Fitch Ratings has assigned an 'AA' rating to the following
Springfield Metro Sanitary District, IL (the district) general
obligation (GO) bonds:
--$22,225,000 GO bonds (alternate revenue source) series
2015A;
--$2,775,000 taxable GO bonds (alternate revenue source) series
2015C.
The bonds are expected to be sold through negotiation on July
16.
The proceeds of the 2015A bonds will be used to (i) finance
certain capital improvements, including a portion of the costs of
the construction of a new Sugar Creek Wastewater Treatment Plan,
(ii) fund capitalized interest, and (iii) currently refund the
district's outstanding sewer revenue subordinate lien bonds, series
2012. The proceeds of the series 2015C bonds will be used to (i)
together with funds of the district, fund debt service reserve
funds for the district's Illinois Environmental Protection Agency
(IEPA) loans, and (ii) fund capitalized interest.
In addition, Fitch affirms the following ratings:
--$54.8 million in outstanding GO bonds (alternate revenue
source) series 2009A and series 2009E (taxable) at 'AA'; and
--$55.1 million in outstanding senior lien sewer revenue bonds
series 2010A (taxable) and series 2011A at 'AA-'.
The Rating Outlook is Stable.
SECURITY
The GO bonds are payable from (a) net revenues of the district's
sewer system (the system) after payment of debt service of senior
lien revenue bonds and (b) ad valorem taxes levied within the
district, without limitation to rate or amount.
The senior lien sewer revenue bonds are payable from a first
lien on the net revenues of the system. Revenues include interest
income, connection fees, and tax revenues (excluding those levied
upon all taxable property in the district for public benefit
purposes and taxes levied for the Illinois Municipal Retirement
Fund).
KEY RATING DRIVERS
GO PLEDGE: While debt service for the GO bonds is expected to be
paid from net system revenues, the 'AA' rating is based on the
unlimited tax GO pledge of the district.
SOUND ECONOMIC FUNDAMENTALS: The 'AA' tax-supported GO rating
reflects a stable and diverse service area economy and tax base,
characterized by below average unemployment, average wealth levels,
stable population, growing assessed valuation and strong property
tax collections.
LOW COVERAGE; RISING DEBT: Debt service coverage (DSC) from net
revenues is low. Fitch-calculated all-in DSC, which includes all
revenues and expenditures and all debt service payments, equaled
just 1.16x in fiscal 2014, although indenture compliant DSC met the
rate covenant of 1.25x in fiscal 2014.
ELEVATED DEBT PROFILE: Existing debt ratios are expected to
reach over 2x median levels in all categories over the next several
years as the district continues to borrow to complete treatment
plant expansions. In addition, debt will likely continue to rise
with significant costs in the intermediate horizon as the district
implements the long-term control plan (LTCP) to address combined
sewer overflows (CSOs). Amortization of principal is slow.
CONTINUED RATE FLEXIBILITY: Despite recent sizable rate
increases to support escalating debt, the district maintains good
rate flexibility with an average monthly sewer bill at just 0.7% of
median household income (MHI) including annual rate increases
through fiscal 2017. Collection of property tax revenues help to
diversify the revenue base.
RATING SENSITIVITIES
SHARP CAPITAL AND DEBT INCREASES: Specific mandates for the LTCP
to address CSOs are pending regulatory input/approval and will
likely be significant. Depending on the magnitude and timing of the
costs, the plan could prove difficult to afford given the already
elevated debt levels, pressuring the tax base.
WEAKER THAN EXPECTED FINANCIALS: With the elevated debt profile
and expectations of additional debt, failure to improve financial
performance, including Fitch-calculated DSC, could lead to negative
rating action.
CREDIT PROFILE
The district was organized in 1924 and is located in Sangamon
County in central Illinois, approximately 190 miles southwest of
Chicago. Headquartered in Springfield, the state capital and county
seat, the district serves an area of approximately 165 square miles
and a population of about 150,135. Roughly two-thirds of the
district's service territory is within the city of Springfield. The
district also serves the villages of Chatham, Grandview, Jerome,
Leland Grove, Rochester, Sherman and Southern View as well as some
unincorporated areas near Springfield.
The district is governed by a five-member board appointed by the
county board chairman and confirmed by the county board of
supervisors. Daily operations are administered by the
Director/Engineer. The district's service area includes
approximately 76% of the equalized assessed value of the county.
Annexations of territory contiguous to the district within the
county are on-going and added approximately $33 million to the
equalized value of the district from 2013 to 2014.
STABLE ECONOMIC PROFILE
The district's economy is anchored by the stable presence of
state government. Local government, healthcare, higher education
and professional services sectors are also well represented.
Springfield's March 2015 unemployment rate of 5.4% is improved from
a year prior (7.1%) and below the state (6.3%) and national (5.6%)
averages. The city figure incorporates declines in both employment
and labor force versus the year prior, and the year-on-year
improvement is driven by labor force contraction outpacing
employment declines. Wealth levels as measured by per capita income
approximate the state and U.S. averages.
The district's equalized assessed valuation (EAV) growth has
continued throughout the recession. Annexations into the district
continue on a moderate but steady basis. The majority of EAV growth
stems from new property with more projects expected to affect the
tax rolls over the coming two years.
