SAN FRANCISCO--()--Fitch Ratings has assigned an 'AA+' rating to the following North Davis Sewer District, UT (the district) bonds:
--$25 million series 2012B sewer revenue bonds.
The bonds are scheduled to price via competitive sale on or about Oct. 11. Proceeds will be used to fund the district's ongoing capital improvement program and to pay costs of issuance.
In addition, Fitch affirms its 'AA+' rating on $53.1 million of outstanding sewer revenue bonds.
The Rating Outlook is Stable
The bonds are secured by system revenues including impact fees. An ad valorem tax is levied by the district for operations and maintenance (O&M) and general obligation (GO) bond debt service, but is not pledged for repayment on the district's revenue bonds.
KEY RATING DRIVERS
STRONG SUBURBAN SERVICE AREA: The rating reflects the district's role as a regional wholesale provider of essential sewer services to seven cities and unincorporated areas within the economically resilient Salt Lake City metropolitan area.
STABLE FINANCES: The district's all-in debt service coverage ratios are solid at an average of 1.5x over the past three fiscal years. Ample reserves and very stable revenues mitigate slightly lower all-in coverage levels for the rating.
VERY LOW RATES: Rate flexibility is strong with very low rates. The board of directors has approved significant rate increases that should provide solid financial performance through 2015.
MODERATE DEBT BURDEN: Debt will be slightly above average at about $600 per capita after the bond offering, but the district may borrow as much as $50 million over the next five years, which could push debt ratios somewhat above average.
ADEQUATE CAPACITY: The district has sufficient treatment capacity to accommodate growth through 2025 after the expansion and upgrade of its treatment plant several years ago.
The district provides wholesale sewer treatment services to approximately 195,000 people in a primarily suburban residential customer base located about 35 miles northwest of downtown Salt Lake City. The service area covers 82 square miles primarily in northern Davis County and also southern Weber County. The district's wholesale contracts with seven cities (Clearfield, Clinton, Layton, Roy, Sunset, Syracuse, and West Point) account for the majority of its revenues and flows. The contracts expire on Dec. 31, 2031 (subsequent to the bond maturity) and allow for rates and charges to be reviewed annually. Each of the contract cities appoints one trustee to the nine-member board governing the district and an additional trustee is elected at large from each of the unincorporated areas of Davis and Weber counties.
Financial performance is healthy. All-in coverage - which includes debt service and related revenues for GO bonds - was modest at 1.2x in 2011, but revenue bond coverage is much higher at 1.9x. All-in coverage was somewhat diluted by a prepayment of GO debt service in 2011. The district's financial forecast, which is based on reasonably conservative assumptions and excludes GO debt service and property tax revenues, shows revenue bond coverage averaging 1.8x over the next five years. The district's revenues are very stable and predictable with property taxes providing 35% of total revenues and flat per household sewer rates providing 45%.
Cash reserves are strong at $23.8 million. Days cash on hand - including unrestricted cash as well as restricted working capital, general contingency and emergency equipment replacement reserves - has averaged 1,572 days over the three fiscal years ended 2011. This number may overstate the degree of liquidity somewhat because the wholesalers' operations tend to be more limited than utilities that provide both treatment and collection services, but reserves are very healthy even relative to combined debt service of $9.5 million (including GOs) in 2011 and operating expenses of $11.3 million. Liquidity is likely to remain strong due to the district board's reserve policies.
The district has a strong history of raising rates as needed to maintain financial stability and very adequate rate flexibility.
Monthly rates are low at $8.00 per household and will remain far below typical affordability metrics even after rising to $12.50 by 2015 to support the district's capital plan. The district's O&M property tax levy provides a significant amount of revenues and much of the district's financial margin. The district raised the O&M levy sharply in 2010, while reducing its general obligation bond debt service levy. The changes raised debt service coverage on the revenue bonds without meaningfully increasing the overall level of taxes. (The GO bonds are not rated by Fitch.)
Debt ratios are moderate. The district's future borrowing plans are uncertain, but if borrowing comes in at the high end of the range under consideration, debt ratios would increase to somewhat above average. Concerns about the debt levels are offset by the district's rapid amortization of debt and significant use of unlimited-tax general obligation (GO) bonds. The district's current debt profile is quite manageable. It is scheduled to pay down 59% of its debt in 10 years and 99% in 20 years. The current five-year capital improvement plan is also moderate at $82.8 million, or $259 per customer annually, and largely focused on improving solids management.
The system has sufficient capacity through 2025 with the completion of an expansion and upgrade of its treatment plant in 2007 to 34 million gallons per day (mgd) of capacity. It provides for secondary treatment and discharges treated effluent into the Great Salt Lake as per its discharge permit. Emerging regulations may require the district to reduce the amount of nutrients in its discharges and could force significant capital improvements at the plant.
Legal provisions are permissive, allowing for available fund balances to be included in meeting a 1.15x rate covenant and allowing for a projected 1.0x maximum annual debt service coverage in order to issue additional bonds.
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 the Revenue-Supported Rating Criteria, this action was informed by information from CreditScope and IHS Global Insights.
Applicable Criteria and Related Research:
'Revenue-Supported Rating Criteria', June 12, 2012;
'U.S. Water and Sewer Revenue Bond Rating Criteria', Aug. 3, 2012;
'2012 Water and Sewer Medians', Dec. 8, 2011;
'2012 Outlook: Water and Sewer Sector', Dec. 8, 2011.
Applicable Criteria and Related Research:
2012 Outlook: Water and Sewer Sector
Revenue-Supported Rating Criteria
U.S. Water and Sewer Revenue Bond Rating Criteria
2012 Water and Sewer Medians