlikely to pursue.
WATER SUPPLY SUFFICIENT
The district's water supply averages 121,785 acre-feet (af) in normal years and 77,438 af in dry years. Annual water demands, including a small amount sold to irrigation entities, were 71,225 af in fiscal 2013. This was the first increase in sales following declines of 5%-8% annually since 2008. This uptick in sales reflects improved economic conditions and drier weather, as well as conservation efforts. However, some concerns remain that once demand recovers, water supplies could be pressured in a period of sustained drought.
The district pays a fixed cost for its Provo River allocation regardless of the allocation actually received. The fixed cost is billed directly to the cities. District revenues are not at risk of the cities using less of this water supply. District supplies declined in fiscal 2013 as a result of a lower allocation from the Provo River Project (the cities had to absorb the lower water availability). The cities both have other supplies in excess of current demand that allowed them to absorb the lower allocation. An additional 5,600 af is anticipated to become available to the district from the Central Utah Project - Utah Lake System Project when completed in 2021, which will help boost the supply total.
The district plays a regional planning role and actively seeks additional water supply development in conjunction with the two cities. That said, it does not have the legal or financial obligation to meet the balance of supply for the members if its resources are short of demand. The operating risk of insufficient supply is a risk managed by the cities' retail utilities.
EXTENSIVE CAPITAL INVESTMENTS COMPLETED; MODERATE DEBT LEVELS
In the last decade, the district completed a major infrastructure investment program that included approximately $250 million in new investment. These projects were intended to enhance overall water supply redundancy and flexibility and included new and expanded treatment facilities, new pipelines, and other facility expansions and interconnections. As a result, future capital needs are generally modest. The district expects a small completion bond issue in fiscal 2015 to finance remaining costs related to the replacement of its 40 million gallon reservoir at an estimated total cost of approximately $36 million. Completion is expected in five to seven years.
The district's direct debt levels are moderate to above-average, with debt per capita at $718. This does not include debt held by the two cities on their own balance sheets and debt-to-net plant of 80%. However, the age of plant is relatively new at nine years, given the recent investment in system assets. The district has approximately $59 million outstanding (24% of total debt outstanding) in variable-rate mode that is held directly by Wells Fargo. The debt has a five-year term and presents some level of refinancing risk to the district. Two interest rate swap agreements synthetically fix the interest rate on the variable-rate debt.
SURETY SUBSTITUTION IS CREDIT NEUTRAL
The district is substituting a surety policy in lieu of the $6 million cash funded debt service reserve fund for the series 2009A bonds. The released funds will be used to reduce the district's anticipated $15 million debt borrowing in fiscal 2015 to $9 million. The use of a surety bond is consistent with the series 2009A bond indenture. The series 2004 and 2005A bonds also have debt service reserve requirements that are satisfied by surety bonds. The series 2012A and 2012B bonds were issued without a debt service reserve requirement.
Additional information is available at 'www.fitchratings.com'.
In addition to the sources of information identified in Fitch's U.S. Municipal Revenue-Supported Rating Criteria, this action was additionally informed by information from Creditscope.
Applicable Criteria and Related Research:
--'U.S. Water and Sewer Revenue Bond Rating Criteria' (July 31, 2013);
--'2014 Water and Sewer Medians' (Dec. 12, 2013);
--'2014 Outlook: Water and Sewer Sector' (Dec. 12, 2013).
Applicable Criteria and Related Research:
U.S. Water and Sewer Revenue Bond Rating Criteria
2014 Water and Sewer Medians
2014 Outlook: Water and Sewer Sector