Fitch Upgrades South Valley Sewer Dist, UT Rev Bonds to 'AA+'; Outlook Stable

NEW YORK--()--Fitch Ratings assigns a 'AA+' to the following South Valley Sewer District, UT (the district's) obligations:

--$49.465 million sewer revenue refunding bonds series 2014.

The bonds are expected to sell via a negotiated sale the week of October 27. Proceeds of the bonds will be used along with cash released from debt service reserve funds of the district's outstanding series 2008, 2009A, and 2009B bonds, and other restricted cash related to impact fees and rate stabilization to refund the district's outstanding series 2008 bonds in full.

In addition, Fitch upgrades to 'AA+' from 'AA' the following outstanding obligations:

--$69 million sewer revenue bonds 2008 and 2009A; and

--$35 million taxable sewer revenue bonds, series 2009B (Build America Bonds.

The Rating Outlook is Stable.

Fitch Ratings has withdrawn its ratings for the following South Valley Sewer District (UT) bond due to prerefunding activity:

-- sewer revenue bonds series 2005 (all maturities).

The updated rating history for the above maturities is now reflected on Fitch's web site at 'www.fitchratings.com'.

SECURITY

The bonds are secured by net system revenues, including impact fees and the federal Build America Bonds subsidy. Following issuance, all series of bonds will be secured by a surety-funded DSRF.

KEY RATING DRIVERS

LOWER DEBT, HEALTHY COVERAGE SUPPORT UPGRADE: Fitch expects debt service coverage (DSC) will remain strong over the forecast period, and somewhat high leverage will become more moderate with the expected cash defeasance of outstanding debt. No additional debt is anticipated in the near term and capital needs are significantly lower than in previous years.

SUFFICIENT CAPACITY: Capacity provided by the district's recently completed treatment facility is expected to be sufficient through at least the next decade.

HEALTHY LIQUIDITY: Liquidity levels remain good, approaching two years' unrestricted cash.

RELIANCE ON IMPACT FEE REVENUES: The district's strong coverage levels are boosted by the inclusion of impact fees. However, forecast revenues from this source appear reasonable and DSC remains satisfactory from service charges alone.

RATE FLEXIBILITY: Rates are affordable and are expected to remain so due in part to the revenue diversity provided by the district's property tax levy, currently set at half the maximum level.

STRONG SERVICE AREA: The area served by the district (Salt Lake County; GO rated 'AAA' by Fitch) is large, diverse, and well-poised for long-term growth. Unemployment and income metrics compare favorably with the state and nation.

RATING SENSITIVITIES

HEALTHY OPERATING MARGINS: Fitch expects the district to maintain healthy operating margins in order to achieve forecast coverage and liquidity levels..

CREDIT PROFILE

The district provides retail sewerage collection and treatment to a primarily residential customer base of 52,573 customers in southern Salt Lake County and northern Utah County, about 17 miles south of downtown Salt Lake City.

AMPLE CAPACITY

Total treatment capacity increased to 31.2 mgd compared to current average daily flow of 16 mgd with the 2012 completion of the Jordan Basin Water Reclamation Facility (JBWRF). The facility is a 15 mgd wastewater treatment facility located in Riverton and Bluffdale with effluent discharged to the Jordan River. Wastewater treatment is also provided at the South Valley Water Reclamation Facility (SVWRF), which is owned and operated by five member entities. The plant's overall capacity recently increased, raising the district's capacity rights to 16.2 mgd from 13.2 mgd. Management expects to expand the JBWRF to a total capacity of 30 mgd in 10 to 15 years at which point it would be sufficient through build out.

DEBT TO DECLINE

Debt levels are somewhat high with debt per customer of about $2,176 and debt per capita of $540 due primarily to the recent investment in capacity. With the completion of the treatment plant, the district's planned capital spending has declined significantly. As such, debt ratios are expected to decline to lower than 'AA' category medians over the forecast period.

