SAN FRANCISCO--(BUSINESS WIRE)--Fitch Ratings assigns an 'AAA' rating to the following Weber Basin Water Conservancy District, Utah (the district) debt:
--$34.3 million water revenue refunding bonds series 2015A.
The bonds are scheduled to sell via negotiation the week of January 6. Proceeds will refund the utility's outstanding 2005B and 2007A water revenue bonds.
In addition, Fitch upgrades the following ratings:
--$103 million outstanding water revenue bonds to 'AAA' from 'AA+'.
The Rating Outlook is Stable.
SECURITY
The bonds are secured by gross water revenues, including impact fees. A property tax is levied, but not pledged for repayment of the revenue bonds.
KEY RATING DRIVERS
UPGRADE REFLECTS SUSTAINED STRENGTH: The upgrade reflects sustained strong financial performance, a very stable revenue structure, modest use of debt and strong economic growth in the service area.
STRONG DEBT SERVICE COVERAGE: Debt service coverage (DSC) averaged a solid 1.8 over the three fiscal years (FY) ended June 30, 2014. Coverage is expected to decline somewhat over the next five years as debt service rises but to remain quite healthy.
SOLID LIQUIDITY IMPROVES: Liquidity has continued to grow, reaching 768 days cash at the end of fiscal 2014.
VERY STABLE REVENUES: The district's revenues are stable and predictable with the bulk of receipts from take-or-pay water contracts and property taxes. The district enjoys good rate flexibility as a wholesaler with fairly low current rates.
MODEST DEBT BURDEN: Debt remains low at $251 per capita. Debt ratios are projected to remain healthy despite $45 million of additional borrowing over the next five years. Amortization is solid with 86% of debt repaid over 20 years.
ADEQUATE SUPPLIES: Supplies are currently estimated to be adequate to meet the region's demands through 2030. The state and the district are proactively planning for major new supply projects that will meet the needs of a growing population after 2030. The district is likely to face significant capital costs as it acquires new supplies.
ESSENTIAL SERVICE TO BROAD AREA: The district provides essential wholesale water services to a broad and economically strong service area.
SOLID MANAGEMENT: The district's management is experienced and professional. Financial, water supply and capital planning are thorough. Budgets are conservative. Governance by an appointed board of directors appears relatively apolitical.
RATING SENSITIVITIES
CHANGE IN FINANCIAL PERFORMANCE: The rating is sensitive to fundamental shifts in credit quality, particularly the debt and financial profiles. The Stable Outlook reflects Fitch's expectation that such shifts are unlikely over the next two years.
CREDIT PROFILE
The district is the local sponsor and operator of the Federal Weber Basin Project. The district serves 571,500 people in a 2,500 square mile service area that spans the counties of Davis, Weber, Morgan, Summit, and a small portion of Box Elder. It is the regional water wholesale water to about 20 municipalities, as well as a significant number of industrial facilities and agricultural enterprises. It sells about 225,000 acre-feet (AF) of water annually with about 40% sold to municipal and industrial users and 60% to agricultural users.
SOLID FINANCIAL PERFORMANCE
Financial performance has been strong. Fitch-calculated all-in debt service coverage was solid at 1.8x in FY 2013 and 2014. Indenture compliant coverage (which excludes revenues and debt service on tax-supported debt) was above 2x in both years. The district's financial forecast shows coverage declining to an average of 1.7x over the next five years. Fitch believes the forecast is reasonably conservative and expects the district to outperform to some degree. Coverage is quite strong for a wholesaler. Wholesalers' strong rate flexibility and large, diverse service areas tend to allow somewhat lower coverage relative to the rating category.
VERY STABLE REVENUES
The district also benefits from a very favorable, stable revenue structure, lessening the need for excess coverage to offset demand variations. Water revenues are largely derived from take-or-pay contracts and land assessments under which customers pay a set fee for a fixed amount of water regardless of variations in retail water demand. Water sales revenues have been extremely stable. Property taxes have also been quite stable due to state tax laws that allow for automatic changes in tax rates to preserve prior year levies. Together, property taxes and water sales revenues make up almost 90% of system revenues.
