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

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

--$12.1 million 2012 revenue bonds (Sonoma Valley County Sanitation District Wastewater Projects).

The Rating Outlook on 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 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

SOLID FINANCIAL PERFORMANCE: Debt service coverage has been not less than 2.0x each of the last four years and is projected to be at least this level during the forecast period. Liquidity increased each of the last two years after dipping below 'AA' category medians in fiscal year 2012 due to equity funding of capital.

RATE FLEXIBILITY: 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 flexibility could become more constrained in the future, although the district reports limited community objection.

MANAGEABLE CAPITAL PLANS: Capital needs are manageable as above average principal payout generates borrowing capacity. However, per capita debt levels are above average and expected to rise with additional planned borrowing.

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 FINANCIAL PERFORMANCE: The district's good financial performance could become pressured in the intermediate term given planned continuation of annual increases to already high rates.

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 rated 'AA+' stable outlook by Fitch), 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 2019, assuming annual rate increases as well as future debt service payments on state loans (expected in fiscals 2017, 2018, and 2019). While ad valorem taxes levied to pay for general obligation debt are not pledged to the revenue bonds, Fitch includes both the GO debt service and the associated tax revenues in all calculations to show the true operating environment of the system.

Liquidity increased each of the last two years to $10.4 million at fiscal year-end 2014, or 430 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 6.1% over the decade ending 2013 and additional 5.0% increases in fiscal 2014 and 2015. As such, Fitch views rate increases of 3.5% to 5.0% over the forecast period as reasonable. While rates are high compared to Fitch's affordability threshold, they are 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 now based 30% on potable water usage and 70% on a fixed rate.

MANAGEABLE CAPITAL PLANS

About half of planned capital spending totaling $21 million from fiscals 2015-2019 is related to main replacements to address inflow and infiltration issues, $3.9 million for Agua Caliente pipeline creek crossing, and the remainder for recycling, pump, and pipeline projects. The district plans to take on additional state loans totaling a combined $12 million in the fiscal 2017-19 timeframe, instead of in fiscals 2014, 2015, and 2017 as originally expected. Amortization of current debt is rapid, with 62% repaid within 10 years.

Per capita debt levels are moderate at about $596 but are expected to increase to well above medians during the forecast period. Current and projected debt per customer, however, remain below Fitch medians.

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. The district expects to replace up to 9,000 feet of pipeline as part of the five-year CIP.

STABLE SERVICE AREA

The district serves a population of around 30,000 in the heart of the Sonoma Valley wine country. Sonoma County (implied general obligation rated 'AA+' Stable outlook by Fitch) population growth averaged 0.9% over the last five years. The local 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 of 5.4% in August 2014 remained below state and national averages.

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 ten customers made up a moderately high 16.5% 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'.

In addition to the sources of information identified in Fitch's Tax-Supported Rating Criteria, this action was additionally informed by information from Creditscope.

Applicable Criteria and Related Research:

--'Tax-Supported Rating Criteria' (Aug. 14, 2012);

--'U.S. Local Government Tax-Supported Rating Criteria' (Aug. 14, 2012).

Applicable Criteria and Related Research:

U.S. Local Government Tax-Supported Rating Criteria

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=685314

Tax-Supported Rating Criteria

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=686015

Additional Disclosure

Solicitation Status

http://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=934495

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Contacts

Fitch Ratings
Media Relations
Elizabeth Fogerty, New York
Tel: +1 (212) 908 0526
Email: elizabeth.fogerty@fitchratings.com
or
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
Arlene Bohner
Senior Director
+1-212-908-0554

Contacts

Fitch Ratings
Media Relations
Elizabeth Fogerty, New York
Tel: +1 (212) 908 0526
Email: elizabeth.fogerty@fitchratings.com
or
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
Arlene Bohner
Senior Director
+1-212-908-0554