The tax rate has fluctuated over the past five years but remains
moderate at $0.0955 per $100 EAV for 2015, up a manageable 9.6%
since 2010. The tax base is well diversified with the top ten
payers accounting for a small 2.7% of assessed valuation. Total
property tax collections are strong, averaging 99.7% over the last
three years.
WEAK FINANCIAL PROFILE
As the district's debt service burden has increased, DSC has
declined. Fitch calculated all-in DSC declined from 3.4x in fiscal
2012 to 1.26x in fiscal 2013 and 1.16x in fiscal 2014. Fiscal 2015
DSC based on estimated revenues is just 1.09x and projections for
fiscal 2016 DSC based on reasonable assumptions and adopted rate
hikes increases to a still weak 1.28x. The district did not provide
projections beyond fiscal 2016.
Senior lien DSC has been strong with coverage of at least 2.25x
(including Build America Bonds subsidy interest payments as
revenues instead of as an offset to debt service) through fiscal
2014. Senior lien debt service payments increased in fiscal 2015 as
the 2014 IEPA loan rolled on, resulting in DSC of 1.85x. However,
these have since been subordinated and senior lien DSC is projected
at 3.1x for fiscal 2016.
In addition to the low total DSC, liquidity and surplus cash
flows have declined to weak levels in recent years. For fiscal
2014, days cash was just 90 days and free cash as a percent of
depreciation was just 22%. Failure to improve key financial metrics
in the upcoming years could lead to downward rating pressure.
Rates are affordable at 0.7% of the MHI and are expected to
remain so through the last increase of the five-year rate package
next year. However, rate flexibility may decline given the
possibility of additional large hikes needed to fund large capital
needs.
PLANT IMPROVEMENTS DOMINATE EXISTING CAPITAL PLAN
In June 2005, the district was notified by the IEPA that its
Spring Creek and Sugar Creek treatment plants were operating in
excess of rated design capacity. The facilities plan for the Spring
Creek plant was approved by the IEPA in January of 2009,
construction of the $144 million plant commenced in September 2009,
and final completion occurred in August 2014. The district recently
began construction on its $67 million Sugar Creek treatment plant
expansion and expects completion by early 2018.
RISING DEBT AND CAPITAL NEEDS
The district does not have a capital improvement plan (CIP), but
expects to spend approximately $67 million on the Sugar Creek
treatment plant project and about $600,000 per year on ongoing
repair and replacement projects over the next five years.
Approximately 64% of the total $70 million is anticipated to be
funded with debt, including the $25 million 2015 issuance, a $20
million 2015 IEPA loan, and another $25 million IEPA loan expected
to be issued in fiscal 2018. The remainder of the CIP will be
funded from pay-as-you-go sources.
Of note is that the current CIP does not include expected
regulatory requirements related to CSO remediation. The district
has not yet received a response from the IEPA on a draft LTCP
submitted in December 2011 that identified $65.5 million of
improvements (2011 dollars) over 20 years as its preferred
alternative; regulators may ultimately require other possible
options. Debt ratios are already high with debt to plant at 78% and
debt per customer at $2,774 as of fiscal 2014 and will rise to
$3,600 over the five year horizon with the current and anticipated
debt and loan issuances to fund the existing Sugar Creek
project.
With the finalization of the LTCP and inclusion of additional
capital needs in the CIP, expected borrowing would likely rise
further over the medium-to long term, could be significant
depending on the scope and timing of the LTCP, and thus could
ultimately pressure the rating. In addition to debt burden
concerns, amortization of principal is slow, with payout at 36% and
65% in 10 and 20 years, respectively.
Additional information is available at
'www.fitchratings.com'.
In addition to the sources of information identified in Fitch's
Tax-Supported Rating Criteria and Revenue-Supported Rating
Criteria, this action was additionally informed by information from
Creditscope, University Financial Associates, S&P/Case-Shiller
Home Price Index, IHS Global Insight, and Zillow.
Applicable Criteria
Revenue-Supported Rating Criteria (pub. 16 Jun 2014)
https://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=750012
Tax-Supported Rating Criteria (pub. 14 Aug 2012)
https://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=686015
U.S. Local Government Tax-Supported Rating Criteria (pub. 14 Aug
2012)
https://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=685314
U.S. Water and Sewer Revenue Bond Rating Criteria (pub. 31 Jul
2013)
https://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=715275
Additional Disclosures
Dodd-Frank Rating Information Disclosure Form
https://www.fitchratings.com/creditdesk/press_releases/content/ridf_frame.cfm?pr_id=987213
Solicitation Status
https://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=987213
Endorsement Policy
https://www.fitchratings.com/jsp/creditdesk/PolicyRegulation.faces?context=2&detail=31
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Fitch RatingsPrimary AnalystShannon
GroffDirector+1-415-732-5628Fitch Ratings, Inc.650 California
StreetSan Francisco, CA 94108orSecondary AnalystKaren
WagnerDirector+1-212-908-0230orCommittee ChairpersonDoug
ScottManaging Director+1-512-215-3725orMedia Relations:Sandro
Scenga, +1-212-908-0278sandro.scenga@fitchratings.com