Fitch Rates Central Weber Sewer Improvement District, Utah's $37MM Sewer Revs 'AA'; Outlook Stable
Source: Business Wire
--$4.3 million sewer revenue bonds series 2010B 'AA';
--$32.7 million sewer revenue bonds (taxable Build America Bonds--issuer subsidy) series 2010C 'AA'.
The bonds are expected to sell via negotiation on June 21. Proceeds will be used to finance part of the final costs of an upgrade and expansion of its wastewater treatment plant and related system improvements, fund a debt service reserve and pay costs of issuance.
In addition, Fitch affirms the following ratings on the district's outstanding sewer revenue bonds:
--$110 million at 'AA';
The Rating Outlook is Stable.
RATING RATIONALE:
--Historically very strong liquidity levels (over 1,000 days cash since 2004) positions the district well as it implements a large capital plan, driven by both growth and regulatory standards.
--The wholesale nature of the district's wastewater treatment system, serving a growing, primarily suburban residential customer base of 175,000 people, provides a high degree of revenue stability.
--Upon completion, the district's $161 million planned expansion will accommodate future growth through 2025.
--The District does not charge on a household basis, but its bill currently is equivalent to approximately $12 per month. Although rates are expected to increase, they should remain affordable.
--Credit concerns center around maintaining the district's strong financial profile, reflected by solid debt service coverage levels and a strong liquidity position, as it implements a large capital improvement plan (CIP) over the next several years.
KEY RATING DRIVERS:
--Implementation of necessary treatment fee rate increases in order to maintain solid debt service coverage levels.
--Maintenance of a strong liquidity position as the district implements a large CIP to expand and upgrade its treatment plant.
SECURITY:
The bonds are payable from net system revenues, including impact fees.
CREDIT SUMMARY:
The district is located approximately 40 miles northwest of downtown Salt Lake City and covers about 73 square miles primarily in the central portion of Weber County. The district provides wholesale wastewater treatment to a population of roughly 175,000 approximately, through 16 municipal customers. The district also provides retail sewer treatment services to small areas that account for less than 1% of the district's annual revenues. The district's sewer system consists of one wastewater treatment plant with a 45 million gallon per day (MGD) capacity that is currently being expanded to 75 MGD to accommodate growth through 2035.
The district's financial performance in terms of liquidity has been very strong with over 1,000 days cash on hand since 2004. Projections indicate that liquidity levels should remain strong over the next five years. With little historic debt, evaluation of annual debt service (ADS) coverage is on a projected basis. Assuming proposed rate increases, 3% annual assessed value (AV) growth and excluding federal subsidies on BABs or available fund balances, senior ADS is expected to average 1.3 times (x) annually over the 2010 to 2014 period and 1.2x without impact fees.
The district does not bill on a household basis, but charges are currently equivalent to about $12 monthly per household. Rates were increased by a large 25% in fiscal 2010 and the district is proposing another 25% rate increase for fiscal 2011. Despite the rate hikes, rates should remain affordable. The district's five-year capital plan totals $85 million. Approximately, $68 million is for the treatment plant expansion and upgrade. Aside from the current debt issuance, the remainder of the CIP is anticipated to be cash-funded.
The 2010 bonds are secured by net system revenues including impact fees. An ad valorem tax is levied by the district for operations and maintenance expenses but is not pledged for repayment of the district's revenue bonds. Overall legal provisions are permissive allowing for available fund balances to be included in meeting a 1.15x rate covenant and allowance for a projected 1.15x maximum annual debt service additional bonds test.
The district's service area is part of the Ogden-Clearfield MSA with access to employment centers in both Davis and Weber Counties. Large employers in the area include Hill Air Force Base, Davis County and Weber County School Districts, Department of Treasury IRS and McKay-Dee Hospital Center. Weber County unemployment rates have historically been higher than Utah state levels and now stand at 8.1% compared to 7.3% for the MSA, 7.4% for the state, and 10.2% nationally as of March 2010. Median household income levels for the county are comparable with state (94%) and U.S. (104%) levels. The district's total AV increased from $7.3 billion in 2008 to $7.5 billion in 2009, with annual 3% growth assumed through 2013 for planning and budgeting purposes.
Considerations for Taxable/Build America Bonds Investors
The following sector credit profile is provided as background for investors new to the municipal market.
Water and Sewer Utility Revenue Bonds:
Municipal water and sewer utilities in the U.S. are enduring natural monopolies that typically have autonomous rate setting ability and provide highly essential services. The bonds are secured by a pledge of net revenues generated by the water and/or sewer system; and typically include structural legal protections such as rate covenants, debt service reserve requirements, and anti-dilution tests. As such, the sector exhibits extremely strong credit characteristics with minimal defaults. Reflective of this strong performance, the average water and sewer revenue bond rating is 'AA' with 86% at or above 'AA-' and approximately 2% rated 'BBB+' or below. Those with low investment-grade or below-investment-grade ratings generally have substantial capital programs, a high degree of leverage or weak financial flexibility as reflected in low cash levels, narrow debt service coverage and/or limited rate-raising flexibility.
Applicable criteria available on Fitch's website at www.fitchratings.com:
--'Revenue-Supported Rating Criteria (Dec. 29, 2009);
--'Water and Sewer Revenue Bond Rating Guidelines' (Aug. 6, 2008).
Additional information is available at www.fitchratings.com.
Contact:
Fitch Ratings
Julie Seebach, +1-512-215-3740 (Austin)
Alan Gibson, +1-415-732-7577 (San Francisco)
or
Cindy Stoller, +1-212-908-0526
(Media Relations, New York)
cindy.stoller@fitchratings.com
