Fitch Ratings affirms the following rating on the Utah Water Finance Agency's bonds as part of its continuous surveillance effort:
-- $30.53 million outstanding revenue bonds (loan financing program) series 2004A at 'AA'.
The Rating Outlook is Stable.
RATING RATIONALE:
-- The 'AA' rating on the Utah Water Finance Agency's 2004 revenue bonds reflects the sound financial margins of the water and sewer utilities that are each pledged to pay a portion of the debt service, as well as the payments made by the Washington County Water Conservancy District (WCWCD; revenue bonds rated 'AA'; Stable Outlook by Fitch) to the water system for 83% of its portion of the 2004 debt service under an interlocal agreement.
-- The water system (revenue bonds rated 'AA-') has limited operational risk as primarily a distribution system that purchases water from WCWCD according to a take-and-pay ongoing contract, which limits St. George's risk to demand fluctuations.
-- The sewer system serves a larger regional service territory that includes both collection and treatment services.
-- While liquidity levels are weaker in the water enterprise system than the sewer system, combined reserves are good.
-- Leverage levels for the combined utilities are moderate but should improve over the near term given that capital needs are manageable and are expected to require little, if any, additional borrowing.
-- The rapid growth of the service area economy has slowed, lessening pressure on capital needs of the system, which is expected to have sufficient capacity for at least the next decade.
KEY RATING DRIVERS:
-- Maintenance of sound financial performance of each of the utilities is key to maintenance of the ratings.
-- A resumption of rapid growth could increase system capital needs and place pressure on financial metrics.
SECURITY:
The bonds are secured by payments from the respective water and sewer systems on a first lien on and pledge of each of the systems' net revenues.
CREDIT SUMMARY:
Located in the southwest corner of Utah, the water system serves about 85,000 people within the city while the sewer system serves the city as well as three neighboring municipalities. The city experienced very high population growth, including annual increases of 8%-11% in the middle of the last decade before slowing significantly in the past two years. The city managed to accommodate the growth without significant leveraging of system assets. Combined water and wastewater debt levels are below average at $800 per customer and $425 per capita.
Since 2006, the water system has purchased the majority of its water from the WCWCD on a pay-as-you-go basis with no fixed obligation, as it is less costly than using the city's own wells. Under an interlocal agreement, the WCWCD pays 83.3% of the water system's portion of the series 2004 debt service. The sewer system consists of a regional water reclamation and treatment facility and a collection system, which are owned and operated by the city. Treatment costs are shared by the three municipalities (Santa Clara, Washington City, and Town of Ivins) served by the treatment plant.
The city has developed most major infrastructure assets, which will allow additional growth if needed. Capital needs in the near term are expected to focus on repair and replacement of system assets and are expected to be funded from system operations. As a result, debt levels should improve even further over time. Proceeds of the series 2011 bonds will be used to refund series 2001 in full.
On a combined basis, debt service coverage for fiscal 2010 was 1.9 times (x) and reserves totaled 540 days' cash. Water system operating results were relatively weak for fiscal 2010, including 1.5x coverage of annual debt service (ADS) and only 31 days' cash on hand. Liquidity for the water utility has been consistently low due to significant funding of capital from surplus revenues. However, the sewer utility has regularly posted strong cash flows, reserve levels, and debt service coverage and provides a source of equity for the water utility if needed. In fiscal 2010, the sewer system had coverage of 2.6x and over 1,000 days' cash. Rates were last increased in 2008 and the city does not anticipate any additional increases in the near term. According to management, the water system funded about $1.5 million for line extension and storage related to the city's new airport and expects reimbursement by 2012.
Additional information is available at 'www.fitchratings.com'
In addition to the sources of information identified in the U.S. Municipal Revenue-Supported Rating Criteria, this action was additionally informed by information from Creditscope, University Financial Associates, LoanPerformance, Inc., IHS Global Insight.
Applicable Criteria and Related Research:
-- 'Revenue-Supported Rating Criteria', dated Oct. 8, 2010;
-- 'Water and Sewer Revenue Bond Rating Guidelines', dated Aug. 6, 2008.
-- '2011 Water and Wastewater Medians', dated Jan. 18, 2011.
-- '2011 Outlook: Water and Wastewater Sector', dated Jan. 18, 2011.
For information on Build America Bonds, visit www.fitchratings.com/BABs.
Applicable Criteria and Related Research:
2011 Outlook: Water and Wastewater Sector
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=593286
2011 Water and Wastewater Medians
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=593285
Water and Sewer Revenue Bond Rating Guidelines
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=395918
Revenue-Supported Rating Criteria
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=564565
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