Nov 12 - Fitch Ratings downgrades the rating on the following bonds for
North Salt Lake City, Utah (the city):
--$7.3 million in outstanding water revenue bonds to 'A-' from 'A+'.
The Rating Outlook is revised to Negative from Stable.
The bonds are secured by a first lien on and pledge of the net revenues of the
city's complete water system (the system), including impact fees.
KEY RATING DRIVERS
FAILURE TO RESTORE LIQUIDITY: The downgrade of the water system revenue bonds
reflects a failure to rebuild unrestricted cash balances and Fitch's expectation
that those balances will not be restored in the near term. Fitch previously
anticipated improvement to the system's liquidity levels which did not
INTERMITENT RATE SUPPORT: The city successfully implemented a delayed and
much-needed double digit rate hike late in fiscal 2010 that succeeded in
restoring strong debt service coverage levels. However, the increase failed to
rebuild liquidity as the system instead repaid a portion of funds it had
borrowed from the city's capital improvement fund. Prior city councils were
reluctant to increase rates to fund system improvement and expansion due to
rapid growth and future rate increases are projected to be minimal.
RELIANCE ON CONNECTION FEES: The city has been dependent on one-time connection
fees to support operations and capital improvements. Annual debt service (ADS)
coverage without connection fees was historically weak, falling below 1.0x.
TRANSITIONAL MANAGEMENT: The city is currently without a financial director.
Fitch is concerned that this leaves the city without financial leadership at a
time when guidance appears needed to improve the system's liquidity position.
AMPLE WATER AND TREATMENT CAPACITY: The city maintains ample water supply and
DIVERSE AND RAPIDLY GROWING ECONOMY: The city has seen rapid growth with
population doubling in the last decade. Wealth levels are above the state and
national averages and unemployment is favorable falling below the state and
nation. The city also benefits from it close proximity to the Salt Lake City
metropolitan statistical area (MSA).
WHAT COULD TRIGGER RATING ACTION
UNCERTAINITY OF FINANCIAL PLAN: Management's lack of a cohesive and effective
plan to restore liquidity to levels consistent with an 'A' category rating could
result in negative rating action.
LIQUIDITY REMAINS LACKING
The downgrade to 'A-' reflects the system's failure to increase unrestricted
cash balances as had been previously expected and the lack of a plan to do so.
Liquidity (reported as days cash on hand ) dropped sharply in 2008 to just
13 days and was depleted in fiscal 2010. Fiscal 2011 reported a small uptick to
26 DCOH, but unaudited results for fiscal 2012 point to another year-end with no
unrestricted cash available.
The system's liquidity position was depleted due to rapid capital investment and
delayed rate adjustments. This resulted in the system relying on inter-fund
loans from the city's capital improvement fund. Unaudited results for fiscal
2012 report the system owing the capital improvement funds over $700,000. While
it was Fitch's expectation in past reviews that a significant rate increase
would replenish unrestricted cash balances, this has not happened due to the
system's rapid repayment of inter-fund loans.
RATE INCREASE IMPROVES COVERAGE
With a sharp decline in connection fee revenue, the need to maintain capital
spending commitments, and a delay in implementing a planned rate hike, both debt
service coverage and liquidity levels diminished significantly in fiscal years
2009 and 2010. Audited results for fiscal 2009 and 2010 reported ADS coverage of
1.09x, a violation of the 1.25x bond covenant. Following the 36% rate increase
adopted in March 2010, coverage has rebounded to over 2.0x in fiscal 2011 and
unaudited fiscal 2012 registers at 2.7x.
DELAYED RATE ADJUSTMENTS
While previous city councils had been reluctant to raise rates, the current
council followed up the double digit rate increase with 3% and 1% hikes in
fiscal years 2011 and 2012, respectively. Rates remain affordable given the
areas above average wealth levels and register at 0.6% of median household
income (MHI), well under Fitch's affordability threshold of 1% of MHI.
LOW DEBT BURDEN
Overall debt levels on a per capita basis register at $433, well under the $743
'A' rating category median level. Amortization is very rapid with 70% principal
pay out in 10 years. The five year capital improvement plan totals over $11
million, or $2,169 per customer. Fiscal year 2012 and 2013 projects account for
the majority ($9 million) of the plan and are to be funded with remaining bond
proceeds and impact fees.
AMPLE SUPPLY WITH SOME CONCENTRATION
The system provides water service to almost 6,000 connections, with the majority
of those being residential accounts. Water demand totals around 4,000 acre-feet
annually with 2,705 acre-feet provided through a take-or-pay contract with Weber
Basin Water Conservancy District (rated 'AA+' by Fitch with a Stable Outlook)
and the remainder being supplied by city wells. While usage of Weber Basin water
varies depending on weather conditions, only about 50% of it is typically
utilized, which provides adequate supply, along with the city's wells, to
accommodate future growth and development needs.
There is some concentration with the largest users representing 15% of revenues
in fiscal 2011, but all are reportedly stable customers. The city has
sufficient water rights to both imported and local well water to meet its
projected culinary water needs through build-out.
RAPID POPULATION GROWTH, DIVERSE ECONOMY
The city is a community of 16,600 residents located seven miles north of Salt
Lake City (rated 'AAA' by Fitch with a Stable Outlook). Located in Davis County,
the city of North Salt Lake is approximately seven miles north of Salt Lake City
and is bordered by the Wasatch Mountains on the east and the Great Salt Lake on
the west. The city's economy benefits from its location and participation in the
greater Salt Lake City MSA. Wealth levels are above average at 124% and 137% of
the state and national averages, respectively.