Fitch Rates Sacramento Co San Dist Fin Auth, CA's Revs 'AA-'; Outlook Stable

Fitch rates the following Sacramento County Sanitation Districts Financing Authority, CA (the authority) revenue bonds:

--Approximately $61.9 million revenue bonds, taxable refunding series 2014B (Sacramento Regional County Sanitation District) 'AA-'.

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

--$1.08 billion in outstanding (pre-refunding) 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.

The bonds are scheduled to sell via negotiation the week of Nov. 3. Proceeds will be used to 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 2014B 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 2017 that are expected to result in some enhancement 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 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.

ECONOMIC IMPROVEMENT: The service area has experienced significant economic weakening but continues to show 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; unaudited figures point to similar results 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, while unaudited fiscal 2014 reserves were down slightly but remained above 1,000 days cash.

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.

After lengthy litigation, a settlement was reached recently between all parties which included the RWQCB amending the permit to allow for reduced filtration capacity and relaxation of certain disinfection requirements. This amendment is expected to ultimately result in around $100 million in avoided capital costs and around $150 million in reduced lifecycle costs. The district must complete all capital requirements associated with the permit by 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 $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 2015-2017 to boost financial resources and support upcoming borrowings.

The district forecasts that rate adjustments will support total DSC improvements at 1.5x-1.6x and position the district to fund a meaningful 22% of the fiscal 2015-2019 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 2020 or 2021.

WHOLESALE BUSINESS PROVIDES STABILITY

The district serves as the wholesale wastewater service provider for the greater Sacramento area. The service area is comprised of more than 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 0.8% 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 2014 unemployment of 7.3% in the county is an improvement from peak recession levels but remains above the 6.3% for the U.S. Wealth levels within the county are average, being on par with the nation but roughly 10% below the state.

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

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

Applicable Criteria and Related Research:

--'Revenue-Supported Rating Criteria' (June 2014);

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

--'2014 Water and Sewer Medians' (December 2013);

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

Applicable Criteria and Related Research:

Revenue-Supported Rating Criteria

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=750012

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=907355

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