Fitch Affirms South Ogden Conservation District, UT's Water Revs at 'AA-'; Outlook Stable
--$9.7 million outstanding water revenue bonds series 2014.
The Rating Outlook is Stable.
The bonds are secured by a senior lien pledge on net revenues of the district's water system.
KEY RATING DRIVERS
ADEQUATE FINANCIAL POSITION: For 2016, projected debt service coverage (DSC) is 1.7x, which is below average for the 'AA' category, but is somewhat offset by the above average projected 541 days of cash on hand (DCOH). Fitch believes these metrics are adequate given the system's low operational risk (gravity fed distribution of non-potable irrigation water).
LOW DEBT BURDEN: Debt metrics are very favorable with low debt per customer ratios, average amortization and no plans for future debt.
LIMITED FUTURE CAPITAL NEEDS: Due to the mature service area with little anticipated growth, no large capital projects are on the horizon. Annual capital needs are limited to rehabilitation and replacement (R&R).
STABLE REVENUES/STRONG ENFORCEMENT: The system charges an annual uniform fee that is collected on the property tax bill, providing a high degree of revenue stability. Delinquencies result in a lien placed on the property, thereby producing nearly 100% collections.
DETERIORATION OF FINANCIAL PROFILE: South Ogden Conservation District's rating is sensitive to actual financial results meeting the forecasted DSC and maintaining liquidity commensurate with or above the 'AA' category.
Located about 40 miles north of Salt Lake City in Weber County, the district provides irrigation water (secondary water) supplied by the Pineview Reservoir to a mature, well-defined service territory that includes portions of Ogden City, South Ogden City, and Washington Terrace. The district has over 9,900 connections and serves approximately 25,000 residents. Growth prospects are limited to infill and redevelopment.
Service is provided to residential, commercial, agricultural and industrial users. Over 90% of customers are residential connections. Annual user fees are calculated based on parcel size and billed to customers regardless of whether or not the property owner uses their allocation of water. This results in a highly predictable revenue stream.
STRONG LIQUIDITY BUT BELOW AVERAGE COVERAGE
Starting in 2012, the district's board of trustees adopted a series of large rate increases to ensure financial support of the series 2014 bond repayment. Rates were increased by 25% in 2012, 16% in 2013 and 12% in 2014 and 2015. Management anticipates only modest annual rate increases due to increases in purchase water costs from Weber Basin Water Conservancy District (water revenue bonds rated 'AAA'/Stable Outlook). As a result, the average annual user fee has increased from $226 in 2014 to $294 in 2016.
The average annual fee equates to 0.7% of median household income (MHI), below Fitch's affordability threshold. However, including drinking water and sewer charges of the typical Ogden City customer raises the total utility bill to over 2% of MHI, above Fitch's affordability benchmark and somewhat limiting overall rate-raising flexibility.
DCOH has increased from 242 days in 2011 to 731 days in 2015, well over the 'AA' median of 485 days. This increase is largely attributable to the rate increases implemented during this period. Although the district plans on covering ongoing capital costs on a pay-go basis, liquidity levels should remain favorable.
For 2015, DSC was high at 5.0x but was the result of interest only debt service during this period. With principal payments beginning in 2016, DSC is projected to drop to 1.7x, below the 'AA' category median. Based on management's provided revenue forecast, DSC is projected to range from 1.3x in 2017 (when maximum annual debt service occurs) to 1.4x in 2019. Fitch believes forecasted results are achievable and that revenue levels may outperform.
LOW DEBT BURDEN AND MINIMAL CAPITAL NEEDS
Ongoing capital needs are modest and are limited to system line replacement at an estimated cost of $400,000 to $600,000 annually. Current debt per customer is $984, well under the 'AA' rating category median of $2,050. The system has no plans to issue additional bonds within the next ten years so debt levels will decrease and will remain favorable over time.