The system has minimal exposure to growth-related development fees. The most significant revenue volatility comes from hydroelectric power revenues, but they made up less than 6% of revenues at their recent peak in FY 2012. The district conservatively assumes minimal hydroelectric revenues in its budgets and financial forecasts.
AFFORDABLE CHARGES, GOOD RATE FLEXIBILITY
The district's rates for treated water appear affordable, ranging from $143 to $546 per acre foot, depending on the source of supply and place of delivery. The district has raised rates very gradually with rate increases for its lowest cost original project water rising by an average of 2.4% annually from 2011 to 2015. Rate decisions have been uncontroversial and have not been unduly politicized. Fitch judges rate flexibility to be adequate and a significant credit strength.
STRONG CASH POSITION
Liquidity was very strong with $28.1 million of unrestricted cash and investments at the end of FY 2014, equaling 768 days of operations. Cash has consistently exceeded 500 days of operating expense and usually exceeds the median for 'AAA' rated utilities. Fitch expects cash levels to rise gradually over the next five years and to remain very healthy.
LOW DEBT BURDEN
Debt is low at $251 per capita and forecast to rise slightly to a still low $289 per capita over the next five years, as the district issues $45 million of new debt. Amortization is typical for a water provider with 44% repaid in 10 years and 86% repaid in 20 years. While wholesale utilities tend to carry rather low debt compared to their high populations, debt-to-equity ratios tend to run high. Weber Basin compares favorably to other wholesalers with a moderate debt-to-equity ratio of 2.5. The district's current five-year capital improvement plan totals a manageable $58.4 million and will be about 77% funded by debt. In the longer term, debt ratios could rise significantly. The district anticipates significant debt-financing will be necessary to help fund the Bear River Water Supply project in the coming decades.
ADEQUATE CAPACITY
About 75% of the district's water supply comes from the federal water project, which stores flows from the Weber and Ogden Rivers that are fed by runoff from the Wasatch Mountains. Another 25% of supplies are provided by district surface water projects, wells and stock in water companies. The district's reliable supplies total about 276,345 AF, compared to annual sales of about 225,000 AF. The district's storage capacity equals about two years' worth of supply, allowing it to build reserves during wet years to assure supplies in dry years.
Supplies appear adequate to meet demand over the next two decades, assuming some conservation offsets new growth. However, long-term demands will require a major new source of supplies for northern Utah. The district and other major water agencies are working with the state to develop the Bear River Water Supply project, which would provide the district with an additional 50,000 acre feet of water annually at project completion in 2035. The project is likely to add significantly to the district's debt burden in the future, but it is also likely to provide an important source of supply to meet future growth needs. The district's efforts to plan for distant supply needs is a credit strength.
STRONG SERVICE AREA
The service area is sizeable and economically resilient. Davis and Weber counties comprise about 90% of the district's population and are part of the Ogden-Clearfield metropolitan statistical area (MSA), which includes Salt Lake City's northern suburbs. Large employers in the area include Hill Air Force Base, Davis County and Weber County School Districts, the Internal Revenue Service and McKay-Dee Hospital Center. MSA unemployment rates have historically tracked Utah state levels and have typically outperformed the nation by a significant margin. The non-seasonally adjusted unemployment rate stood at a healthy 3.7% in October 2014.
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 informed by information from CreditScope and IHS Global Insights.
Applicable Criteria and Related Research:
--'Revenue-Supported Rating Criteria' (June 16, 2014);
--'U.S. Water and Sewer Revenue Bond Rating Criteria' (July 31, 2013);
--'2015 Water and Sewer Medians' (Dec. 10, 2014);
--'2015 Outlook: Water and Sewer Sector' (Dec. 10, 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=961935
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