SAN FRANCISCO--()--Fitch Ratings assigns an 'AA+' rating to the following North Davis Sewer District, Utah (the district) general obligation (GO) refunding bonds:
--$22.8 million series 2013A (tax exempt);
--$7.6 million series 2013B (federally taxable).
The bonds will be sold on or about the week of Feb. 25. The proceeds will refund all or portions of the district's series 1994A, 2004 and 2005 GO bonds.
In addition, Fitch affirms the following ratings:
--$76.6 million in outstanding sewer revenue bonds at 'AA+'.
The Rating Outlook is Stable.
The GO bonds are secured by an unlimited ad valorem tax levy on all taxable property within the district.
The revenue bonds are secured by gross revenues of the district's sewer system (the system), including impact fees but excluding tax revenues.
KEY RATING DRIVERS
STRONG SUBURBAN SERVICE AREA: The ratings reflect 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.
VERY STRONG LIQUIDITY: The district maintains significant reserves totaling 1,460 days cash at the end of fiscal 2011, the last audited fiscal year.
STABLE FINANCES: All-in debt service coverage (DSC) has averaged a moderate 1.5x over the three years ended fiscal 2012. Ample reserves and very stable revenues offset any concerns about the level of all-in DSC.
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 fiscal 2015.
GROWING DEBT BURDEN: Debt is only slightly above average, but the district may borrow as much as $55 million over the next five years, pushing debt ratios to well above average. Concerns about debt levels are somewhat offset by the district's rapid amortization and its ability to tap the GO taxing margin, which enhances rate flexibility.
ADEQUATE CAPACITY: The district has sufficient treatment capacity to accommodate growth through 2025 after completing an expansion and upgrade of its treatment plant in recent years.
GO STRENGTHS: The above-average GO rating is also supported by the district's broad and diverse tax base, the strength of the unlimited-tax GO pledge, and a low level of tax-supported debt.
WEAKENED FINANCIAL CAPACITY: Given rising debt levels and moderate debt service coverage, it will be important that the district preserve sufficient offsetting considerations, particularly with regards to liquidity and rate flexibility, to maintain the existing ratings.
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.
SOUND FINANCIAL PERFORMANCE
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. Liquidity is likely to remain strong due to the district board's reserve policies.
DSC, while adequate, is much weaker. All-in DSC, which includes debt service and related revenues for both GO and revenue-supported bonds, was a modest 1.2x in fiscal 2011 (audited) and 1.4x in fiscal 2012 (unaudited). The district's financial forecast, which is based on reasonably conservative assumptions, shows all-in DSC remaining 1.4x 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%, creating less need for excess coverage than utilities with more volatile revenues.
GOOD RATE DISCIPLINE
The district has a strong history of raising rates as needed to maintain financial stability. Monthly rates also 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 operations and maintenance (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.
GROWING DEBT BURDEN
Debt ratios are moderate but likely to rise to above-average. The current five-year capital improvement plan (CIP) is large at $96.7 million, or $302 per customer annually, and focuses on improving solids management. The district plans to issue about $55 million of revenue bonds in fiscal 2014 to fund a portion of the CIP. Concerns about the rising debt levels are offset by the district's rapid amortization of debt and flexibility to raise revenues from taxing sources for both O&M and debt service on GO bonds. The direct and overlapping tax-supported debt burden is quite moderate at 2.1% of AV. Amortization is rapid with 57% of debt repaid in 10 years and 99% in 20 years.
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 of capacity. The plant 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.
STRONG TAX BASE
The GO bond rating takes into account certain additional factors that are key to Fitch's tax-supported criteria, but not relevant to the revenue bonds. The district's $12.6 billion tax base has experienced modest declines in recent years. But Fitch believes the tax base is fundamentally sound due to its location on the economically strong Wasatch Front, healthy median household incomes, low unemployment and the diversity of the tax base. The tax base is largely residential, and the top 10 taxpayers represent a reasonable 8.7% of assessed values.
PERMISSIVE LEGAL PROVISIONS FOR REVENUE BONDS
Revenue bond 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 DSC 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 Fitch's Revenue-Supported Rating Criteria and Tax-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);
--'Tax-Supported Rating Criteria' (Aug. 14, 2012);
--'U.S. Local Government Tax-Supported Rating Criteria' (Aug. 14, 2012);
--'2013 Water and Sewer Medians' (Dec. 5, 2012);
--'2013 Outlook: Water and Sewer Sector' (Dec. 5, 2012).
Applicable Criteria and Related Research:
2013 Water and Sewer Medians
2013 Outlook: Water and Sewer Sector
Revenue-Supported Rating Criteria
U.S. Water and Sewer Revenue Bond Rating Criteria
Tax-Supported Rating Criteria
U.S. Local Government Tax-Supported Rating Criteria