Fitch Affirms Sonoma Valley County Sanitation District, CA Rev Bonds at 'AA-'; Outlook Stable

SAN FRANCISCO--()--Fitch Ratings has affirmed the 'AA-' rating for the following Sonoma County Water and Wastewater Financing Authority, CA (the authority) obligations issued on behalf of the Sonoma Valley County Sanitation District, CA (the district):

--$11.44 million 2012 revenue bonds (Sonoma Valley County Sanitation District Wastewater Projects).

The Rating Outlook is Stable.

SECURITY

The bonds are payable from a first pledge and lien on installment payments to the authority from the district under the Installment Sale Agreement. Installment payments are payable from net revenues of the district's sewer system not including ad valorem property taxes levied to pay GO bonds of the district, special assessments or special taxes levied on real property, or connection fees and developer impact fees.

KEY RATING DRIVERS

LOWER SOLID FINANCIAL PERFORMANCE: Debt service coverage has been not less than 2.0x each of the last five years and is projected to be at least this level during the forecast period. Liquidity increased over the last several years to strong levels.

DISCIPLINED RATE SETTING: The district's rate flexibility is demonstrated by its practice of annual increases, which has been prudent given rising debt service and operational costs. Rates are above Fitch's affordability threshold and, as such, despite district reports of limited community objection, flexibility could become more constrained in the future.

AFFORDABLE DEBT PLANS: Capital needs are manageable with above average amortization of principal. Additional planned borrowing is lower than previously expected.

AMPLE CAPACITY: System treatment capacity is sufficient with limited growth forecast, but repairs are needed to address collection system inflow and infiltration.

STABLE SERVICE AREA: The system serves a stable, primarily residential population in the Sonoma Valley area.

RATING SENSITIVITIES

CONTINUED SOLID FINANICAL PERFORMANCE: The district's good financial performance could become pressured in the intermediate term given planned continuation of annual increases to rates already above Fitch's affordability threshold. However, continued solid financial metrics given stability of revenues and modest additional debt could lead to positive rating action.

CREDIT PROFILE

The district provides sewage collection, treatment, and disposal service to the Sonoma Valley area including the city of Sonoma and communities of Boyes Hot Springs, Ague Caliente, El Verano, and Glen Ellen. Wastewater is collected primarily by a gravity system and flows to the district's wastewater treatment plant for processing. The treated recycled water is used to irrigate local crops during the summer and is discharged to San Pablo Bay via Schell Slough during the winter. The district has been managed since 1995 along with three other county sanitation districts by the Sonoma County Water Agency (SCWA; water revenue bonds 'AA+'/Outlook Stable), which provides engineering, environmental, administration, operational, and maintenance services.

GOOD FINANCIAL PERFORMANCE

Coverage has been at least 2.0x each of the last four years and is projected to remain at these levels through fiscal 2021, including annual rate increases as well as future debt service payments on state loans (approximately $7 million over fiscals 2018 and 2019). Reasonable assumptions include annual rate increases of 3.5% (compared to historical average annual rate increase of 6%), and operations and maintenance cost increases of 4%. The projections do not include connection fees. In calculating debt service, Fitch included the debt service related to district's general obligation bonds (which mature in fiscal 2017) and the associated tax revenues in order to show the true operating environment of the system. However, ad valorem taxes levied to pay for GO debt are not pledged to the revenue bonds.

Liquidity increased each of the last two years to $14 million at fiscal year-end 2015, or 548 days cash. Cash had previously reached a trough of $4.6 million, or 220 days cash on hand, in fiscal year 2012 due to the use of pay-go for a new storage pond with 100 acre-feet of treated water storage as part of Napa Salt Marsh project.

DEMONSTRATED RATE FLEXIBILITY; LARGE FIXED RATE COMPONENT

Rate flexibility is good, with willingness and ability to raise rates demonstrated by annual increases averaging 6%. As such, Fitch views rate increases of 3.5% over the forecast period as reasonable. While rates of $81 per month for 6,500 gallons of usage are high compared to Fitch's affordability threshold, actual usage is lower at 4,420 gallons and rates are reportedly comparable to surrounding communities. Effective fiscal year 2012, the district implemented a partially volume based rate structure from a completely fixed charge. Residential rates are based 30% on potable water usage and 70% on a fixed charge.

MANAGEABLE CAPITAL PLANS

About 75% of planned capital spending totaling $32 million from fiscals 2017-2021 is related to main replacements and collection system repairs to address inflow and infiltration issues. The district entered into a settlement agreement with the San Francisco Bay Regional Water Quality Control Board (SFBRWQB) in 2015 which establishes a timeline for completing collection improvement projects to reduce wet weather overflows. The district expects to take on additional state loans totaling a combined $7 million in the fiscal 2018-19 timeframe, instead of $12 million as previously expected. Current and projected debt per customer remains below Fitch medians while per capita debt levels are about 1.5 medians. Amortization of current debt is rapid, with 69% repaid within 10 years.

AMPLE CAPACITY; AGING INFRASTRUCTURE

System capacity is good with treatment capacity of 3 million gallons per day (mgd) in dry weather and 16 mgd in wet weather. The system meets tertiary treatment standards. Given projected annual growth of less than 1% per year, the system is expected to have sufficient capacity indefinitely. However, the collection system, which includes about 135 miles of gravity sewer lines, is in need of repairs to address inflow and infiltration issues as addressed in the district capital improvement plan.

STABLE SERVICE AREA

The district serves a population of around 30,000 in the heart of the Sonoma Valley wine country. The Sonoma County (IDR 'AA+'/Outlook Stable) economy is focused on agriculture, tourism and public services. Median household income in the county is comparable to the state and 18% above the nation. County unemployment generally tracks the state average.

The total number of district connections has remained flat over the past five years and includes approximately 75% residential, 10% commercial, and 5.5% industrial. The top 10 customers made up a moderately high 17% of total wastewater billings and include a state medical facility, winery, four mobile home parks, a school district, cheese factory, and two hotels.

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=1014970

Solicitation Status

https://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=1014970

Endorsement Policy

https://www.fitchratings.com/regulatory

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Contacts

Fitch Ratings
Primary Analyst
Shannon Groff
Director
+1-415-732-5628
Fitch Ratings, Inc.
650 California Street, 4th Floor
San Francisco, CA 94108
or
Secondary Analyst
Andrew Ward
Director
+1-415-732-5617
or
Committee Chairperson
Douglas Scott
Managing Director
+1-512-215-3725
or
Media Relations:
Elizabeth Fogerty, +1-212-908-0526
elizabeth.fogerty@fitchratings.com

Contacts

Fitch Ratings
Primary Analyst
Shannon Groff
Director
+1-415-732-5628
Fitch Ratings, Inc.
650 California Street, 4th Floor
San Francisco, CA 94108
or
Secondary Analyst
Andrew Ward
Director
+1-415-732-5617
or
Committee Chairperson
Douglas Scott
Managing Director
+1-512-215-3725
or
Media Relations:
Elizabeth Fogerty, +1-212-908-0526
elizabeth.fogerty@fitchratings.com