SOLID DEBT SERVICE COVERAGE

Due to erroneous reporting by the district, previously reported coverage dips of 1.5x and 1.7x in fiscals 2010 and 2011, respectively, should have been 2.2x and 1.7x. District management had been reporting debt service payments as of the actual payment dates instead of the due dates causing some payments to be reported in the incorrect fiscal years. Coverage increased to 2.0x in fiscal 2012 and 2.5x in fiscal 2013 due to rate increases of 5% and 16%, respectively. Rates are set at $25 per month for a single family residence, which is well within Fitch's affordability threshold. Management does not expect any additional rate increases until 2017, as reflected in projections.

DIVERSE REVENUE BASE

Revenues include property taxes at about $5.4 million or 16% of total revenues, and impact fees at $9.3 million or 27%. Service fees make up 55%. Due to the annual adjustment in the tax rate to account for assessment changes and new growth, property tax revenues have remained very stable. The district's levy for operations and maintenance is $0.000371 per dollar of taxable property with a maximum rate of $0.0008 available. These revenues are not pledged for repayment of the bonds.

Impact fees are used for capital and not operations and maintenance costs. After dropping about half to $5 million in 2008, and hitting a low point of $4.3 million in 2010, they rebounded to $9.3 million in 2013. The district has included $5 million annual impact fee revenues in out-year projections which Fitch views as somewhat reasonable.

HEALTHY LIQUIDITY

Liquidity has been in excess of 15 months of operations since fiscal 2004, not including restricted cash from impact fees and a rate stabilization fund. At the end of fiscal year 2013, in addition to $22.6 million of unrestricted cash (equal to 668 days cash), restricted cash from the rate stabilization fund and from impact fees totaled $5.5 million and $29.3 million, respectively. After using some of these balances in this refunding, the rate stabilization fund will have a balance of $3 million and impact fees about $23 million. The district's policy is to add $1.5 million per year to the stabilization fund though no minimum balance is targeted.

STRONG, GROWING SERVICE AREA

The service area, which includes about 25% of Salt Lake County, is very strong. Unemployment (3.7% as of July 2014) and income metrics compare favorably with the state and nation. Connections have increased at an annual average of 2.6% over the last five years. Management estimates that the district is currently at 43% build out and will be fully built out in 25-30 years. Concentration is low with the top 10 customers representing about 5% of operating revenues.

Additional information is available at 'www.fitchratings.com'.

In addition to the sources of information identified in Fitch's Revenue-Supported Rating Criteria, this action was additionally informed by information from Creditscope.

Applicable Criteria and Related Research:

--'Revenue-Supported Rating Criteria (June 12, 2012);

--'U.S. Water and Sewer Revenue Bond Rating Criteria' (Aug 3, 2012);

--'2013 Water and Sewer Medians' (Dec. 4, 2012);

--'2013 Water and Sewer Medians' (Dec. 4, 2012).

Applicable Criteria and Related Research:

Revenue-Supported Rating Criteria - Effective June 12, 2012 to June 3, 2013

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=681015

U.S. Water and Sewer Revenue Bond Rating Criteria - Effective Aug. 10, 2011 to Aug. 3, 2012

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=647331

2013 Water and Sewer Medians

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=695756

Additional Disclosure

Solicitation Status

http://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=903774

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Contacts

Fitch Ratings
Primary Analyst
Shannon Groff
Director
+1-415-732-5628
Fitch Ratings, Inc.
650 California St., 4th Floor
San Francisco, CA 94108
or
Secondary Analyst
Andrew Ward
Director
+1-415-732-5617
or
Committee Chairperson
Michael Rinaldi
Senior Director
+1-212-908-1833
or
Media Relations:
Elizabeth Fogerty, New York, +1 212-908-0526
Email: elizabeth.fogerty@fitchratings.com

Contacts

Fitch Ratings
Primary Analyst
Shannon Groff
Director
+1-415-732-5628
Fitch Ratings, Inc.
650 California St., 4th Floor
San Francisco, CA 94108
or
Secondary Analyst
Andrew Ward
Director
+1-415-732-5617
or
Committee Chairperson
Michael Rinaldi
Senior Director
+1-212-908-1833
or
Media Relations:
Elizabeth Fogerty, New York, +1 212-908-0526
Email: elizabeth.fogerty@fitchratings.com