News Column

Fitch Rates Sacramento County Sanitation Dist Fin Auth, Ca's Revs 'AA-'; Outlook Stable

June 11, 2014

AUSTIN, Texas--(BUSINESS WIRE)-- Fitch Ratings rates the following Sacramento County Sanitation Districts Financing Authority, CA (the authority) revenue bonds:

--Approximately $385.8 million revenue bonds, series 2014 (Sacramento Regional County Sanitation District) 'AA-'.

In addition, Fitch affirms the following ratings on the authority's bonds:

--$964 million in outstanding (pre-refunding) senior lien revenue bonds (Sacramento Regional County Sanitation District) at 'AA-';

--$350 million in outstanding subordinate lien revenue bonds (Sacramento Regional County Sanitation District) at 'A+'.

The Rating Outlook is Stable.

The bonds are scheduled to sell via negotiation the week of June 23. Proceeds will be used to pay for certain capital projects, refund a portion of the authority's bonds related to the Sacramento Regional County Sanitation District, CA (SRCSD, or the district) for interest savings, and pay costs of issuance.

SECURITY

The series 2014 bonds are senior lien bonds. 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 PASSAGE: The district's board has approved rate increases through fiscal 2016 that are expected to result in continued improvements in debt service coverage (DSC) and provide initial 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 of operating expenses.

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

ECONOMIC IMPROVEMENT: The service area has experienced significant economic weakening but is showing signs of improvement, although the county unemployment rate remains above the national average.

RATING SENSITIVITIES

Capital Cost Containment: Inability 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

Financial performance has historically been solid, but DSC weakened in fiscals 2009-2011 due to the housing downturn and subsequent decline in impact fees. Total DSC was just 1.10x during these years including rate stabilization fund (RSF) transfers as permitted by bond ordinance. To enhance financial results and begin positioning the district to address capital requirements, the district's board adopted a three-year rate package increasing rates between 8% and 10% annually for fiscals 2011-2013.

The rate package led to an improvement of total DSC to 1.4x for fiscal 2013 and similar results are expected for fiscal 2014. In addition, no further RSF draws have been utilized and none are expected. Reserves have been maintained at significant levels throughout the last several years despite RSF transfers totaling over $21 million during fiscals 2009-2011. For fiscal 2013 liquidity was noteworthy at over 1,160 days of operations.

STRINGENT PERMIT REQUIREMENTS

The Central Valley Regional Water Quality Control Board adopted a new discharge permit for the district in December 2010. 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 district reached a partial settlement with regulators in 2013 after filing an appeal with the state. The district received a two-year extension (to 2023) to achieve compliance with filtration and disinfection components associated with the new permit.

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 $2.1 billion, of which a sizeable portion is expected to be debt-financed. District debt levels are already elevated and will nearly double by fiscal 2020 to meet the permit requirements. The district passed another multi-year rate package in March 2014 for fiscals 2014-2016 to boost financial resources and support upcoming borrowings.

The district forecasts that rate adjustments will support total DSC improvements at 1.5x and position the district to fund a meaningful 17% of the fiscal 2014-2018 CIP from pay-go sources. Additional rate hikes beyond fiscal 2016 will be necessary to support the CIP, but costs are expected to level off by fiscal 2020 or 2021. At the same time pay-go funding levels are expected to increase so that at least 25% of new assets are funded from cash resources.

WHOLESALE BUSINESS PROVIDES STABILITY

The district serves as the wholesale wastewater service provider for the greater Sacramento area with about 580,000 equivalent single family dwelling units (or 400,000 customers), including 98% of Sacramento County's (the county) population. Customer growth levels have averaged a modest 0.7% over the last five years and are expected to remain manageable over the next several years. The cities of Sacramento and Folsom and the Sacramento Area Sewer District (formerly, Sacramento County Sanitation District No. 1), and West Sacramento 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.

ECONOMY RECOVERING SLOWLY

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, but the housing collapse and recession significantly pressured the service area and have had lingering effects. March 2014 unemployment of 8.1% in the county is an improvement from peak recession levels but remains above the 6.8% for the U.S. despite accelerating job growth during 2013. Wealth levels within the county are average, being about 5% higher than the nation but a little more than 5% lower than the state.

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

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

Applicable Criteria and Related Research:

--'Revenue-Supported Rating Criteria (June 2013);

--'U.S. Water and Sewer Revenue Bond Rating Criteria' (July 2013);

--'2014 Water and Sewer Medians' (Dec. 2013);

--'2014 Outlook: Water and Sewer Sector' (Dec. 2013).

Applicable Criteria and Related Research:

Revenue-Supported Rating Criteria

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=709499

U.S. Water and Sewer Revenue Bond Rating Criteria

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=715275

2014 Water and Sewer Medians

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=724358

2014 Outlook: Water and Sewer Sector

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=724357

Additional Disclosure

Solicitation Status

http://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=834202

ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: HTTP://FITCHRATINGS.COM/UNDERSTANDINGCREDITRATINGS. IN ADDITION, RATING DEFINITIONS AND THE TERMS OF USE OF SUCH RATINGS ARE AVAILABLE ON THE AGENCY'S PUBLIC WEBSITE 'WWW.FITCHRATINGS.COM'. PUBLISHED RATINGS, CRITERIA AND METHODOLOGIES ARE AVAILABLE FROM THIS SITE AT ALL TIMES. FITCH'S CODE OF CONDUCT, CONFIDENTIALITY, CONFLICTS OF INTEREST, AFFILIATE FIREWALL, COMPLIANCE AND OTHER RELEVANT POLICIES AND PROCEDURES ARE ALSO AVAILABLE FROM THE 'CODE OF CONDUCT' SECTION OF THIS SITE. FITCH MAY HAVE PROVIDED ANOTHER PERMISSIBLE SERVICE TO THE RATED ENTITY OR ITS RELATED THIRD PARTIES. DETAILS OF THIS SERVICE FOR RATINGS FOR WHICH THE LEAD ANALYST IS BASED IN AN EU-REGISTERED ENTITY CAN BE FOUND ON THE ENTITY SUMMARY PAGE FOR THIS ISSUER ON THE FITCH WEBSITE.



Fitch Ratings

Primary Analyst

Doug Scott

Managing Director

+1-512-215-3725

Fitch Ratings, Inc.

111 Congress Ave, Ste 2010

Austin, TX 78701

or

Secondary Analyst

Kathy Masterson

Senior Director

+1-512-215-3730

or

Committee Chairperson

Amy Laskey

Managing Director

+1-212-908-0568

or

Media Relations

Elizabeth Fogerty, +1-212-908-0526

elizabeth.fogerty@fitchratings.com


Source: Fitch Ratings


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