Fitch Rates Salt Lake & Sandy Metro Water District, UT's Revs 'AA+'
OREANDA-NEWS. Fitch Ratings assigns an 'AA+' rating to the following bonds issued by the Metropolitan Water District of Salt Lake & Sandy, Utah (the district):
--Approximately $55 million water system revenue refunding bonds, series 2016A.
Bond proceeds will refund all outstanding series 2009A bonds for savings and pay costs of issuance. Bonds are expected to price via negotiated sales April 28, 2016.
In addition, Fitch affirms its outstanding 'AA+' rating on the following outstanding parity debt:
--$182.9 million water system revenue bonds, series 2009A, 2012A, 2012B and 2015A.
The Rating Outlook is Stable.
Bonds are payable from the district's net system revenues, including water sales revenues and 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 the major supplier of supplemental wholesale water to the cities of Salt Lake City and Sandy. 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.
CONSISTENT FINANCIAL MARGINS: Debt service coverage levels are healthy and 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.
LOWER FINANCIAL RESULTS: The Metropolitan District of Salt Lake and Sandy routinely outperforms its targeted debt service coverage level of 1.25x, with actual coverage at or above 1.5x. While not expected given the district's very high degree of revenue consistency, a sustained decline in debt service coverage could place pressure on the rating.
The district serves as the supplemental wholesale provider of water to Salt Lake City and Sandy, serving a combined population of approximately 450,000. The district typically provides 35%-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.
Sales were lower in fiscals 2014 and 2015 given the district's lower water availability on its allocation from the Provo River Project (the district's primary water supply). The two cities take the allocation risk of the Provo River Project and have had to absorb the lower water availability through use of their other supplies. District revenues have remained consistent.
MODERATE BUT CONSISTENT FINANCIAL PERFORMANCE
Debt service coverage in fiscal 2014 was 1.6x. Coverage has consistently ranged between 1.4x-1.7x for the past five years. Similar debt service coverage levels are projected in management's cash flow forecast. Revenues of the district exhibit a high degree of consistency.
Liquidity levels remain strong at $27.1 million, or 780 days of operating cash at the end of fiscal 2015. 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 12 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 2015, with fixed capacity assessments and property taxes representing approximately 32% and 26%, respectively. The capacity assessments were established in 2001 agreements with the two cities and are structured to match the district's costs related to specific projects constructed after that time. 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. Utah's truth-in-taxation law provides tax revenue protection to the district from changing assessed valuations by automatically adjusting the tax rate to preserve revenue neutrality.
SUFFICIENT LONG-TERM WATER SUPPLY
The district's water supplies consist of the water rights in the Provo River Project (61,700 af), 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 five years to amounts below the full allocation. Annual water sales to the two cities averaged 65,000 af over the past five years.
The district pays a fixed cost for its Provo River allocation, which is billed indirectly to the cities through volumetric water sales. The district manages the risk associated with lower usage of this supply through its reserves. The cities both have other water 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. The Utah Lake System Project costs will be funded by a capacity assessment charged to the cities but the original 20,000 af of Central Utah Project water is billed indirectly through water sales.
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, estimated at around $8 million annually. Capital needs in the next five years are expected to be funded from ongoing revenues. No additional new debt is expected. Final completion of the district's terminal reservoir replacement project is expected in 2017.
The district's direct debt levels are moderate to above-average, with debt per capita at $1,093. This does not include debt held by the two cities on their own balance sheets. However, the age of plant is relatively new at 11 years, given the recent investment in system assets. The district has approximately $59 million outstanding (22% of total debt outstanding) in variable-rate mode that is held directly by Wells Fargo. The debt matures in 2019 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.