SAN FRANCISCO--(BUSINESS WIRE)--Fitch Ratings has assigned an 'AA' rating to Jordan Valley Water Conservancy District, Utah's (the district) bonds as follows:
--$44.2 million water revenue and refunding bonds series 2014A;
--$5.8 million taxable water revenue refunding bonds series 2014B.
The bonds will sell via negotiated sale on or about the week of May 26. Proceeds will be used to finance various capital improvements, including a 12 million gallon water storage reservoir, new transmission pipes, seismic improvements, and other projects. A portion of the proceeds will also be used for capitalized interest and to refund the district's 2005A bonds for net present value savings.
In addition, Fitch affirms the following ratings at 'AA':
--$22.2 million taxable water revenue bonds series 2009B;
--$16.9 million water revenue and refunding bonds series 2011A
--$70.7 million water revenue bonds series 1992, 2005B, 2007B, 2009A, 2011B;
--$15.6 million water revenue bonds (taxable Build America Bonds- Issuer Subsidy) series 2010C.
The Rating Outlook is Positive.
SECURITY
The bonds are secured by net system revenues. Although the 2014A and 2014B bonds do not include a debt service reserve fund, a number of the district's parity revenue bonds are additionally secured by cash-funded debt service reserves.
KEY RATING DRIVERS
SOUND FINANCIAL PROFILE: The Positive Outlook reflects Fitch's expectation that the system's sound financial operations will continue despite management's projections of deterioration. If operations perform materially better than projected, as they have in the past, Fitch likely would upgrade the district's bonds. Other credit factors, including supply and service area characteristics, are consistent with a higher rating.
STABILITY AS REGIONAL WHOLESALE PROVIDER: The district serves as a regional wholesale water supplier to a substantial customer base of 580,000. Given that 85% of the district's water sale revenues are derived from take or pay wholesale contracts, its revenues and customer base are relatively stable.
CONSISTENT RATE HIKES: The district has increased rates incrementally in all but one of the past 10 years and expects to continue this practice over the next decade.
LOW TO MODERATE DEBT LEVELS: The district's current per capita debt levels are low for the rating category, and are expected to rise to low to moderate levels in anticipation of future leveraging.
RATING SENSITIVITIES
COVERAGE LEVEL STABILIZATION: Stabilization of the district's coverage at satisfactory levels and above the district's conservative projections could result in an upgrade to 'AA+'.
CREDIT PROFILE
The district is a regional wholesale water supplier to 580,000 residents, including the majority of Salt Lake County, excluding the cities of Salt Lake and Sandy. The majority of water delivered by the district is sold to its wholesale customers, which have take-or-pay contracts with minimum-purchase commitments. The district also supplies retail service to 35,000 residents through 8,820 connections primarily in unincorporated areas of Salt Lake County.
SOUND FINANCIAL PROFILE
Fitch views the system's financial profile as adequate for the rating level. Most system revenues derive from water sales, but property tax revenues make up a significant 23% of total revenues and tend to be quite stable. Coverage exclusive of non-recurring capital contributions fell to a satisfactory 1.6x in fiscal 2013 from 1.8x the year prior due to rising expenditures and debt service levels without commensurate revenue growth. Coverage has been somewhat volatile over the past few years due to the variability of sizeable capital contributions. The five years prior to fiscal 2010, net coverage had been at least 1.6x.
Coverage projections provided by the issuer, which Fitch views as reasonable and include conservative variable rate interest assumptions, show a decline to an adequate 1.25x in fiscal 2014 due to rising debt service costs that decline somewhat in the subsequent year. Fitch has adjusted the calculation downward by treating the district's federal interest rate BABs subsidy as a revenue instead of an offset to debt service. The same projections show coverage rising to a satisfactory 1.34x-1.44x from fiscal 2015-2019 assuming annual rate increases of 4%-5%, an annual delivery increase of 1%, and projected new issuances.
Although coverage is projected to fall significantly lower than the 'AA' category median of 2.0x, the wholesale nature of the district provides more revenue stability through its take-or-pay agreements, and rate flexibility appears solid. The district's wholesale customer base is adequately diversified, with no single user making up more than 23% of water sales. The largest users include the Granger-Hunter Improvement District, the City of West Jordan, and the City of South Jordan (implied general obligation [GO] bonds rated 'AAA' by Fitch).
