Fitch Affirms South Valley Sewer District, UT's Sewer Revs at 'AA+'; Outlook Stable

AUSTIN, Texas--()--Fitch Ratings has affirmed the rating on the following South Valley Sewer District, UT's (the district) obligations at 'AA+':

--$35 million outstanding sewer revenue bonds, series 2009B;

--$49.2 million outstanding sewer revenue refunding bonds, series 2014.

The Rating Outlook is Stable.

SECURITY

The bonds are secured by net system revenues, including impact fees and the federal Build America Bonds subsidy.

KEY RATING DRIVERS

STRONG AND IMPROVING DEBT PROFILE: The district's already strong debt profile should continue improving, since it has no plans to issue debt within the next 10 years. Debt per customer and debt/net plant are both better than the categorical medians, and should continue improving over the five-year forecast period.

HEALTHY FINANCIAL PROFILE: All-in debt service coverage (DSC) for 2015 came in at a robust 3.7x, and out-performed projected DSC for both 2014 and 2015. Additionally, the district ended 2015 with 735 days cash on hand, which is well over the 'AA' category median of 485.

RELIANCE ON CONNECTION FEES: The district's strong coverage levels are boosted by the inclusion of connection fees. However, forecasted revenues from this source appear reasonable, and DSC remains satisfactory from service charges alone.

RATE FLEXIBILITY: Monthly rates are affordable at 0.35% of median household income (MHI), well under Fitch's affordability threshold of 1.0%. Should the revenue generated by connection fees begin to decline, the district maintains ample flexibility to increase rates to meet projected DSC levels.

STRONG, GROWING SERVICE AREA: The majority of the district's service area is the southern portion of Salt Lake County (general obligation bonds rated 'AAA'). The area's unemployment rate and MHI compare favorably with the state and national averages, and the district's customer base has grown by 13% since 2012.

RATING SENSITIVITIES

CONTINUED SUCCESSFUL MANAGEMENT OF GROWTH: If South Valley Sewer District can sustain its solid financial and debt profile through anticipated steady growth, positive rating action could result over the long term.

CREDIT PROFILE

The district provides retail sewer collection and treatment to nearly 58,000, primarily residential customers in southern Salt Lake County and northern Utah County, about 17 miles south of downtown Salt Lake City (general obligation bonds rated 'AAA').

DEBT PROFILE TO CONTINUE IMPROVING; LIMITED CAPITAL NEEDS

Current outstanding debt amortizes quickly with nearly 50% amortized in 10 years, and all debt fully amortizes within 20 years, both better than the 'AA' categorical medians. As of fiscal 2015, debt per customer was $1,696 and debt per capita was $424, both lower than the categorical medians. Both metrics are anticipated to continue to improve over the forecast period, as no new debt is planned and population and customer growth is likely.

The district's capital needs for the next five to 10 years are manageable and primarily driven by growth. Most projects included in the current five-year capital improvement plan are flexible and could be moved to out- years should the growth rate abate. Moreover, projects are funded with connection fees collected in the prior year, allowing the district to ensure adequate revenue was collected to fund upcoming projects. Fitch views this flexibility to shift spending positively.

SOLID HISTORICAL AND PROJECTED DSC

All-in DSC for 2015 came in at a robust 3.7x, up from the district's historical usual range of 2.4x to 2.5x. The increase in coverage in 2015 is largely attributable to a notable increase in connection fee revenue, which was 60% higher than 2014. Even excluding connection fees, all-in DSC for 2015 was an adequate 2.0x.

Through the five-year forecast all-in DSC is projected to range from 2.4x to 2.8x. It is possible actual results will exceed projections, since the forecast provided by the district assumes connection fee revenue well below actual annual collections since 2012. Should growth slow and reduce connection fee revenue, all-in DSC excluding connection fees is expected to range from an adequate 1.7x to 1.8x, in line with the categorical median.

AMPLE RATE FLEXIBILITY AND DIVERSE REVENUE BASE

The district's current monthly rate of $25 is affordable when compared to the area's MHI. Both Salt Lake County and Riverton City (general government IDR of 'AA'), which is fully within the district's service area, have above-average MHI as compared to the national average. The individual monthly sewer bill equates to 0.35% of Riverton City's MHI. A combined monthly bill for sewer and water service is estimated at 0.8% of MHI, well under Fitch's affordability measure of 2% for a combined bill. Typical residents in the area also pay a monthly stormwater fee and an irrigation water fee. Even after accounting for these additional utility costs, Fitch estimates the combined bill is less than 1.5% of MHI. This provides the district with ample rate flexibility should rate increases be necessary.

