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

SAN FRANCISCO--()--Fitch Ratings assigns the following rating to Sonoma County Water and Wastewater Financing Authority (the authority) debt obligations issued on behalf of the Sonoma Valley County Sanitation District, CA (the district):

--$12.845 million 2012 revenue bonds (Sonoma Valley County Sanitation District Wastewater Projects) at 'AA-'.

The bonds will be sold via competition the week of Jan. 7, 2013. Proceeds will be used to refund and defease $6.46 million authority 1998 Special Revenue Bonds, finance certain capital improvements (the Napa Salt Marsh project) of the district's wastewater enterprise (the system), and fund a debt service reserve fund. The refunding is expected to generate approximately $1 million in savings.

The Rating Outlook is Stable.

SECURITY

The bonds are payable from and secured by a first pledge and lien on installment payments to the authority from the district under the installment sale agreement. Installment payments are payable from and secured by 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: Total debt service coverage has historically been no less than 1.75x and is projected to be at least 1.9x during the forecast period. Historically, liquidity has been solid but dipped to below 'AA' category medians in fiscal year 2012 due to capital spending.

SUFFICIENT RATE FLEXIBILITY: While rates are above Fitch's affordability threshold, the district's rate flexibility is demonstrated by its practice of annual increases, which has been prudent given rising debt service and operational costs.

MANAGEABLE CAPITAL PLANS BUT RISING DEBT: Capital needs are manageable with above average principal payout and favorable cash to depreciation ratios. However, moderate per capita debt levels are expected to double with the borrowing anticipated in the five-year capital improvement plan (CIP).

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

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

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.

GOOD FINANCIAL PERFORMANCE

Total debt service coverage (including outstanding general obligation debt) has been good, but somewhat variable ranging from 1.75x to 2.8x the past five fiscal years. Coverage improved in fiscal 2012 to 2.6x due in part to a 7% decrease in expenditures as a result of reduction in power and maintenance related spending. Projected coverage ranges from 1.9x to 2.2x through 2018, including annual rate increases as well as future debt service payments on state loans expected in fiscals 2014, 2015 and 2017.

Liquidity dipped to $4 million, or 220 days cash on hand, in fiscal year 2012 from a four-year average of 300 days due to the use of pay-go for a new storage pond with 100 acre-feet of treated water storage as part of the Napa Salt Marsh project. While adequate, cash levels are somewhat below Fitch's 'AA' category medians.

DEMONSTRATED RATE-RAISING

Rate flexibility is sufficient based on willingness and ability to raise rates. Rates have been raised on average 5.9% over the five years ending fiscal 2012 and an additional 5.5% increase in fiscal 2013. As such, Fitch views rate increases of 4.5% to 5.5% over the forecast period as reasonable. While rates are somewhat 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 BUT RISING DEBT

Per capita debt levels are moderate at about $588 but are expected to double given the district's additional borrowing plans. In addition to this debt issuance and two 2012 state loans, the district expects to incur state loans totaling a combined $12 million in fiscals 2014, 2015, and 2017. In total, borrowing equals about 85% of the five-year $27 million CIP.

Capital spending includes about $8.6 million for sewer main replacement, $6.8 million for the Napa Salt Marsh Project funded by this issuance, $3 million for Agua Caliente pipeline creek crossing, $3 million for a biosolids handling facility, and the remainder for recycling, pump, and pipeline projects. Free cash was a solid 102% of depreciation in 2012, indicating the system is generating sufficient cash for reinvestment. Also, amortization is above average with a 10-year principal payout of 58%.

AMPLE CAPACITY

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. County-wide population growth averaged 1.2% over the last five years. The local economy is focused on agriculture, tourism and public services. Median household income in the county is 5% above the state and 22% above the nation. County unemployment of 7.6% in September 2012 remained even with the national average, but well below 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 ten customers makes up a moderately high 15.6% of total wastewater billings and included four mobile home parks, a state medical facility, winery, cheese factory, and two hotels.

Additional information is available at 'www.fitchratings.com'. The ratings above were solicited by, or on behalf of, the issuer, and therefore, Fitch has been compensated for the provision of the ratings.

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 12, 2012);

--'U.S. Water and Sewer Revenue Bond Rating Criteria' (Aug. 3, 2012);

--'2012 Water and Sewer Medians' (Dec. 8, 2011);

--'2012 Sector Outlook: Water and Sewer' (Dec. 8, 2011).

Applicable Criteria and Related Research:

Revenue-Supported Rating Criteria

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=681015

U.S. Water and Sewer Revenue Bond Rating Criteria

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=684901

2012 Water and Sewer Medians

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=657111

2012 Outlook: Water and Sewer Sector

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=657110

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