Water sales in fiscal 2014 are projected at 86,000 acre feet (af), which are moderately below the prior year's 91,455 af, but above recent year's trough levels. Property tax revenues increased in each of the last four years to $13.6 million in fiscal 2013, but remain below the $13.8 million received in fiscal 2009. The district's operations and maintenance (O&M) property tax levy, which has historically provided 20% to 28% of the district's revenues, is set slightly above the maximum of $0.0004 of the assessed value within the district, as allowed by Utah law when required to maintain prior year revenues in declining assessed valuation environments.
Liquidity increased in fiscal 2013 to a solid $32 million, or 372 days cash on hand, close to the 'AA' category median of 398 days.
CONSISTENT RATE INCREASES
The district has historically raised its rates gradually each year and, since fiscal 2004, has utilized a seasonal rate structure in an effort to promote conservation (higher summer rates). Rates are reviewed annually and currently average $377 per acre-foot in winter months and $465 per acre-foot in summer months plus a monthly capacity charge based on meter sizes. Based on a standard 7,500 gallons per month, monthly rates are very low at $17.30 (.3% of median household income). The district held rates at 0% and a 2% increase in fiscal years 2010 and 2011, respectively, due to the general economic downturn but resumed increases with 5% rate hikes annually from 2012 to 2014 and a 4% hike in 2015. Rates are expected to remain affordable despite the projected increases.
SUFFICIENT SUPPLY AND STABLE BASE
With the completion of the Southwest Jordan Valley Groundwater project, the district's current water supply is adequate in drought conditions through 2035. The district has planned for additional sources, which are projected to provide sufficient supply to accommodate future growth through 2060. These sources include the Utah Lake system, which will provide 21,400 acre-feet annually (afa) is scheduled to be completed in 2016, subject to federal appropriations. The Central Water Project will provide 11,680 af and is expected to be available in fiscal 2015.
With the lion's share of the district's deliveries provided on a wholesale basis, the district's customer base is very stable. Most entities that purchase from the district provide retail water deliveries to their customers within their respective areas. Wholesale contracts are generally perpetual in term and take-or-pay contracts with minimum purchase commitments. Contractors may take up to an additional 20% more water than the minimum contracted amount, subject to availability, and are charged on a volumetric basis when doing so.
MANAGEABLE CAPITAL PLANS
The district's current 10-year capital improvement plan (CIP) through fiscal 2024 is manageable, totaling about $330 million, with a focus on water supply. Management expects to fund 70%-75% with additional borrowing every other year, including approximately $45 million to be issued in fiscal 2017. Total debt per capita is lower than average at approximately $382 due to the large service area and is expected to rise to a low to moderate $507.
DIVERSE AND HEALTHY ECONOMY
Salt Lake County (GOs rated 'AAA' by Fitch) is Utah's economic and cultural center and includes 41% of the state's population. Median household income levels are on par with the state and moderately above the nation. March unemployment fell slightly year over year to a low 4.3% from 4.4% the year prior owing to a robust 3.9% employment base expansion.
Leading employers in Salt Lake County include the University of Utah, Intermountain Healthcare, the state of Utah, Granite School District, and Jordan School District. Population growth has hovered well above the national rate over the past decade and long-term growth estimates point to an 80% cumulative population increase by 2030.
Additional information is available at 'www.fitchratings.com'.
In addition to the sources of information identified in Fitch's Tax-Supported Rating Criteria, this action was additionally informed by information from Creditscope
Applicable Criteria and Related Research:
--'Revenue-Supported Rating Criteria' (June 3, 2013);
--'U.S. Water and Sewer Revenue Bond Rating Criteria' (July 31, 2013);
--'2014 Water and Sewer Medians', Dec. 12, 2013;
--'2014 Outlook: Water and Sewer Sector', Dec. 12, 2013.
Applicable Criteria and Related Research:
Revenue-Supported Rating Criteria
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=709499
U.S. Water and Sewer Revenue Bond Rating Criteria
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=715275
2014 Water and Sewer Medians
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=724358
2014 Outlook: Water and Sewer Sector
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=724357
Additional Disclosure
Solicitation Status
http://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=829974
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