In addition, Fitch affirms the following ratings on the authority's bonds:
The Rating Outlook is Stable.
The bonds are scheduled to sell via negotiation the week of
The series 2014 bonds are senior lien bonds. The senior lien bonds are secured by a first lien on net revenues of the district's wastewater system. Subordinate lien bonds are secured by a second lien claim on the same funds supporting senior lien debt.
KEY RATING DRIVERS
FINANCIAL STRENGTHENING FROM RATE PASSAGE: The district's board has approved rate increases through fiscal 2016 that are expected to result in continued improvements in debt service coverage (DSC) and provide initial funding for necessary capital costs associated with the district's new permit requirements.
ROBUST RESERVES: SRCSD maintains very high liquidity. Unrestricted cash and investments are consistently over 1,000 days of operating expenses.
WEAK DEBT PROFILE: Leverage ratios are high and will increase with this and other anticipated issuances of significant debt to fund projects necessary to comply with new discharge permit requirements. Furthermore, debt amortization is slow, which will contribute to leverage remaining high over the long-term.
ESSENTIAL SERVICE PROVIDER: Bond security is enhanced by the district's role as a wholesale provider of an essential service. Also, contributing agencies pay the district regardless of collection at the retail level.
ECONOMIC IMPROVEMENT: The service area has experienced significant economic weakening but is showing signs of improvement, although the county unemployment rate remains above the national average.
Capital Cost Containment: Inability to contain capital costs related to the new permit requirements could put downward pressure on the rating.
Rate Increase Delays: Difficulty or delay in adopting rate increases necessary to fund the new permit requirements would likely influence the rating.
IMPROVED DSC; STRONG LIQUIDITY
Financial performance has historically been solid, but DSC weakened in fiscals 2009-2011 due to the housing downturn and subsequent decline in impact fees. Total DSC was just 1.10x during these years including rate stabilization fund (RSF) transfers as permitted by bond ordinance. To enhance financial results and begin positioning the district to address capital requirements, the district's board adopted a three-year rate package increasing rates between 8% and 10% annually for fiscals 2011-2013.
The rate package led to an improvement of total DSC to 1.4x for fiscal 2013 and similar results are expected for fiscal 2014. In addition, no further RSF draws have been utilized and none are expected. Reserves have been maintained at significant levels throughout the last several years despite RSF transfers totaling over
STRINGENT PERMIT REQUIREMENTS
The district reached a partial settlement with regulators in 2013 after filing an appeal with the state. The district received a two-year extension (to 2023) to achieve compliance with filtration and disinfection components associated with the new permit.
RISING DEBT EXPECTED TO REMAIN AFFORDABLE
The high rating reflects Fitch's expectation for rising but relatively affordable debt. Capital costs associated with the new permit requirements may reach as high as
The district forecasts that rate adjustments will support total DSC improvements at 1.5x and position the district to fund a meaningful 17% of the fiscal 2014-2018 CIP from pay-go sources. Additional rate hikes beyond fiscal 2016 will be necessary to support the CIP, but costs are expected to level off by fiscal 2020 or 2021. At the same time pay-go funding levels are expected to increase so that at least 25% of new assets are funded from cash resources.
WHOLESALE BUSINESS PROVIDES STABILITY
The district serves as the wholesale wastewater service provider for the greater
ECONOMY RECOVERING SLOWLY
In addition to the sources of information identified in Fitch's Revenue-Supported Rating Criteria, this action was additionally informed by information from Creditscope.
Additional information is available at 'www.fitchratings.com'.
--'Revenue-Supported Rating Criteria (
--'U.S. Water and Sewer Revenue Bond Rating Criteria' (
--'2014 Water and Sewer Medians' (
--'2014 Outlook: Water and Sewer Sector' (
Revenue-Supported Rating Criteria
U.S. Water and Sewer Revenue Bond Rating Criteria
2014 Water and Sewer Medians
2014 Outlook: Water and Sewer Sector
Source: Fitch Ratings
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