Fitch Affirms Sacramento County Sanitation Dist Fin Auth, CA's Revs; Outlook Stable

AUSTIN, Texas--()--Fitch Ratings has affirmed the following Sacramento County Sanitation Districts Financing Authority, CA (the authority) revenue bonds issued on behalf of the Sacramento Regional County Sanitation District, CA (SRCSD or the district):

--$1.1 billion in outstanding senior lien revenue bonds (Sacramento Regional County Sanitation District) at 'AA-';

--$100 million in outstanding subordinate lien revenue variable rate bonds, series 2000C (Sacramento Regional County Sanitation District) at 'A+'.

The Rating Outlook is Stable.

SECURITY

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 PLAN: The district's board approved a three-year rate plan through fiscal 2017 that is expected to maintain improved all-in debt service coverage (DSC) levels above 1.8x and provide 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 cash on hand (DCOH).

WEAK DEBT PROFILE: Leverage ratios are high and will increase with anticipated issuances of additional debt to fund projects necessary to comply with new discharge permit requirements. Furthermore, very slow debt amortization 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.

LARGE, DIVERSE SERVICE AREA: SRCSD serves approximately 1.4 million people primarily in Sacramento County. The service area continues to show signs of improvement, although the county unemployment rate remains above the national average.

RATING SENSITIVITIES

CAPITAL COST CONTAINMENT: Inability for the Sacramento Regional County Sanitation District, CA 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.

CREDIT PROFILE

IMPROVED DSC; STRONG LIQUIDITY

SRCSD's financial performance has improved annually over the past five years. To enhance financial results and begin positioning the district to address wastewater discharge permit requirements, the district's board adopted a three-year rate package increasing rates by an additional $2 per equivalent single-family dwelling (ESD) per month each year in fiscal years 2012 through 2014. Another three-year rate plan was approved to increase rates by $3 per ESD per month in fiscals 2015 through 2017.

The recent rate plan led to an improvement in total DSC to 2.0x for fiscal 2015 from 1.4x in fiscal 2013. Reserves have been maintained at significant levels (at around or above 1,000 DCOH); for fiscal 2015, liquidity was noteworthy at over 1,200 days of operations. Based on reasonable assumptions of 0.5% annual growth in ESDs and a $1 per ESD increase in rates over fiscal 2018 to 2020, the district's forecast points to continued solid DSC of between 2.0x to 2.1x over the next five years. Liquidity levels are expected to remain robust given the planned limited use (13%) of pay-go sources to fund capital projects.

STRINGENT PERMIT REQUIREMENTS

The Central Valley Regional Water Quality Control Board (the RWQCB) adopted a new discharge permit for the district in December 2010, which has been amended at various times since. The permit contains several new conditions requiring the district to meet increased treatment requirements for pathogens, ammonia and nitrogen removal. A significant focus of the permit is protection of the Sacramento-San Joaquin River Delta (the delta), into which the district discharges its flows. The delta is a sensitive ecosystem that provides drinking water for approximately two-thirds of all Californians.

The permit requires the new advanced wastewater treatment facilities (EchoWater Project) to be constructed and operational by 2021 for ammonia and nitrogen removal, and by 2023 for the new filtration and disinfection process. Total EchoWater Project costs are estimated to range between $1.5 and $1.75 billion. Additional ongoing operations and maintenance costs for the EchoWater Project are estimated at around $42 million annually when fully operational by fiscal year 2023.

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 $1.8 billion, of which a sizeable portion is expected to be debt-financed. District debt levels are already elevated and are expected to increase by around 1.5x by fiscal 2021 to meet the permit requirements. The district passed the recent three-year rate plan in March 2014 for fiscals 2015-2017 to boost financial resources and support upcoming borrowings.

The district forecasts that rate adjustments will position it to fund a meaningful 13% of the fiscal 2017-2021 capital improvement program (CIP) from pay-go sources. Additional rate hikes beyond fiscal 2017 will be necessary to support the CIP, but costs are expected to level off by fiscal 2021.

WHOLESALE BUSINESS PROVIDES STABILITY

The district serves as the wholesale wastewater service provider for the greater Sacramento area. The service area is composed of more than 586,000 ESDs, including 98% of Sacramento County's population. Customer growth levels have averaged a modest 0.6% over the last five years and are expected to remain manageable over the next several years.

The cities of Sacramento, West Sacramento, and Folsom and the Sacramento Area Sewer District (formerly, Sacramento County Sanitation District No. 1) are the local retail wastewater service providers that convey flows to district facilities. The contributing agencies each have at least one district board member, with additional members based on population. The district board has sole authority to set rates and charges.

ECONOMIC RECOVERY CONTINUING

Sacramento County includes the state capitol and is the business and commercial center of California's agricultural region. Strong job, population and related economic growth characterized the area historically, but the 2007-2009 housing collapse and recession significantly pressured the service area and have had lingering effects. August 2016 unemployment of 5.7% in the county is a significant improvement from peak recession levels but remains above the 5.0% for the U.S. Wealth indicators for the county are 93% of state levels but 104% of the national level.

Additional information is available at 'www.fitchratings.com'.

Applicable Criteria

Revenue-Supported Rating Criteria (pub. 16 Jun 2014)

https://www.fitchratings.com/site/re/750012

U.S. Water and Sewer Revenue Bond Rating Criteria (pub. 03 Sep 2015)

https://www.fitchratings.com/site/re/869223

Additional Disclosures

Dodd-Frank Rating Information Disclosure Form

https://www.fitchratings.com/creditdesk/press_releases/content/ridf_frame.cfm?pr_id=1012891

Solicitation Status

https://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=1012891

Endorsement Policy

https://www.fitchratings.com/regulatory

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Contacts

Fitch Ratings
Primary Analyst
Julie Garcia Seebach
Director
+1-512-215-3743
Fitch Ratings, Inc.
111 Congress Avenue, Suite 2010
Austin, TX 78701
or
Secondary Analyst
Shannon Groff
Director
+1-415-732-5628
or
Committee Chairperson
Doug Scott
Managing Director
+1-512-215-3725
or
Media Relations:
Alyssa Castelli, +1-212-908-0540
alyssa.castelli@fitchratings.com

Contacts

Fitch Ratings
Primary Analyst
Julie Garcia Seebach
Director
+1-512-215-3743
Fitch Ratings, Inc.
111 Congress Avenue, Suite 2010
Austin, TX 78701
or
Secondary Analyst
Shannon Groff
Director
+1-415-732-5628
or
Committee Chairperson
Doug Scott
Managing Director
+1-512-215-3725
or
Media Relations:
Alyssa Castelli, +1-212-908-0540
alyssa.castelli@fitchratings.com