Fitch Rates Sacramento County Sanitation Dist Fin Auth, CA's $127MM Revs 'AA'; Outlook Stable
Source: Business Wire
--$117.4 million series 2010A taxable Build America Bonds - direct subsidy (Sacramento Area Sewer District);
--$9.3 million series 2010B (Sacramento Area Sewer District).
The bonds are expected to sell via negotiation the week of July 29 and are separately secured by payments from the Sacramento Area Sewer District (SASD, or the district).
In addition, Fitch affirms the following ratings:
--$148.7 million in outstanding revenue bonds (County Sanitation District No. 1) at 'AA'.
The Rating Outlook is Stable.
RATING RATIONALE:
--The district has a stable financial operating history, although some weakening occurred in the last two fiscal years.
--SASD's capital needs are manageable.
--The district maintains rate flexibility.
--Leverage ratios are low and will remain low even with the current debt issuance.
--Debt amortization is slow.
--The service area is broad and diverse, though unemployment rates are high relative to state and national averages.
KEY RATING DRIVERS:
--Maintenance of sound financial results despite rising fixed costs will be important to maintaining the rating level.
--Continued rate hikes will be needed to support future increases in annual debt service payments.
SECURITY:
The series 2010A and series 2010B bonds and outstanding parity bonds are secured by a first lien on and pledge of net SASD revenues, which are gross revenues of the system less operations and maintenance expenses. Revenues include any subsidy, reimbursement or other payment from the federal government of the United States of America under the American Recovery and Reinvestment Act of 2009 (or any similar regulation or legislation of the federal government).
CREDIT SUMMARY:
The district serves as a retail wastewater service provider in the greater Sacramento area. Its service area includes the unincorporated areas of Sacramento County, the cities of Citrus Heights, Elk Grove, and Rancho Cordova and portions of the cities of Sacramento and Folsom. The district, formerly known as Sacramento County Sanitation District No. 1, was formed in 1978 through the consolidation of four maintenance and six sanitation districts. SASD maintains approximately 3,000 miles of main sewer pipelines and 103 pump stations; the customer count is roughly 394,000. The district has no employees but contracts administrative and operational functions to Sacramento County. Wastewater flows are conveyed to the Sacramento Regional County Sanitation District (SRCSD) pursuant to a master agreement that expires in 2024.
Financial performance has weakened some in the last two fiscal years. Senior ADS dropped from a high of 8.3 times (x) in fiscal 2005 to 2.3x in fiscal 2009. The decline in impact fees from $11 million in fiscal 2005 to $2 million in fiscal 2009 due to reduced building activity drove part of the decline in coverage. Furthermore, operating expenses increased during fiscal 2008 and 2009 due to an increase in regulatory costs, increases in salary and benefits, and an increase in chemical and other costs. Coverage is projected to decline to a low of 1.4x in fiscal 2013 before climbing back to 2.0x in fiscal 2014. Nevertheless, projections are very conservative and assume 0.2% growth in new connections; growth has averaged 2.0% annually over the past five years. Liquidity was a healthy 255 days cash on hand as of fiscal 2009. Reserve levels are also slightly weaker than historical norms due to the recent increase in operating expenses. Given that the district anticipates primarily debt funding its capital improvement plan (CIP), liquidity should improve over the medium term.
The district's CIP totals a manageable $156 million. Approximately 81% of the plan is anticipated to be funded with the series 2010 bond proceeds, with the remainder to be funded with cash. Despite the anticipated increase in debt, debt ratios are projected to remain very low with outstanding debt per customer at $593 in five years. Debt amortization, however, is slow with principal payout at 16% and 44% in 10 and 20 years, respectively.
The district currently charges a monthly fee of $19.85 per equivalent single family dwelling (ESD). A typical monthly retail wastewater bill of $39.60 (including the regional treatment fee) is affordable at 0.7% of median household income (MHI). A $2.35 rate increase has been adopted for fiscal 2011 and no other rate increases are forecast until fiscal 2014. The district also charges a connection fee of $2,000 per ESD in existing service areas and $2,500 in new service areas.
The district provides wastewater collection services to an estimated population of 1.1 million residents, or approximately 75% of the county population. The service area is predominantly residential with residential customers accounting for 99% of total revenues. The Sacramento area economy is diversified; leading employment sectors include state government, electronics manufacturing, food processing and healthcare. Local unemployment rates at 12.1% are above state (11.9%) and national (9.3%) levels as of May 2010. Wealth indicators, as measured by MHI, are slightly below the state (94%) but above the national average (111%).
Considerations for Taxable/Build America Bonds Investors
The following sector credit profile is provided as background for investors new to the municipal market.
Water and Sewer Utility Revenue Bonds:
Municipal water and sewer utilities in the U.S. are enduring natural monopolies that typically have autonomous rate setting ability and provide highly essential services. The bonds are secured by a pledge of net revenues generated by the water and/or sewer system; and typically include structural legal protections such as rate covenants, debt service reserve requirements, and anti-dilution tests. As such, the sector exhibits extremely strong credit characteristics with minimal defaults. Reflective of this strong performance, the average water and sewer revenue bond rating is 'AA' with 86% at or above 'AA-' and approximately 2% rated 'BBB+' or below. Those with low investment-grade or below-investment-grade ratings generally have substantial capital programs, a high degree of leverage or weak financial flexibility as reflected in low cash levels, narrow debt service coverage and/or limited rate-raising flexibility.
Applicable criteria available on Fitch's website at www.fitchratings.com:
--'Revenue-Supported Rating Criteria, (Dec. 29, 2009);
--'Water and Sewer Revenue Bond Rating Guidelines', (Aug. 6, 2008).
Additional information is available at www.fitchratings.com.
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Fitch Ratings
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