Fitch Affirms South Tahoe Public Utility District with AA+; Rating Outlook Stable

Fitch Ratings affirmed South Tahoe Public Utility District on Monday as part of its ongoing survey of public agencies, noting the ratings outlook remains within the organization remains "stable."
The firm, which positions itself as a global rating agency dedicated to providing value beyond the rating through independent and prospective credit opinions, research and data, gave the water and sewer district a AA+ rating, noting $10.8 million sewer revenue certificates of participation. The ratings agency also asserts that STPUD continues to have strong reserves in place that protects the district against a reduction in its property tax revenues.

The following from Business Wire is the breakdown of how South Tahoe Public Utility District was judged.

SECURITY
The COPs are secured by net revenues of the district's sewer enterprise fund (the system), including connection fees and property taxes.

KEY RATING DRIVERS

SOLID FINANCIAL PERFORMANCE: Financial performance remains solid with annual debt service coverage (DSC) over 2.0 times (x) and good liquidity.

LIMITED RATE FLEXIBILITY: Combined water and sewer user rates as a percent of median household income (MHI) are above average at 1.9 percent and approaching Fitch's affordability threshold. Rate pressure could exist given the expectation of annual, albeit moderate, 4 percent rate increases for the next 10 years to support the district's capital needs.

FAVORABLE DEBT PROFILE: System debt levels overall are below average relative to the categorical medians and amortization is rapid. While additional debt is planned for capital improvements, no material change in debt ratios is expected.

HIGH STANDARDS FOR WASTEWATER DISPOSAL: The district complies with stringent requirements to protect Lake Tahoe (the lake) through the transportation of treated effluent out of the county.

STRONG RESERVE POLICIES: Strong reserve policies protect the district against a reduction in its property tax revenues.

TOURISM DRIVEN ECONOMY: The service area includes economic concentration in the tourism industry. The tourism-dominated economy is characterized by the area's major ski resorts and nearby casinos located across the California border in Nevada.

WHAT COULD TRIGGER A RATING ACTION

DECLINING PROPERTY TAX REVENUE: Approximately 40% of system revenues are provided by the district's share of property taxes. These revenues declined in the most recent fiscal year and further declines are anticipated for the next two fiscal years. Potential instability in this revenue source could result in slimmer financial margins.

CREDIT PROFILE

The system collects, conveys, and provides treatment of wastewater via 420 miles of collection pipeline. The district's wastewater treatment facility has a permitted, advanced-secondary treatment capacity of 7.7 million gallons per day (mgd), with current flows averaging 4 mgd for the past five years. The system serves approximately 17,800 customers and growth has been moderate, averaging just less than 1 percent annually over the last five years. Customer concentration is limited, with the top 10 customers accounting for only 7.5 percent of total system revenues.

STATE REQUIREMENT FOR WASTEWATER TRANSPORTATION

Treated wastewater is pumped 26 miles out of the Tahoe basin into neighboring Alpine County and deposited into a district-owned reservoir before being disposed of through land application by various agricultural interests. State law requires that all Tahoe basin wastewater be pumped out of the basin in order to preserve the lake's water quality. This extraordinary requirement, enacted by legislation in 1968, adds considerable cost to district operations (estimated at 38 percent of rates). The costs are partially offset by the district's receipt of a portion of El Dorado County's (the county) general 1 percent property tax levy.

LIMITED RATE FLEXIBILITY

Despite the burden of transporting treated wastewater out of the basin for disposal in an adjacent county, sewer rates are comparable for the region, with an average monthly bill of $29. However, on a combined basis, the average residential monthly water and sewer bill is approaching Fitch's 2 percent of MHI affordability threshold. For fiscal 2012 the board approved a 3 percent sewer rate increase, and the district anticipates additional annual increases going forward. For fiscal 2013, rates are expected to rise by 2 percent and 5 percent for the water and sewer, respectively. Moderate additional annual rate increases of 4 percent are assumed in the district's 10-year financial plan. While the level of combined charges poses some concern, the incremental rate increases coupled with the expectation that rates should remain around the 2% MHI threshold provides some comfort as to affordability.

STRONG FINANCIAL METRICS

The district's financial position is solid, with a history of positive operations and healthy unrestricted retained earnings levels. Fiscal year 2011 did register a decline in DSC, but continued to be a still solid 2.3x from 3.3x in fiscal 2010. Liquidity is robust. The sewer fund's current cash balance for fiscal 2011 is over $10 million, providing 295 days of cash. Taking into account unrestricted cash funds treated as non-current assets, unrestricted assets grow to over $23 million or 665 days cash.

PROPERTY TAX REVENUE DECLINE

The district's revenue diversity benefits from over $6.5 million in property taxes received annually. However, the district did experience declines in property tax receipts of 8 percent in fiscal 2011 and the district anticipates an additional drop of approximately 1 percent for fiscals 2012 and 2013. Fitch takes comfort in the board policy requiring the district to maintain a rate stabilization fund equal to its minimum annual property tax revenues to avoid any potential shortfall that could occur if property taxes were below what was budgeted.

In 2006 the Board approved the purchase over 1,400 acres of land for application of treated sewer effluent, which was financed through an installment sale agreement on parity with the COPs. The land purchase provides the district with ownership of the land on which it applies treated wastewater and independence from reliance on current contracts for disposal. However, the purchased land is not yet permitted for effluent discharge and will require construction of a pipeline to deliver the treated water.

MODERATE CAPITAL PLAN, MANAGEABLE DEBT BURDEN

Future capital spending, including the pipeline for disposal of treated effluent, is estimated at approximately $26 million over the next five years. The district anticipates debt financing just over 40 percent of the capital plan with open-market borrowings or state revolving fund loans. This will increase the system's debt ratios somewhat but is not expected to lead to a significant change in the district's debt profile, which is favorable overall. Current debt per customer of $1,297 is lower than the 'AA' category median of $1,615. Projected debt per customer will grow to $1,814 in five years taking into account planned debt financing of capital improvements, remaining below the 'AA' category median. Also, amortization of principal is rapid, with 82 percent of debt maturing within 10 years.

TOURISM-BASED ECONOMY

The district provides service to an area of about 42 square miles in and around the city of South Lake Tahoe (the city) and unincorporated parts of the county. Located approximately 100 miles east of Sacramento, the district is mostly residential. The district provides both water and sewer service, although only net revenues of the sewer enterprise secures these COPs. The service area has been significantly affected by the economic recession and housing price declines, but county unemployment has seen improvement over the prior year; city unemployment is not available. Wealth levels fall below state and national levels, indicative of the tourism-based economy, but fail to take into account the sizeable amount of wealthy visitors and second homeowners. Of some concern is the increase in system delinquencies, which have climbed to 8 percent of total receipts from around 2% historically. But the district has hired a full time employee dedicated to collections, and a decline in the delinquency rate to more normal levels experienced nationwide is anticipated.

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 the U.S. Municipal Revenue-Supported Rating Criteria, this action was additionally informed by information from Creditscope.

Applicable Criteria and Related Research:

--'Revenue-Supported Rating Criteria', dated Jun. 20, 2011;

--'Water and Sewer Revenue Bond Rating Guidelines', dated Aug. 10, 2011.

--'2012 Water and Wastewater Medians', dated Dec. 8, 2011.

--'2012 Outlook: Water and Wastewater Sector', dated Dec. 8, 2011.

Applicable Criteria and Related Research:

Revenue-Supported Rating Criteria

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=637130

U.S. Water and Sewer Revenue Bond Rating Criteria

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=647331

2012 Water and Sewer Medians

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=657111

SOURCE: Fitch Ratings