AUSTIN, Texas--(BUSINESS WIRE)--Fitch Ratings has affirmed the 'A+' rating on Mountain Regional Water Special Service District, UT's (the district) following obligations:
--$4.6 million water revenue refunding bonds series 2009B;
--$27.3 million water revenue refunding bonds series 2012;
--$8.1 million water revenue bonds series 2014.
The Rating Outlook is Stable.
The bonds are secured by net revenues of the district's water system, including impact fees and special assessments.
KEY RATING DRIVERS
MODEST FINANCIAL PROFILE: Historic and projected all-in debt service coverage (DSC) typically is lower than the categorical median. Additionally, all-in debt as a percentage of gross revenues is high at 37%, while the median is 25%.
HIGHLY LEVERAGED SYSTEM: Although declining over the five-year forecast period, debt levels are projected to remain high. Debt per capita and debt to equity are both higher than categorical medians.
LIMITED SHORT-TERM CAPITAL NEEDS: The current five-year capital improvement program (CIP) totals only $4.3 million, and will be mostly cash funded. Projects related to new development will be paid for by developers.
REVENUE STABILITY IN RATE STRUCTURE: A large portion of an average resident's monthly bill is recovered through a fixed fee, providing a measure of revenue stability.
GROWING CUSTOMER BASE: The district serves a growing area through both retail and wholesale accounts. New retail customers have grown by an average of over 3% each of the last three years.
ABILITY TO ACHIEVE FORECAST: The rating is sensitive to Mountain Regional Water Special Service District's ability to achieve forecasted DSC and operating revenues. Failure to do so would likely result in downward rating pressure.
The district is a culinary and irrigation water supplier in western Summit County, an area generally known as the Snyderville Basin. Covering approximately 40 square miles, it serves nearly 7,000 residents and The Canyons ski resort. A regionalization agreement between the district, Summit Water, Park City, and Weber Basin enables the district to sell surplus water to other retail water service providers in the area. As a result of two large wholesale contracts with Summit Water and Park City, the district produces more water for its wholesale customers, than for its retail customers.
SUFFICIENT COVERAGE AND LIQUIDITY
The district achieved all-in DSC of 1.4x and 1.7x in fiscals 2014 and 2015, exceeding prior forecast expectations. Management's forecast points to all-in coverage of 1.5x in 2016, dropping to 1.3x 2017, and returning to 1.4x in 2018 and beyond. To achieve targeted DSC of 1.4x, the district anticipates implementing rate increases in fiscals 2019 through 2021, in addition to cash defeasing debt due in fiscals 2019 through 2021. Successful defeasance of the planned debt will be critical to the district achieving targeted coverage levels, as will continued growth in the customer base. Fitch believes the forecasted growth assumptions used by management are reasonable. Additionally, the cash to be used for defeasing debt in 2019 through 2021 will be provided by water sales under the regionalization agreement. Based on audited 2015 results, and the existing contract with Summit Water, Fitch expects there to be sufficient cash available to execute the planned defeasances.
Liquidity has steadily improved from 181 days cash on hand (DCOH) in fiscal 2011 to 339 DCOH in fiscal 2015. The district plans on cash funding about 75% of its CIP so liquidity may decline somewhat, but should still remain sufficient to provide financial flexibility.
HIGH DEBT LEVELS, MANAGEABLE CAPITAL NEEDS
With almost $49 million in debt outstanding at fiscal 2015, debt levels are high with debt to equity at 13.2x versus the categorical median of 4.5x. Debt per capita also is elevated and higher than similarly-rated systems. For 2015, debt per capita was $7,154, while the categorical median is only $675. Positively, the district's debt amortizes more quickly than similarly-rated systems, with 50% amortized within ten years, and all debt fully amortized within 20 years.
Future capital needs are manageable, with the majority of water infrastructure needed by the district to meet projected demand through build out completed. The current five-year CIP totals $4.3 million. The district plans to cash fund the CIP with cash and impact fee collections. While debt per capita is expected to decline over the five-year horizon, it will likely remain above the categorical median.
As outlined in the regionalization agreement, a second water importation project will be constructed by Weber Basin in the area, projected within the next seven to fifteen years. Management anticipates its prorated share of the project costs will be $4 to $6 million. The district will reimburse Weber Basin through increased lease fees over a 20 year period, but accounting standards will require the district to reflect the cost as a note payable, which would be on parity with existing debt. Given the anticipated timing of the project, the district's relatively rapid amortization, and projected steady growth, Fitch does not expect debt ratios would return to their historically high levels.
RATE STRUCTURE PROVIDES REVENUE STABILITY
The district has several types of retail customers, including active customers and standby customers. Standby customers are considered to be platted properties for which water infrastructure is installed and in a ready-to-serve status. The standby customers' monthly fee of $38.50 is entirely fixed and is paid by developers until the property is purchased and the new owner takes over payment. For active customers, the average residential monthly bill is comprised of a fixed fee that equates to 75% of the monthly bill. The balance is recouped through tiered volumetric charges. Such a rate structure provides a good deal of revenue stability for the district.
In 2015, rates slightly exceeded Fitch's affordability measure and equated to 1.1% of median household income, based on actual average residential usage of 8,454 gallons per month. High rates are partially attributable to the challenges of distributing water in a mountainous topography and the small customer base. However, this concern is somewhat mitigated by comparable rates in surrounding areas and limited additional capital needs.
GROWING CUSTOMER BASE, AFFLUENT SERVICE AREA
The district's customer base is small but growing, with nearly 5,200 accounts in fiscal 2015. Since 2013 the number of active customers has increased by an average of 3.3% each year. The district's top ten customers represented nearly 25% of revenues in fiscal 2015, which is moderate for a system that produces both retail and wholesale water. Wholesale revenue also is expected to increase with additional contracted sales to Summit Water increasing in 2018, and possibly again in 2020.
Summit County wealth levels are high with median household incomes at 140% of state and 160% of U.S. averages. Unemployment is extremely low at 2.8% (September 2016) compared to the national average of 4.7% (October 2016).
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Revenue-Supported Rating Criteria (pub. 16 Jun 2014)
U.S. Water and Sewer Revenue Bond Rating Criteria (pub. 03 Sep 2015)
Dodd-Frank Rating Information Disclosure Form
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