OREANDA-NEWS. Fitch Ratings assigns an 'AA' rating to the following Sacramento County Sanitation Districts Financing Authority, CA (the authority) bonds, issued on behalf of the Sacramento Area Sewer District (SASD, or the district):

--\$44 million Sacramento County Sanitation Districts Financing Authority revenue bonds, refunding series 2015 (Sacramento Area Sewer District).

The bonds are expected to sell via negotiated sale the week of March 9. Proceeds will refund a portion of the authority's outstanding revenue bonds, series 2005 (Sacramento Area Sewer District) for net present value savings of \$25.5 million. In addition, the district will use approximately \$71.1 million in cash as well as the release of debt service reserve funds to defease the remainder of the series 2005.

In addition, Fitch affirms the following authority bonds at 'AA':

--\$130.6 million in outstanding series 2005 bonds (County Sanitation District No. 1);
--\$110.7 million in outstanding series 2010A taxable Build America Bonds - direct subsidy (Sacramento Area Sewer District);
--\$13.4 million in outstanding series 2010B bonds (Sacramento Area Sewer District).

The Rating Outlook is Stable.

SECURITY

The bonds are secured by a net revenue pledge of the district's wastewater utility system (the system).

KEY RATING DRIVERS

STRONG FINANCIAL PERFORMANCE: The district's financial profile is strong with very stable revenues, solid debt service coverage (DSC) and robust liquidity levels. Projections provided by the district indicate coverage of at least 2.2x over the next five years.

LOW DEBT BURDEN: Debt ratios are very low and are expected to decline given the district's lack of additional borrowing plans over the near term. This strength is somewhat offset by the slow pace of debt amortization.

RATES TO RISE: Combined district and wholesale service charges are equal to Fitch's affordability threshold of 1% of median household income (MHI). While district rates are not expected to increase over the forecast period, wholesale rates are subject to significant increases over the medium term to support a \$2 billion upgrade to the wastewater treatment plant necessary to comply with regulatory requirements. However, rates are comparable to surrounding areas, some of which will be subject to the same wholesale increases.

GOOD GOVERNANCE PRACTICES: The utility engages in thorough financial and capital planning practices within a solid policy framework.

LARGE, DIVERSE SERVE AREA: The service area including parts of Sacramento County (implied general obligation [GO] rated 'A'/Stable Outlook by Fitch) is broad, diverse, and largely residential although it has been slow to recover from the economic downturn.

RATING SENSITIVITIES

STABLE RATING: The rating is sensitive to fundamental shifts in the district's financial and operating profiles, as well as possible regulatory requirements. The Stable Outlook reflects Fitch's expectation that such shifts are unlikely in the near-to-medium term.

CREDIT PROFILE

The district serves as a retail wastewater service provider in the greater Sacramento area. Its service area includes the unincorporated areas of Sacramento, the cities of Citrus Heights, Elk Grove, and Rancho Cordova, and portions of the cities of Sacramento (implied GO rated 'AA-'/Stable Outlook) 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. 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, or Regional San, senior lien revenue bonds rated
'AA-'/Stable Outlook) pursuant to a master agreement that expires in 2024.

SOLID FINANCIAL METRICS

DSC excluding any Build America Bonds (BABs) interest subsidy came in about as expected at 1.9x versus an estimated 2.0x in fiscal 2014 as operating costs increased by 18.5% primarily to cover increases in contract service cost for maintenance tasks needed to meet service level requirements resulting from new regulations and a recent California Sportfishing Protection Alliance lawsuit settlement. Operating expenses are projected to increase by an average of 4.4% over the remainder of the forecast period. Due to the current refunding and cash defeasance of series 2005 bonds, the DSC forecast has improved and is projected to range between 2.2x and 2.8x through fiscal 2019. Fitch views the district's projections as reasonable with no rate increases other than the wholesale hikes and 0.5% growth in connections.

Liquidity remained very strong at 809 days cash on hand in fiscal 2014. Even with pay-as-you-go capital funding and the cash defeasance of a portion of the series 2005 bonds in fiscal 2015, liquidity is expected to remain solid (above 400 days) through the forecast period.

LOW DEBT RATIOS; SLOW AMORTIZATION

The district's capital improvement plan totals a manageable \$74 million. The plan is anticipated to be entirely funded with pay-go. Given the district has no debt issuance plans, debt ratios are projected to decrease with outstanding debt per customer at an estimated \$393 in five years. Debt amortization, however, is below average with principal payout of 17% and 50% in 10 and 20 years, respectively.

REVENUE STABILITY; RATE INCREASES TO SUPPORT REGIONAL PROJECT

The majority of the district's revenues come from flat fees on residential accounts, providing a high degree of revenue stability and predictability. The district currently charges a flat monthly fee of \$19.85 per equivalent single-family dwelling (ESD) related to its retail service as well as a flat pass-through charge associated with the SRCSD's costs. As of fiscal 2015, a typical monthly retail wastewater bill of \$48.85 (including the regional treatment fee) is equal to Fitch's affordability threshold of 1% of median household income.

No district rate increases are forecast over the next five years, although SRCSD is projecting \$3.00 annual increases through fiscal 2017, which will be passed through to district customers. Furthermore, SRCSD is estimating that monthly service charges could nearly double over the medium term to support an estimated \$2 billion in upgrades to the Sacramento Regional Wastewater Treatment Plant.

SERVICE AREA

The district provides wastewater collection services to an estimated population of over 1.2 million residents, or approximately 75% of the county population. Roughly 99% of the district's service area is comprised of residential and commercial flat rate customers, and the remaining 1% consists of usage-based rate industrial customers. The Sacramento area economy is diversified. Leading employment sectors include state government, electronics manufacturing, food processing, and healthcare. County unemployment rates of 6.2% as of December 2014 remain elevated relative to the U.S. (5.4%) but are lower than the state average (6.7%). Wealth indicators, as measured by MHI, are slightly below the state (90%) and about even with the national average (104%).