Fitch Affirms St. George, UT Water Revs at 'A+'; Outlook Stable

NEW YORK--()--Fitch Ratings affirms its 'A+' rating to the following St. George, UT (the city) revenue bonds:

--$4.7 million water revenue refunding bonds, series 2011.

The Rating Outlook is Stable.

SECURITY

The bonds are secured by a first lien and pledge of the city's water system (the system) net revenues.

KEY RATING DRIVERS

IMPROVING FINANCES: The system's liquidity and debt service coverage (DSC) metrics are on the rebound following several years of poor cash positions and weak coverage levels.

FAVORABLE DEBT PROFILE: Debt levels are low and expected to decline over time as capital needs through the fiscal 2019 forecast period will be funded from surplus cash flows.

RATES REMAIN AFFORDABLE: The average water system customer pays roughly 0.9% of median household income (MHI), slightly below the Fitch affordability threshold of 1.0%.

LIMITED OPERATIONAL RISK: As primarily a distribution system that purchases water from the Washington County Water Conservancy District, UT (WCWCD; rated 'AA', Outlook Stable by Fitch) according to a take-and-pay contract, the system has limited operational risk.

RATING SENSITIVITIES

IMPROVED LIQUIDITY: Management's ability to complement the current trajectory of improved DSC levels with a growth in liquid resources will support near-term rating stability.

CREDIT PROFILE

St. George covers approximately 71 square miles in the southwest corner of Utah, located about 120 miles northeast of Las Vegas and 300 miles south of Salt Lake City. The system serves an estimated population of 78,000 residents and 24,000 customers. The city's low unemployment rate of 3.8% in Oct. 2014 (down from 6.2% two years prior) was slightly higher than the state's rate (3.6%) but lower than the national level (5.7%) in Oct. 2014. The city's MHI is 90% of the state and 82% of the nation.

STABILIZING FINANCIAL PROFILE

The utility's financial position is starting to show improvement after several years of thin coverage margins and negative cash levels. DSC averaged 1.37x from fiscals 2010 through 2012 and cash levels dropped from over $800,000 to a negative $1.6 million during that time, largely attributable to expansion-related capital outlays prior to receipt of impact fees.

In fiscal 2012 the city closed some of its wells due to stricter federal arsenic regulations, leading to the city purchasing additional supplies from WCWCD at a higher cost than historical local production costs. WCWCD bills the city based on expected annual use and fixed charges, then rebates the city back any charges above actual use at the end of the year. The WCWCD and the city have different fiscal years, leading to a one-year lag when the rebates are accounted for on the system's financial statements. These two factors - the rising water costs and rebate money lag - led to decreased net revenues in fiscal 2012 and resulted in DSC declining to the rate covenant of 1.15x.

Anticipating continued purchase of the bulk of its water from WCWCD over the long term, the city enacted two separate rate increases over the course of two years: a $6.60 increase to the base rate in 2013 (with a concurrent $6.60 decrease to the sewer base rate to maintain level rates), and a 10% base rate increase in July 2014, combining to represent a nearly 33% increase in order to improve net revenues. This, coupled with lower annual debt service (ADS) costs, yielded fiscal 2013 net revenues that resulted in over 3x DSC. Liquidity remained poor, however, as that year marked the third consecutive year of negative operating cash due to continued capital outlays.

Fiscal 2014 audited results reflect a modest departure from this period of poor financial results: unrestricted cash totaled $774,000 or the equivalent of an estimated 24 days' cash on hand and net revenues yielded 2.1x DSC. According to projections provided by management, DSC is expected to show further improvement through fiscal 2020 as ADS wanes and net revenues maintain steady, albeit modest, year-over-year growth. Furthermore, management expects that the implementation of more rigorous internal financial policies targeting DSC and liquidity is likely to improve these metrics further.

LIMITED OPERATIONAL RISK

Operations are limited. The water system is primarily a distribution system, purchasing the majority of its water on a take-and-pay basis (i.e. paying only for the water it purchases) through a perpetual contract with WCWCD. Ultimately, due to the more stringent arsenic regulations in recent years, purchased water from WCWCD was and remains more economical than the city treating the arsenic present in its own wells.

RATES REMAIN AFFORDABLE

The city increased water rates, which apply to both treatment and distribution, in fiscal 2013 for the first time since 2008. Concurrently, the city decreased sewer rates by approximately the same amount to maintain an overall level rate structure. The average St. George water customer pays 0.9% MHI for water, just below Fitch's affordability threshold of 1% for a single utility charge. On a combined basis, water and wastewater charges equate to only 1.2% MHI, well below Fitch's 2% combined charge threshold. This margin lends management flexibility for further rate increases if necessary.

MANAGEABLE CAPITAL PLAN

Debt levels are low at about $576 per customer and are expected to decline over time given limited capital needs and a lack of future borrowing plans. Positively, the debt amortization schedule is rapid, with 100% of debt being paid off in 12 years.

The system's five-year fiscal 2015-2019 capital improvement plan of about $14.2 million is manageable, equating to an average of roughly $117 per capita, and is ably funded by projected recurring surplus revenues. Major projects include a connection pipe to the WCWCD regional pipeline to extend along the southern corridor towards the airport, the replacement of an industrial tank, and various repair and replacement projects.

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 additionally informed by information from Creditscope.

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:

2015 Outlook: Water and Sewer Sector

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

2015 Water and Sewer Medians

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

U.S. Water and Sewer Revenue Bond Rating Criteria

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

Revenue-Supported Rating Criteria

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

Additional Disclosure

Solicitation Status

http://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=979457

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Contacts

Fitch Ratings
Primary Analyst
Eva D. Rippeteau, +1-212-908-9105
Associate Director
Fitch Ratings, Inc.
33 Whitehall Street
New York, NY 10004
or
Secondary Analyst
Shannon Groff, +1-415-732-5628
Director
or
Committee Chairperson
Doug Scott, +1-512-215-3725
Managing Director
or
Media Relations
Elizabeth Fogerty, +1-212-908-0526 (New York)
elizabeth.fogerty@fitchratings.com

Contacts

Fitch Ratings
Primary Analyst
Eva D. Rippeteau, +1-212-908-9105
Associate Director
Fitch Ratings, Inc.
33 Whitehall Street
New York, NY 10004
or
Secondary Analyst
Shannon Groff, +1-415-732-5628
Director
or
Committee Chairperson
Doug Scott, +1-512-215-3725
Managing Director
or
Media Relations
Elizabeth Fogerty, +1-212-908-0526 (New York)
elizabeth.fogerty@fitchratings.com