Fitch Ratings assigns an 'AA-' rating to City of South Jordan (the city), Utah's $9.3 million water revenue bonds, series 2009. In addition, Fitch upgrades to 'AA-' from 'A+' the rating on the $27.8 million of outstanding parity water revenue bonds. The bonds are expected to sell via negotiation on or about March 25. The Rating Outlook is Stable.
The upgrade to 'AA-' reflects the city's water system's (the system) solid future-oriented capital and financial planning, strong financial performance, healthy leverage ratios, affordable rates, long-term water supply contract for potable water and an economically strong service area. Credit concerns are centered on the rapidly growing customer base which could place operational, and consequently financial, pressure on the system. Growth and drought-prone conditions will necessitate careful stewardship of existing resources and increased conservation.
The system primarily provides potable water service to city residents through its culinary system, but also provides irrigation water to a limited number of customers through its secondary water system. Customer accounts for the culinary system total around 16,240 with growth averaging about 6.2% annually over the last five fiscal years. Culinary water is supplied by the Jordan Valley Water Conservancy District (JVWCD, water revenue bonds rated 'AA-' by Fitch), a regional wholesale provider, through a perpetual take-or-pay contract.
Proceeds from these bonds will be used to finance improvements and additions to the city's water system, including the construction of a storage tank, distribution lines, and an addition to the city's SCADA system, fund a deposit to a debt service reserve fund and pay costs of issuing the series 2009 bonds. The city adopted a master plan for the culinary system in fiscal 2003, which forms the basis for projects to be funded from the current transaction as well as future projects. All capital developments under the city's master plan will be completed with the addition of the 7.5 million and 4.0 million gallon storage tanks. The city does not expect to issue additional debt within the next five years. However, given the city's historically rapid growth, additional debt issuance may be required and the upgrade assumes this possibility at a moderate amount.
Financial performance has been very good over the last five fiscal years with the system maintaining solid coverage and cash balances. Annual debt service (ADS) coverage on parity bonds, based on pledged revenues, ranged between 2.3 times (x) and 6.0x from fiscal years 2004-2008. Even with the decline in the collection of impact fees due to the slowdown in housing starts, ADS coverage in fiscal 2008 was a strong 3.3x. For fiscal 2008, results point to 457 days cash on hand and 438 days of working capital.
The city is primarily a residential community, but has a growing commercial presence. Population growth remains strong at 6.4% in 2008. Despite the growth pressures, economic prospects for the city are favorable due to low unemployment rates, strong tax base growth, and above-average wealth levels. Historically, the city's unemployment rate has remained well below that of the county, state, and nation, falling to a very low 1.6% in 2007. Wealth levels for the city are 1.6x higher than the state and 1.7x higher than the nation.
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