Fitch Rates Jordan Valley Water Conservancy Dist, UT Water Rev & Rfdg Bds 'AA+'; Upgrs Outstanding
Fitch Ratings has assigned the following ratings to bonds issued by the Jordan Valley Water Conservancy District, UT (the district):
--Approximately $65 million water revenue bonds, series 2016A 'AA+';
--Approximately $25 million water revenue refunding bonds, series 2016B 'AA+'.
Proceeds of the 2016A bonds will be used to finance various capital projects, including construction and capital assessments for the Central Water Project, construction of a 12 million gallon reservoir at the Jordan Valley Water Treatment Plant, and various other projects. Proceeds of the 2016B bonds will refund water conservancy revenue refunding bonds, series 2007A, and water revenue improvement and refunding bonds, series 2014A. The bonds are expected to price on or around June 8, 2016 via negotiation.
In addition, Fitch upgrades the following outstanding ratings (pre-refunding) to 'AA+' from 'AA':
--$155.9 million outstanding water revenue and refunding bonds.
The Rating Outlook is revised to Stable from Positive.
The bonds are secured by net system revenues.
KEY RATING DRIVERS
STABILITY AS REGIONAL WHOLESALE PROVIDER: The upgrade to 'AA+' is based upon the district's revenue stability and sound financial profile given that approximately 84% of the its revenues less capital contributions are derived from take or pay wholesale contracts with 17 member agencies, as well as property tax receipts.
COMPREHENSIVE AND STABLE FINANCIAL MANAGEMENT: The district engages in prudent financial management practices and comprehensive long-term planning designed to secure a diverse regional and state-wide future water supply.
SOUND FINANCIAL PROFILE: The district's financial profile is healthy overall with sound debt service coverage (DSC) for a wholesale utility. Financial projections show DSC remaining at adequate levels over the next 10 years, assuming 4%-5% annual rate increases and projected debt issuances. The district's liquidity position remains solid at over a year's cash on hand.
CONSISTENT RATE HIKES: The district has increased rates incrementally in all but one of the past 10 years with support from its members and board and expects to continue this practice. Rates are affordable relative to incomes.
LOW DEBT LEVELS: The district's per capita debt levels are low and are expected to remain so given the manageable capital improvement plan, affordable rates, and significant use of pay-as-you-go capital financing. Debt is supported by a substantial customer base of 950,000 including the majority of Salt Lake County, apart from the cities of Salt Lake and Sandy.
FINANCIAL MARGINS: The Stable Outlook reflects Fitch's expectation of continued financial performance at or above the district's forecasts. The rating could be pressured if financial margins fall below expectations.
The district is a regional wholesale water supplier serving 950,000 residents, approximately 630,000 directly and the remainder indirectly, including the majority of Salt Lake County apart from 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 9,000 connections primarily in unincorporated areas of Salt Lake County.
SUBSTANTIAL REVENUE STABILITY
District revenues are very stable as they are generated primarily from wholesale take-or-pay agreements and property tax receipts. These two sources generate 84% of total revenues on average excluding capital contributions. Wholesale contracts account for approximately 59% of revenues and 90% of sales volume. Water sales decreased in fiscal 2014 and again in fiscal 2015 to 83,250 acre-feet (AF), but remained above recent years' trough levels. The district has historically increased rates modestly on an annual basis.
Most of the 17 member agencies that purchase from the district provide retail water deliveries to their customers within their respective areas. Wholesale contracts are 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.
Property taxes account for approximately 25% of revenues. Receipts have increased in each of the last several years to reach $13.8 million in fiscal 2015, equal their 2009 peak. The district expects an increase to $14.9 million in fiscal 2016. The district's operations and maintenance (O&M) property tax levy is set at the maximum of $0.0004 of the assessed value within the district. The rate has gone slightly above the maximum in prior years as allowed by Utah law when required to maintain prior year revenues in declining assessed valuation environments.
SOUND COVERAGE; STRONG LIQUIDITY
Fitch views the system's DSC as sound given the district's wholesale role and limited risk profile. DSC exclusive of non-recurring capital contributions equaled 1.8x and 1.6x in fiscals 2014 and 2015, respectively, after averaging 1.5x the prior three years.
Issuer-projected DSC excluding capital contributions indicates 1.5x in fiscal 2016 and 1.3x to 1.5x from fiscal 2017-2021 assuming annual rate increases of 4%-5%, an annual delivery increase of 1%, and projected additional borrowing. The district has more revenue stability due to its wholesale take-or-pay agreements and significant property tax receipts.
Liquidity increased in fiscal 2015 to $42.9 million, or 458 days cash on hand, after averaging over 336 days in the prior four years. The district maintains policies establishing reserve requirements, including an operation and maintenance fund equal to three months working capital, an emergency reserve/self-insurance fund, and aqueduct and treatment plant maintenance funds, among others.
CONSISTENT RATE INCREASES AND SUPPORT
The district reports consistent support from its members and board, which has historically raised its wholesale and retail 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 wholesale rates currently average $391 per acre-foot in winter months and $482 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 retail rates are very low at $18.98 (0.3% of median household income [MHI]); however, based on actual average use, rates are about $52 per month (0.9% of MHI). 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 4% in 2015 and 2016. The district plans to continue increasing rates by 4%-5% over the foreseeable future. Rates are expected to remain affordable despite the continued increases.
SUFFICIENT SUPPLY AND SIGNIFICANT PLANNING EFFORTS
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 taken a leadership role in the development of a statewide water infrastructure plan, Prepare60, to assess and prepare for needs through 2060. The district projects that additional planned sources, along with conservation, will provide sufficient supply to accommodate future growth over this timeframe. These sources include the Utah Lake system and Provo sources using the Provo River Aqueduct, which will provide 28,700 acre-feet annually (afa), and the state-wide Bear River Project, which will provide an additional 50,000 afa around 2045. The Central Water Project began providing water in 2015 and is expected to increase to 10,000 afa by 2018. The district's conservation goal, consistent with the state mandate, is to reduce 2000 per capita water use 25% by 2025.
Indicative of these strong planning efforts, the district maintains a comprehensive 10-year financial forecast to guide its revenue requirements in light of expected capital projects. In addition to the series 2016 $65 million issuance of new money, the district is planning to borrow $160 million through fiscal 2026. Per capita debt levels would remain in the low to moderate range given existing principal amortization.
Additional information is available at 'www.fitchratings.com'.
Revenue-Supported Rating Criteria (pub. 16 Jun 2014)
U.S. Water and Sewer Revenue Bond Rating Criteria (pub. 03 Sep 2015)
Dodd-Frank Rating Information Disclosure Form
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