Fitch Ratings assigns an 'AA-' rating to the following Mountain Regional Water Special Service District, UT (the district) bonds:
--$27.4 million water revenue and refunding bonds, series 2012.
The bonds are expected to sell via competitive sale on or close to June 5, 2012. The proceeds will be used to refund series 2003 water revenue and refunding bonds for cost savings with no extension of maturity dates.
In addition, Fitch affirms the 'AA-' rating on the following outstanding obligations:
--$8.4 million water revenue refunding bonds, series 2009B;
--$29.9 million water revenue and refunding bonds, series 2003.
The Rating Outlook is revised to Negative from Stable.
SECURITY
The bonds are secured by net revenues of the water system, including impact fees and special assessments.
KEY RATING DRIVERS
Diminished Flexibility: The Negative Outlook reflects the district's declining operating margins coupled with reduced liquidity, which prompted a cash flow borrowing from Summit County this past year.
ADEQUATE COVERAGE: Historically solid annual debt service (ADS) coverage levels have declined to a more adequate level over the past several years due to a decline in impact fee revenue, and lower sales due to cool, wet weather and the economic slowdown. Adopted rate increases in fiscal years 2011 and 2012 are projected to improve ADS coverage going forward.
REDUCED LIQUIDITY: Reserves have declined over the past several years as the district prepaid debt maturities between 2009 and 2013 and the district utilized reserves rather than increasing rate further.
STABLE CUSTOMER BASE: The district's primarily residential customer base provides a strong degree of revenue stability enhanced by its growing wholesale customer commitments and the large fixed-rate component of its rate structure.
LEVERAGED SYSTEM: High debt levels reflect the recent acquisition costs of the system but are expected to decline over time given limited capital needs and adequate supply, with water rights to accommodate growth through build-out.
WHAT COULD TRIGGER A RATING ACTION
SLIM COVERAGE CUSHION: The district's inability to achieve the operating results included in its financial forecast and rebuild reserves to an acceptable level for the given rating will likely result in negative rating action.
CREDIT PROFILE
Adequate Debt Service Coverage
ADS coverage has declined over the past several years with senior lien coverage, including impact fees and excluding grant revenues which are restricted for eligible capital projects, falling to 1.3x in fiscals 2010 and 2011. The drop in coverage was driven primarily by a 25.6% decline in water demand that occurred between 2007 and 2011 due to the housing downturn and cooler, wet weather. A continued increase in operating expenditures and debt service costs also factored into the decline in ADS coverage. In response, the district enacted 7.5% rate increases effective August 2011 and August 2012.
Given the recent rate hikes and what Fitch considers reasonable revenue and spending assumptions, projected senior lien coverage is expected to remain at or slightly better than 1.2x through 2016 as debt service continues to increase. Excluding impact fees, projected coverage remains at or very slightly below 1.2x. Due to the current refunding occurring prior to the July 2012 debt service payment, fiscal 2012 coverage is expected to be inflated at about 2.8x. The district's inability to achieve its financial forecast and rebuild its cash position could result in negative rating action over the medium term.
Low Liquidity
Liquidity has also declined as a result of the district spending on capital, including power upgrades, distribution line replacement, and water pretreatment facilities, and using reserves to minimize the need to increase rates. The district ended fiscal year 2011 with an adequate 178 days cash on hand compared to a high of 391 in fiscal 2008. However, 36% of the 2011 cash balance is due to a $500,000 loan from the county to supplement cash flow. The district expects to repay the loan within three years. The district established a rate stabilization fund in 2011 with a balance of about $550,000 at year end 2011 expected to increase to $1 million by year end 2012.
Stable Customer Base
The district was created in April 2000 by the Summit County Commission to regionalize water service in the western portion of Summit County by consolidating several water companies, both public and private, that were failing operationally and financially. The district's customer base is stable, with 4,977 accounts in fiscal 2012. The district has several wholesale agreements, most recently with Park City, and ample capacity for additional wholesaling. The district covers approximately 39 square miles within Summit County and serves a primarily residential customer base of approximately 6,000 residents.
The service area includes the unincorporated areas of the Snyderville Basin surrounding Park City, the Promontory development and the Colony development. The system serves three ski resorts - Park City, Deer Valley, and the Canyons. In addition to 3,075 customers, the district assessed a standby fee on about 1,900 undeveloped lots. Summit County wealth levels are high with median household incomes at 151% of state and 163% of U.S. averages. County unemployment is low at 5.5% compared to state and national averages of 7.6% and 9.2%, respectively, as of March 2011.
Rate Structure Provides Revenue Stability
The fixed component of the district's rate structure accounts for a high 70% of water sales, providing a great deal of stability and helping to mitigate consumption declines. Management increased rates as expected by a combined 15% over fiscals 2011 and 2012. Rates are high with an average monthly bill for a single-family residence between $80 and $90. High rates are attributed to the cost of transporting water to a challenging geography, a small customer base, and new infrastructure. However, this concern is somewhat mitigated by comparable rates in surrounding areas, the affluence of the customer base and limited additional capital needs.
High Debt Levels Due to Capital Investment
Debt levels are high with debt/net plant at nearly 60% and per capita debt of almost $1,200, both notably higher than Fitch's median ratios for similarly rated systems. Amortization of principal is average. Debt levels are expected to decline, however, as capital needs are very manageable with the majority of water infrastructure needed by the district to meet projected demand over the next 20 years completed.
The district's 7,800 acre-feet of water rights provides adequate supply to accommodate growth through ultimate build-out, which the district estimates occurring between 20 and 50 years. The district anticipates utilizing excess revenues and reserves to fund about $350,000 to $500,000 per year for each of the next five years on capital items including the replacement of vehicles and equipment and minor repairs and upgrades to infrastructure.
Adequate Legal Provisions
Legal provisions are adequate with a 1.25x rate covenant and 1.25x maximum ADS additional bonds test. The 2012 series does not have a debt service reserve requirement. The 2009 refunding modified the bond indenture to include special improvement district assessments as part of the pledged revenues for debt repayment. The bonds are secured by net water system revenues, including impact fees and special assessments and are on parity with approximately $4.8 million of state loans. In addition, the district has about $2.6 in subordinate notes outstanding.
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.
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:
--'Tax-Supported Rating Criteria' (Aug. 15, 2011);
--'U.S. Local Government Tax-Supported Rating Criteria' (Aug. 15, 2011).
Applicable Criteria and Related Research:
Tax-Supported Rating Criteria
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=648898
U.S. Local Government Tax-Supported Rating Criteria
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=648842
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