OREANDA-NEWS. Fitch Ratings affirms the 'AA' rating on St. Vrain Sanitation District, CO's (the district) approximately $15.9 million in outstanding wastewater system revenue bonds.

The Rating Outlook is Stable.

SECURITY

The bonds are secured by a first lien on net revenues of the district's wastewater system (including connection fees) and federal Build America Bonds subsidy payments.

KEY RATING DRIVERS

SOUND FINANCIAL PROFILE: Liquidity remains exceptional, and overall financial performance is stable. Financial performance is projected to remain solid with a combination of continued customer growth and scheduled rate increases.

RELIANCE ON CONNECTION FEES: Connection fees are a large proportion of operating revenues. Should the growth rate moderate and result in lower than anticipated connection fee revenues, debt service coverage (DSC) could drop well-below category medians.

AFFORDABLE, FLAT FEE STRUCTURE: The district charges a flat fee for sewer service equal to $26 per month per single family equivalent in fiscal 2016, or an affordable 0.38% of median household income (MHI). Additional rate increases are already approved in fiscals 2017 and 2019, but fees will remain affordable. The district has rate flexibility should additional future rate increases be necessary.

MODEST CAPITAL PROGRAM: The district completed its sewer treatment plant expansion project in 2015, which was the bulk of its capital improvement plan (CIP). Future capital needs are expected to be modest and will be cash funded.

SMALL, GROWING CUSTOMER BASE: The district is a relatively small, but well-managed system serving nearly 11,000 mostly residential customers in the central portion of the Denver-Boulder-Greeley Combined Metropolitan Statistical Area. Customer growth has been strong (around 5% annually), fueled by low-cost housing and available land, and is expected to continue at a moderate pace.

RATING SENSITIVITIES

CONTINUED GROWTH IN THE AREA: Given St. Vrain Sanitation District's reliance on connection fees, the rating is sensitive to the district's growth rate. The Stable Outlook reflects Fitch's expectation that financial margins will remain strong based on conservative growth assumptions and that robust cash on hand would cover any unanticipated revenue shortfalls.

CREDIT PROFILE

The St. Vrain Sanitation District is located 30 miles north of the city of Denver in Weld County, CO, near Interstate 25, and is accessible to both the Denver and Boulder metropolitan areas. The district serves the towns of Firestone and Frederick, and the city of Dacono--an area known as the "Tri-Area." Governance is provided by a five-member board of directors elected to four-year terms with day-to-day operations administered by the district manager and professional staff.

STRONG LIQUIDITY, LOW RATES PROVIDE FINANCIAL FLEXIBILITY

Rate flexibility and ample cash on hand are important factors for the district's rating since it relies heavily on connection fees to generate adequate debt service coverage. Rate increases of $2 per month are planned in fiscals 2017 and 2019, which will result in an additional $264,000 in operating revenues each year. After the increase in fiscal 2019 the monthly fixed fee will be $30, or an affordable 0.44% of MHI.

Strong customer growth and free cash flow allowed the district to accumulate sizable cash balances, allowing it to cash fund a portion of its recent plant expansion project. Despite a decline in cash to $14.9 million in 2015, this still equates to a very strong 1,518 days cash on hand. Cash will be spent down through 2021 to fund the CIP program. However, Fitch projects the district's liquidity will remain above the 'AA' category median.

FINANCIAL METRICS SOUND, BUT DEPENDENT ON CONNECTION FEES

Operating revenues have increased every year since 2011, but overall revenues vary from connection fees. The district receives a large portion of its revenue from connection fees (over 40% in 2014 and 2015). DSC from all available revenues exceeded 5.0x in the past two years. Coverage excluding connection fees was 1.9x in fiscal 2015 and 1.3x in fiscal 2014.

Fitch does not expect the pace of growth above 5% annually to continue through the forecast period through 2020. The district forecasts a more moderate growth rate of 1% in its financial forecast, which is considered a positive. Management forecasts that DSC should remain at 1.87x or higher through the forecast period, but coverage is reliant on some level of connection fees to remain above 1.0x. Despite the volatility of connection fees, operating revenues from the district's monthly flat service fee are very stable.

PLANT EXPANSION COMPLETED IN 2015, FUTURE CAPITAL NEEDS MODEST

The district completed an expansion to its sewer treatment plant in fiscal 2015 that doubled capacity to six million gallons per day (mgd). As part of the project the district also expanded the plant's headworks capacity to nine mgd, which will allow the district to more easily and cost-effectively build additional capacity for future growth, when needed.

The fiscal 2016-2020 CIP totals $5.9 million, which is down from the 2014-2018 CIP total of $16 million. With the plant expansion project complete, future capital needs are modest and no large projects are planned. The district benefits from upfront developer contributions to expand its service area. Additional treatment capacity is not expected to be needed for several years, leaving capital spending for smaller projects necessary to allow for development of new land.

DEBT BURDEN TO CONTINUE IMPROVING

System debt consists of the series 2010 bonds, with approximately $15.9 million outstanding. In fiscal 2015, the board directed the district to pay off a small state loan, which had a little more than $1.6 million outstanding. Fitch views this action favorably given the very high cash balances held at the district.

Overall, the debt burden is manageable and stronger than similarly rated systems; debt per customer improved to $1,457 and debt to net plant was 19% in 2015. Projected debt per customer is expected to continue decreasing through 2020 to $1,030. Amortization of existing bonds is in line with the 'AA' category medians: 31% of principal is retired over the next 10 years, and all debt fully amortizes within 20 years. Management indicated there are no plans to issue additional bonds over the next five years.

ACCESS TO STABLE EMPLOYMENT CENTERS, CUSTOMER GROWTH TO CONTINUE

The district's proximity to nearby employment centers and its relative affordability has led to several years of residential growth. Customer growth has been steady and grew from 9,839 to 10,963 customers between 2013 and 2015--a rate of 11.4% during the period. With a significant amount of raw land still available for development, Fitch expects additional growth will continue at a measured rate for the foreseeable future. Fitch notes that the large availability of undeveloped land in the service area could prompt long-term capital needs that require additional debt.