Fitch Downgrades Douglas County Sewer District No. 1, WA's Rev Bonds to 'A+'; Outlook Stable
Fitch Ratings downgrades the following Douglas County Sewer District No. 1, Washington (the district) ratings:
-- $10.9 million sewer revenue bonds, series 2002, 2006, and 2008 to 'A+' from 'AA-';
-- $4.2 million sewer revenue refunding bonds, series 2003 to 'A+' from 'AA-'.
The Rating Outlook is Stable.
The bonds are secured by net system revenues, including connection fees and utility local improvement district (ULID) assessments.
KEY RATING DRIVERS
LOWER COVERAGE LEVELS: The downgrade to 'A+' reflects the district's much lower debt service coverage levels, which have fallen to just adequate levels due in part to steep declines in connection fees. Increased rates have not fully mitigated the revenue fall-off.
STRONG LIQUIDITY: The district maintains strong cash balances, with over 1,000 days' cash on hand each of the last five years.
HIGH DEBT; RAPID AMORTIZATION: The district's rapid debt amortization and limited capital needs balance its somewhat high debt levels per customer.
LIMITED BUT STABLE CUSTOMER BASE: The district's service area is stable, but exhibits somewhat below average wealth levels.
The district is located in central Washington east of the Cascade mountain range at the intersection of the Columbia and Wenatchee rivers. Its service area of 23,704 residents includes the City of East Wenatchee and a portion of the surrounding area.
LOWER BUT ADEQUATE DEBT SERVICE COVERAGE
The downgrade reflects recent and projected lower debt service coverage levels which are more consistent with the 'A+' rating level. Debt service coverage declined over the past few years due primarily to a drop in connection fees and interest income. All-in coverage of outstanding debt, including state loans, was lower in fiscals 2009 and 2010 at 1.4x and 1.3x, respectively, versus at least 1.7x the prior three years. Excluding connection fees, coverage levels were just adequate at 1.2x and 1.1x in 2009 and 2010, respectively.
Due to the economic slowdown, connection fees declined by more than half from about $800,000 in fiscal 2007 to $352,000 in fiscal 2008 and just $200,000 in fiscal 2010. Fiscal 2010 is the latest audited information as financial reporting is delayed by the practice of state audits occurring on a bi-annual basis; Fitch considers the delay in release of audits as weak but gains some comfort from the availability of unaudited information in a timely fashion. In addition to service charges, the district receives assessments from three ULIDs, which are established by property owners for a term of 15 years to finance their costs of connecting to the district. These assessments account for less than 2% of total annual revenues.
Projections estimate all-in coverage ranging from 1.1x to 1.2x and senior coverage of 1.4x to 1.5x through fiscal year 2015. Fitch views the assumptions as reasonable, including very low connection fees at about a quarter of fiscal 2010 levels going forward and customer growth of only 1% per year.
EXTREMELY HIGH LIQUIDITY LEVELS
Liquidity is very good, with consistently high cash balances of at least $5 million the last five years. In fiscal 2010, the district posted a balance of $6.4 million, or 1,528 days' cash on hand. These high cash balances help to somewhat mitigate the district's lower coverage.
RATE RAISING ABILITY
The district has demonstrated its willingness to raise rates through several increases the past few years in part to offset connection fee declines. The residential sewer rate, which is fixed and not based on volumetric usage, increased by $2 per month in fiscal 2008 and $1.50 per month in 2009, generating a combined $360,000 in additional revenue. More recently, the district raised rates by $0.50 per month in June 2012 to total $29.50 and plans to increase rates by another $0.50 in June 2013 and June 2014. Each $0.50 increase generates about $54,000 in additional revenues. Rates are well within Fitch's affordability threshold and lower than most regional service providers.
HIGH DEBT BUT RAPID AMORTIZATION
Debt per customer of $2,757 is above average. This concern is largely offset by the district's large cash balances, rapid debt amortization (58% of principal is retired in 10 years), and manageable capital plan. Treatment capacity is good at 2.6 million gallons per day (mgd) compared to current demand of 1.43 mgd and capital needs over the next five years total less than $1 million.
STABLE SERVICE AREA
County population growth has averaged 2% per year over the five years ending 2011. The regional economy is dominated by fruit processing and other agricultural activities. Education and health care are also significant employment sectors.
Unemployment of 5.8% as of October 2012 is lower than state and national averages. County wealth indicators are slightly below average, with median household income at 88% and 98% of state and national levels, respectively. Customer concentration is low, with the top ten customers generating about 6% of revenues.
Additional information is available at 'www.fitchratings.com'. The ratings above were solicited by, or on behalf of, the issuer, and therefore, Fitch has been compensated for the provision of the ratings.
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. 5, 2012);
-- '2013 Sector Outlook: Water and Sewer' (Dec. 5, 2012).
Applicable Criteria and Related Research:
Revenue-Supported Rating Criteria
U.S. Water and Sewer Revenue Bond Rating Criteria
2013 Water and Sewer Medians
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