In addition to collecting a monthly service fee, the district also assesses a property tax. Tax revenue is used to pay for operations and maintenance only; the revenue is not pledged for the repayment of the bonds. For 2015, property tax revenues totaled $6.3 million, compared to $20.2 million collected in service fees, and $13.4 million collected in connection fees. The current tax rate is less than half the maximum rate that could be assessed by the district, providing additional flexibility for generating revenue.

STRONG, GROWING SERVICE AREA

The district's service area has benefited from strong population, employment, and income growth in recent years. Since 2012, the district's customer base has increased by 13%. The unemployment rate of 3.4% is well below the national average of 5.0% (as of August 2016), and income metrics compare favorably with the state and nation. Management estimates that the district is currently at 48% build-out and will be fully built out in about 25 years. Concentration is low with the top 10 customers representing about 5% of operating revenues.

AMPLE CAPACITY

The district retains adequate capacity for the next 10 to 15 years despite the area's steady growth. Total treatment capacity provided by two facilities is 31.2 million gallons per day (mgd), compared to the 2015 average daily flow of 16.7 mgd. The Jordan Basin Water Reclamation Facility currently has 15 mgd of capacity and can be expanded to treat up to 30 mgd. Management expects after expanding to 30 mgd the district will have adequate capacity through full build-out. Assuming 3% growth in customer base, management does not expect to begin the design phase of the JBWRF expansion until 2024.

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

Applicable Criteria

Revenue-Supported Rating Criteria (pub. 16 Jun 2014)
https://www.fitchratings.com/site/re/750012

U.S. Water and Sewer Revenue Bond Rating Criteria (pub. 03 Sep 2015)
https://www.fitchratings.com/site/re/869223

Additional Disclosures

Dodd-Frank Rating Information Disclosure Form
https://www.fitchratings.com/creditdesk/press_releases/content/ridf_frame.cfm?pr_id=1012683

Solicitation Status
https://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=1012683

Endorsement Policy
https://www.fitchratings.com/jsp/creditdesk/PolicyRegulation.faces?context=2&detail=31

ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: HTTPS://WWW.FITCHRATINGS.COM/UNDERSTANDINGCREDITRATINGS. IN ADDITION, RATING DEFINITIONS AND THE TERMS OF USE OF SUCH RATINGS ARE AVAILABLE ON THE AGENCY'S PUBLIC WEB SITE AT WWW.FITCHRATINGS.COM. PUBLISHED RATINGS, CRITERIA, AND METHODOLOGIES ARE AVAILABLE FROM THIS SITE AT ALL TIMES. FITCH'S CODE OF CONDUCT, CONFIDENTIALITY, CONFLICTS OF INTEREST, AFFILIATE FIREWALL, COMPLIANCE, AND OTHER RELEVANT POLICIES AND PROCEDURES ARE ALSO AVAILABLE FROM THE CODE OF CONDUCT SECTION OF THIS SITE. FITCH MAY HAVE PROVIDED ANOTHER PERMISSIBLE SERVICE TO THE RATED ENTITY OR ITS RELATED THIRD PARTIES. DETAILS OF THIS SERVICE FOR RATINGS FOR WHICH THE LEAD ANALYST IS BASED IN AN EU-REGISTERED ENTITY CAN BE FOUND ON THE ENTITY SUMMARY PAGE FOR THIS ISSUER ON THE FITCH WEBSITE.

