SAN FRANCISCO--(BUSINESS WIRE)--Fitch Ratings affirms the following ratings of Douglas County Sewer District No. 1, WA (the district):
--$9.9 million sewer revenue bonds series 2006 and 2008 at 'A+'.
The Rating Outlook is Stable.
SECURITY
The bonds are payable from net system revenues, including connection fees and utility local improvement district (ULID) assessments.
KEY RATING DRIVERS
REASONABLE DEBT SERVICE COVERAGE: The district's debt service coverage (DSC) is adequate but has fallen from previous highs. DSC may improve slightly over the next couple of years from a recent refunding and cash defeasance but remain relatively flat overall over the longer term assuming debt is utilized for a significant portion of identified capital needs.
STRONG LIQUIDITY: The district maintains very strong cash balances, with over 1,000 days' cash on hand each of the last five years.
HIGH DEBT; RAPID AMORTIZATION: The district's debt levels are elevated but benefit from rapid principal amortization. Sizeable capital spending is possible over the next five years, particularly to meet growth needs, and this could necessitate additional borrowing and keep debt ratios near current levels.
LIMITED BUT STABLE CUSTOMER BASE: The district's service area is stable, generating steady service revenues, but is limited and exhibits somewhat below average wealth levels.
RATING SENSITIVITIES
DIMINISHED COVERAGE: Deterioration in DSC would be expected to put downward pressure on the rating given the current levels, particularly without consideration of connection fees.
CREDIT PROFILE
The district is located in central Washington State east of the Cascade mountain range at the intersection of the Columbia and Wenatchee rivers. Its service area of around 23,700 residents includes the City of East Wenatchee and a portion of the surrounding area.
ADEQUATE DEBT SERVICE COVERAGE; HIGH LIQUIDITY
Total DSC was just under 1.2x for 2012 (the most recent audited year), which was similar to DSC for 2010 and 2011 but down from 1.7x in 2008. DSC declined over the past few years due primarily to a drop in connection fees and interest income. Excluding connection fees, total DSC was under 1.1x for 2012.
Due to the economic slowdown, connection fees declined by half from about $350,000 in 2008 to less than $180,000 in 2012. Calendar 2012 is the latest audited information as financial reporting is delayed by the practice of state audits occurring on a biennial basis.
Estimates for 2013 - 2016 currently point to a slight improvement in DSC to the 1.3x - 1.5x range based on a refunding and cash defeasance of bonds in 2013. The district is in the process of finalizing a rate study which could lead to changes in the forecast depending on the DSC targets desired and the level of borrowing and/or pay-go capital spending expected over the next several years. Based on historical performance, DSC should remain adequate for the rating level.
Liquidity is very good, with consistently high cash balances of at least $5 million the last five years. For 2012, cash levels rose to $6.4 million, equaling nearly 1,400 days cash on hand. Depending on the actual capital spending adopted by the district's governing body in conjunction with the rate study results, cash reserves may be spent down somewhat but should continue to well exceed 'A' category medians.
HIGH DEBT; RAPID AMORTIZATION
Debt per customer of $2,376 is about 20% higher than the 'A' category median. Debt per capita is similarly high. Debt levels are somewhat offset by the rapid amortization (nearly 85% of principal retires within 10 years) and fixed rate nature of the debt.
Identified capital costs for fiscals 2015 - 2019 are large at $6.7 million. However, much of these costs are related to expansion projects or rebuilding mains in conjunction with street reconstruction. Consequently, there is some flexibility with regards to timing of projects. Funding for the capital plan has yet to be decided, although the district anticipates the possibility of at least $1 million in borrowing in 2015. Even if borrowing ultimately accounts for much of the capital plan, debt ratios likely would be no higher than the district's existing debt burden given $1 million of the district's debt amortizes each year through 2019.
STABLE SERVICE AREA
County population growth has averaged less than 2% per year the five years ending 2012. The regional economy is dominated by fruit processing and other agricultural activities; education and health care are also significant employment sectors. Unemployment of 4.0% as of July 2014 is lower than state and national averages. County wealth indicators approximate the national average but are typically 10%-15% below that of the state. Concentration among the top ten customers is low, accounting for about 6% of 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 2014);
--'U.S. Water and Sewer Revenue Bond Rating Criteria' (July 2013).
Applicable Criteria and Related Research:
Revenue-Supported Rating Criteria
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=750012
U.S. Water and Sewer Revenue Bond Rating Criteria
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=715275
Additional Disclosure
Solicitation Status
http://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=953035
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