SAN FRANCISCO--(BUSINESS WIRE)--Fitch Ratings assigns the following rating for the Metropolitan Water District of Salt Lake & Sandy, Utah:
--Approximately $120 million water system revenue and refunding bonds, series 2012A rated 'AA+'.
The bonds are expected to price in a negotiated sale on Feb. 16, 2012. Proceeds will be used to fund certain capital improvements and to refund existing bonds for cost savings or to convert unhedged variable rate debt to fixed rate debt.
In addition, Fitch affirms the outstanding ratings as follows:
--$134.4 million water system revenue bonds, series 2004, 2005A, and 2009A at 'AA+'.
The Rating Outlook is Stable.
SECURITY
The bonds are secured by the district's net system revenues. Property taxes are not pledged to bondholders but are available to pay operating expenses of the district. The series 2012A bonds do not have a debt service reserve fund.
KEY RATING DRIVERS
REGIONAL WHOLESALE SUPPLIER: The Metropolitan Water District of Salt Lake and Sandy (the district, or MWD) is a major supplier of wholesale treated water to Salt Lake City and Sandy City.
REVENUE DIVERSITY AND STABILITY: Revenue diversity provided by water sales, property taxes and special assessments provide stability during times of demand variability. The rates for both water sales and property taxes have considerable flexibility, and the district can incorporate new assessments, if increased revenues are needed for debt servicing purposes.
STRONG CAPITAL INVESTMENT: Water supplies and delivery reliability have been improved as a result of significant capital investments made in the last decade, which are supported in most cases by direct capital assessments paid by Salt Lake City and Sandy.
DIVERSE SERVICE AREA: The service area's economy is strong and diverse, with a solid customer base. Although water deliveries to Salt Lake City and Sandy have declined for the past three years, this has not had a material impact on the district's financial position due to its revenue structure.
SLIM BUT CONSISTENT FINANCIAL METRICS: Debt service coverage levels are modest for the rating but the lower metrics are mitigated by revenue stability provided by property taxes and assessment revenues, management's consistency in meeting or exceeding budgeted results, a strong liquidity position, and a rapidly amortizing debt portfolio.
CREDIT PROFILE
MWD serves as the supplemental wholesale provider of water to Salt Lake City and Sandy. The district is a key supplier in that it supplies 50% of the treated water used by Salt Lake City and 50%-75% of the treated water used by Sandy. The district's current water supply totals 121,785 acre-feet in an average year and 77,438 acre-feet in a dry year. Annual water demands, including a small amount sold to irrigation entities, were 71,341 acre-feet in 2008 but have tapered downward by 5%-8% annually in the last three years; this trend reflects both slower economic and local weather conditions. However, some concerns remain that once demand recovers water supplies would be pressured to withstand a period of sustained drought. MWD has an additional 5,600 acre-feet that is anticipated to become available from the Central Utah Project - Utah Lake Project when completed in 2021, which will help boost the supply total.
In the last decade, the district completed a major infrastructure investment program that included approximately $250 million in new investment. These projects, intended to enhance the overall water supply redundancy and flexibility, included new and expanded treatment facilities, new pipelines, and other facility expansions and interconnections. As a result, capital needs are generally modest. The district will use proceeds from this sale to finance a portion of the replacement of its 40 million gallon reservoir at an estimated cost of approximately $36 million; completion is expected in five to seven years.
Large rate adjustments needed to support the increased leverage were put in place in previous years, and the district has moved to more moderate 3% annual rate increases beginning in fiscal years 2011. In 2009, the district also moved to a revenue-neutral adjustment in its rate structure that uses peak summer pricing for three months out of the year to send a price signal and encourage conservation during the summer months.
The district has a diverse revenue stream that provides insulation from variable water demand. Water revenues accounted for 36% of revenues in fiscal 2011, with special assessments and property taxes representing approximately 36% and 28%, respectively. The special assessments are structured to satisfy the district's debt obligations for specific projects. Based on the cities' differing needs for additional capacity, each city pays special assessments on a pro rata basis. The district also levies property taxes for operations and maintenance. The district maintains flexibility in its tax rate, which is well below the maximum permitted, despite recent automatic adjustments in the rate required by Utah's truth in taxation law. The adjustments are designed to hold tax revenues neutral in the event of assessed valuation movement (which in most recent years have been declines).
This revenue structure results in consistency in financial performance and actual financial results that are in line with or exceed budgeted financial metrics. Debt service coverage in fiscal 2011 was 1.43 times (x), down slightly from 1.54x in fiscal 2010 and well below the 2.0x and higher coverage reported prior to fiscal 2006. The decline to lower levels was anticipated given escalating debt service, and it is below typical levels for the rating category. However, very strong cash levels, the consistency of the revenue streams, and rate flexibility (both in water rates and the tax rate) mitigate concerns about the district's intent to operate slightly above its internal debt service coverage target of 1.25x. Liquidity was sound at $26 million at the end of fiscal 2011, or 799 days operating cash. Although it will likely decline, management projects it will remain over 365 days cash. Given the district's conservative management practices, Fitch anticipates liquidity levels will remain healthy.
Debt levels are moderate to above average with debt per capita at $672 and debt/net plant of 75%, and these metrics will increase with the reservoir replacement project. The district has approximately $95 million 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 are in place that synthetically fix the interest rate on approximately $58 million of the variable-rate debt.
Additional information is available at 'www.fitchratings.com'. The ratings above were solicited by, or on behalf of, the issuer, and therefore, Fitch has been compensated for the provision of the ratings.
Applicable Criteria and Related Research:
--'Revenue-Supported Rating Criteria', dated June 20, 2011;
--'U.S. Water and Sewer Revenue Bond Rating Criteria', dated Aug. 10, 2011.
Applicable Criteria and Related Research:
Revenue-Supported Rating Criteria
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=637130
U.S. Water and Sewer Revenue Bond Rating Criteria
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=647331
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