Copyright © 2016 by Fitch Ratings, Inc., Fitch Ratings Ltd. and its subsidiaries. 33 Whitehall Street, NY, NY 10004. Telephone: 1-800-753-4824, (212) 908-0500. Fax: (212) 480-4435. Reproduction or retransmission in whole or in part is prohibited except by permission. All rights reserved. In issuing and maintaining its ratings and in making other reports (including forecast information), Fitch relies on factual information it receives from issuers and underwriters and from other sources Fitch believes to be credible. Fitch conducts a reasonable investigation of the factual information relied upon by it in accordance with its ratings methodology, and obtains reasonable verification of that information from independent sources, to the extent such sources are available for a given security or in a given jurisdiction. The manner of Fitch's factual investigation and the scope of the third-party verification it obtains will vary depending on the nature of the rated security and its issuer, the requirements and practices in the jurisdiction in which the rated security is offered and sold and/or the issuer is located, the availability and nature of relevant public information, access to the management of the issuer and its advisers, the availability of pre-existing third-party verifications such as audit reports, agreed-upon procedures letters, appraisals, actuarial reports, engineering reports, legal opinions and other reports provided by third parties, the availability of independent and competent third- party verification sources with respect to the particular security or in the particular jurisdiction of the issuer, and a variety of other factors. Users of Fitch's ratings and reports should understand that neither an enhanced factual investigation nor any third-party verification can ensure that all of the information Fitch relies on in connection with a rating or a report will be accurate and complete. Ultimately, the issuer and its advisers are responsible for the accuracy of the information they provide to Fitch and to the market in offering documents and other reports. In issuing its ratings and its reports, Fitch must rely on the work of experts, including independent auditors with respect to financial statements and attorneys with respect to legal and tax matters. Further, ratings and forecasts of financial and other information are inherently forward-looking and embody assumptions and predictions about future events that by their nature cannot be verified as facts. As a result, despite any verification of current facts, ratings and forecasts can be affected by future events or conditions that were not anticipated at the time a rating or forecast was issued or affirmed.

The information in this report is provided "as is" without any representation or warranty of any kind, and Fitch does not represent or warrant that the report or any of its contents will meet any of the requirements of a recipient of the report. A Fitch rating is an opinion as to the creditworthiness of a security. This opinion and reports made by Fitch are based on established criteria and methodologies that Fitch is continuously evaluating and updating. Therefore, ratings and reports are the collective work product of Fitch and no individual, or group of individuals, is solely responsible for a rating or a report. The rating does not address the risk of loss due to risks other than credit risk, unless such risk is specifically mentioned. Fitch is not engaged in the offer or sale of any security. All Fitch reports have shared authorship. Individuals identified in a Fitch report were involved in, but are not solely responsible for, the opinions stated therein. The individuals are named for contact purposes only. A report providing a Fitch rating is neither a prospectus nor a substitute for the information assembled, verified and presented to investors by the issuer and its agents in connection with the sale of the securities. Ratings may be changed or withdrawn at any time for any reason in the sole discretion of Fitch. Fitch does not provide investment advice of any sort. Ratings are not a recommendation to buy, sell, or hold any security. Ratings do not comment on the adequacy of market price, the suitability of any security for a particular investor, or the tax-exempt nature or taxability of payments made in respect to any security. Fitch receives fees from issuers, insurers, guarantors, other obligors, and underwriters for rating securities. Such fees generally vary from US$1,000 to US$750,000 (or the applicable currency equivalent) per issue. In certain cases, Fitch will rate all or a number of issues issued by a particular issuer, or insured or guaranteed by a particular insurer or guarantor, for a single annual fee. Such fees are expected to vary from US$10,000 to US$1,500,000 (or the applicable currency equivalent). The assignment, publication, or dissemination of a rating by Fitch shall not constitute a consent by Fitch to use its name as an expert in connection with any registration statement filed under the United States securities laws, the Financial Services and Markets Act of 2000 of the United Kingdom, or the securities laws of any particular jurisdiction. Due to the relative efficiency of electronic publishing and distribution, Fitch research may be available to electronic subscribers up to three days earlier than to print subscribers.

For Australia, New Zealand, Taiwan and South Korea only: Fitch Australia Pty Ltd holds an Australian financial services license (AFS license no. 337123) which authorizes it to provide credit ratings to wholesale clients only. Credit ratings information published by Fitch is not intended to be used by persons who are retail clients within the meaning of the Corporations Act 2001.

Contacts

Fitch Ratings
Primary Analyst:
Audra C. Dickinson, +1-512-813-5701
Associate Director
Fitch Ratings, Inc.
111 Congress
Austin, TX 78701
or
Secondary Analyst:
Shannon Groff, +1-415-732-5628
Director
or
Committee Chairperson
Dennis Pidherny, +1-212-908-0738
Managing Director
or
Media Relations:
Alyssa Castelli, +1-212-908-0540
New York
alyssa.castelli@fitchratings.com

Contacts

Fitch Ratings
Primary Analyst:
Audra C. Dickinson, +1-512-813-5701
Associate Director
Fitch Ratings, Inc.
111 Congress
Austin, TX 78701
or
Secondary Analyst:
Shannon Groff, +1-415-732-5628
Director
or
Committee Chairperson
Dennis Pidherny, +1-212-908-0738
Managing Director
or
Media Relations:
Alyssa Castelli, +1-212-908-0540
New York
alyssa.castelli@fitchratings.com