Fitch Ratings assigns its 'AA+' rating to the following bonds issued by the Metropolitan Water District of Salt Lake & Sandy, Utah (the district):
--Approximately $6.3 million water system revenue bonds, series 2015A.
Proceeds will be used to fund final construction costs associated with the District's terminal reservoir replacement project. Bonds are expected to price via negotiated sales on Jan. 21, 2015.
In addition, Fitch affirms its outstanding 'AA+' rating on the following outstanding parity debt:
--$182.4 million water system revenue bonds, series 2004, 2005A, 2009A, 2012A and 2012B.
The Rating Outlook is Stable.
SECURITY
Bonds are secured by the district's net system revenues, including annual assessments charged to the two cities to support specific water supply projects. Property taxes are not pledged to bondholders but are available to pay operating expenses of the district.
KEY RATING DRIVERS
REGIONAL WHOLESALE SUPPLIER: The district is a major supplier of supplemental wholesale water to the cities of Salt Lake City and Sandy, servicing a combined population base of around 390,000. District water supplies are developed at the direction of the two cities and the cities are committed to pay district costs through water rates and capacity assessments.
ADEQUATE MARGINS BUT PRESSURE EXISTS: Debt service coverage levels are in line with the rating category, given the district's wholesale role and limited risk profile. Sales are lower as a result of lower available water supply but have not affected financial margins due to higher costs per unit of water sold being passed through to Salt Lake City and Sandy.
REVENUE DIVERSITY AND STABILITY: Revenue diversity provided by water sales, property taxes, and fixed capacity assessments provides stability during times of demand variability.
STRONG CAPITAL INVESTMENT: Water supplies and delivery reliability have been improved as a result of significant capital investments made in the last decade.
RATING SENSITIVITIES
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.
CREDIT PROFILE
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 2014 was 1.57x. Coverage has consistently been between 1.4x-1.6x for the past five years. Lower debt service coverage levels are projected in management's cash flow forecast. However, the district typically outperforms its forecast and coverage is expected to remain around historical levels and above the district's targeted minimum of 1.25x.
Liquidity levels remain strong at $25.2 million, or 703 days of operating cash at the end of fiscal 2014. This amount includes the $3.4 million three-month operations and maintenance (O&M) reserve required by the bond indenture. Management projects unrestricted cash and investments might decline closer to a still-healthy six months of O&M. Potentially lower reserves are not viewed as a credit risk given the district's rate flexibility and stable financial margins.
REVENUE DIVERSITY AND STABILITY
The district has a diverse revenue stream that provides insulation from variable water demand. Water sales revenues accounted for 42% of revenues in fiscal 2014, with fixed capacity assessments and property taxes representing approximately 32% and 26%, respectively. The capacity assessments are structured to match the district's costs related to specific projects. Based on the cities' differing needs for additional capacity, each city pays special assessments on a pro rata basis.
The district has covenanted in its bond indenture that it will maintain its property tax levy, up to the maximum permitted by law, sufficient to cover operation and maintenance costs of the district. The ability to increase tax revenue is limited by a legislative change that became effective in 2014, which requires any increase in tax revenues (other than changes in the tax rate permitted by Utah's truth-in-taxation law) to be approved by the city councils of Salt Lake City and Sandy.
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 sales to the two cities averaged 65,000 af over the past five years.
The district's water supplies consist of the water rights in the Little Cottonwood Creek (water rights owned by the member cities and treated by the district), the Provo River Project (61,700 af in most water years), and the Central Utah Project (20,000 af). Water supplies have been highly reliable historically but a regional drought has reduced the water available from the Provo River Project for the past three years.
The district pays a fixed cost for its Provo River allocation, which is billed directly to the cities. District revenues are not at risk of the cities using less of this water supply, since the assessments paid by the cities cover the full cost of the Provo River allocation, regardless of usage. The cities both have other supplies in excess of current demand that allowed them to absorb the lower allocations. 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 total supply. Utah Lake System costs are also funded by a capacity assessment charged to the cities.
The district plays a regional planning role and actively seeks additional water supply development in conjunction with the two cities. However, 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 in any given year. The operating risk of insufficient supply is a risk managed at 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 series 2015A bonds will finance remaining costs related to the replacement of its 40 million-gallon reservoir at an estimated total cost of approximately $42 million. Completion is expected by 2017. No further new debt issuance is expected in the near term.
The district's direct debt levels are moderate to above-average, with debt per capita at $700. This does not include debt held by the two cities on their own balance sheets. However, the age of plant is relatively new at 10 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.
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', Aug. 3, 2013.
Applicable Criteria and Related Research:
U.S. Water and Sewer Revenue Bond Rating Criteria
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=715275
Additional Disclosure
Solicitation Status
http://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=964095
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