AUSTIN, Texas--(BUSINESS WIRE)--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.
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.
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.
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.
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'.
Revenue-Supported Rating Criteria (pub. 16 Jun 2014)
U.S. Water and Sewer Revenue Bond Rating Criteria (pub. 03 Sep 2015)
Dodd-Frank Rating Information Disclosure Form
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