Fitch Upgrades North Salt Lake City, UT's Water Revs to 'A+'; Outlook Stable
--$3.4 million water revenue bonds, series 2010.
The Rating Outlook is Stable.
The bonds are secured by a first lien on and pledge of the net revenues of the city's complete water system including culinary water, irrigation, and storm water (collectively, the system).
KEY RATING DRIVERS
HEALTHY CASH BALANCES: The upgrade is based primarily on the city council's 2013 adoption of a minimum cash balance policy and resulting significantly improved cash balances. Prior to this policy change, the system's days of cash on hand often registered at or near $0.
IMPROVED FINANCIAL MARGINS: All-in debt service coverage (DSC) has improved following a series of rate increases that began in 2011. Fiscal 2015 financial results show all-in DSC at a solid 2.6x versus a weak 1.1x coverage in 2010.
RELIANCE ON CONNECTION FEES: Although now strong, DSC is still somewhat reliant on connection fees. Excluding connection fees, fiscal 2015 DSC was 1.6x which, while adequate for the rating, is somewhat below average.
LOW DEBT BURDEN: The overall debt burden on a per-customer basis is low for the 'A'-rating category and amortization is rapid. Manageable capital plans and the expectation of no new borrowing should keep debt levels low over the intermediate term.
STRONG YET CONCENTRATED ECONOMY: The city has seen rapid growth with population doubling in the last decade. Wealth levels are above the state and national averages and employment trends are favorable. However, there is some concentration in the customer base, with the ten largest users representing 18% of total revenues in fiscal 2014.
MAINTENANCE OF FINANCIAL PROFILE: With the recent implementation of new reserve policies, the system's financial profile is now sound and is expected to remain stable over the intermediate term. Maintenance of sound debt and financial profiles are key to maintaining rating stability.
The city is approximately seven miles north of Salt Lake City and is bordered by the Wasatch Mountains on the east and the Great Salt Lake on the west. The system services a small service area of approximately 6,700 culinary and irrigation water customers.
HEALTHY LIQUIDITY BALANCES
Since the city implemented changes to its policies requiring minimum unrestricted cash balances for each of the culinary, irrigation and storm water funds, the system's cash balances have been positive and have climbed in every subsequent year. Fiscal 2015 finished with 465 days of cash on hand, which Fitch considers to be very strong for the rating level. Liquidity may be somewhat reduced over the near term but is expected to be sufficient going forward in keeping with the aforementioned policy change.
RATE INCREASES IMPROVE COVERAGE, REMAIN AFFORABLE
The system's financial performance suffered during the recession when coverage margins and cash balances worsened while rates were held flat. Subsequently, the city council enacted a significant rate increase for fiscal 2010 and followed with frequent smaller increases, leading to improved financial operations. As a result, DSC, which had been just above 1.0x (and less than 1.0x excluding connection fees), has improved to levels which Fitch now considers to be sound. All-in DSC for fiscal years 2014 and 2015 improved to 4.4x and 2.6x, respectively. These levels compare favorably to Fitch's 'A' median DSC of 2.0x. Excluding connection fees, DSC has been lower, but is still considered adequate, averaging about 1.4x since 2013. Calculations of DSC based on the bond rate covenant consider debt service for the forthcoming year. All-in DSC would be higher in 2014 and 2015 under this methodology.
Despite the increases, rates remain very affordable. Based on Fitch's standard residential usage assumption of 7,500 gallons per month, current monthly bills register at 0.5% of median household income (MHI). Although actual usage may be a bit higher than Fitch's assumption, actual customer bills are still expected to be below Fitch's affordability threshold of 1.0% of MHI.
LOW DEBT BURDEN, MANAGEABLE CAPITAL NEEDS
The five-year capital improvement plan for the combined systems totals a manageable $9.3 million. Overall debt on a per-customer basis is below average at $1,126 and is not expected to increase as there are no plans to issue more debt in the near term. Additionally, as the system contracts with a wholesale provider for a significant portion of its water supply, costs associated with such provider's capital needs are typically borne by the provider thereby minimizing direct costs to the system. Amortization is very rapid with 72% principal pay-out in 10 years.
AMPLE SUPPLY WITH SOME CONCENTRATION
Annual culinary water demand totaled around 4,150 acre-feet in 2014 with a large portion provided through a take-or-pay contract with Weber Basin Water Conservancy District (rated 'AAA' with a Stable Outlook by Fitch) and the remainder being supplied by city wells. While usage of Weber Basin water varies depending on weather conditions, only about 50% of it is typically utilized. This supply, combined with the city's wells, is expected to accommodate future growth and development needs through build-out. There is some concentration as the single largest (Big West Oil) and 10-largest users represented 7.7% and 18% of revenues, respectively in fiscal 2014. All are reportedly stable customers.
STRONG AND GROWING LOCAL ECONOMY
The city's economy benefits from its location and participation in the greater Salt Lake City MSA. County wealth levels are above average with MHI at 116% and 131% of the state and national averages, respectively. At just 3.8%, county unemployment levels were also strong in July 2015.