OREANDA-NEWS. Fitch Ratings has affirmed Ross Valley Public Financing Authority, CA's (the authority) following obligations, issued on behalf of Ross Valley Sanitary District, CA (the district) at 'A+':

--$30 million outstanding sewer revenue bonds, series 2014.

The Rating Outlook is Stable.

SECURITY

The bonds are secured by installment payments to the authority from the district, to be made from net revenues of the system including connections fees.

KEY RATING DRIVERS

REGULATORY REQUIREMENTS WEIGH ON OPERATIONS: The district is currently in compliance with requirements outlined in regulatory actions taken against it in 2012 and 2013 in response to sanitary sewer overflows (SSOs). Although progress has been made addressing requirements, additional regulatory projects drive the increased capital improvement program (CIP) through at least 2021.

HIGH, CAPITAL-DRIVEN DEBT: Debt-funded capital projects have driven the district's debt to net plant ratio to a high 72%, above the 'A' category median of 67%. Debt to equity also is elevated at 6.8x, well over the 'A' category median of 4.5x. Planned issuance of additional debt in fiscal 2017 will increase debt per customer further from $2,331 in fiscal 2015 to over $3,000 by fiscal 2020.

FORECAST PROJECTS ADEQUATE COVERAGE: All-in debt service coverage (DSC) is projected at 2.9x for fiscal 2016. Debt service is expected to rise with the issuance of additional debt, but with planned rate increases, Fitch calculates DSC should remain over 2.0x.

INCREASING RATE STILL AFFORDABLE: For 2015, the individual sewer bill equated to.7% of median household income (MHI), under Fitch's affordability threshold of 1%. This allows the district to maintain affordability even after previously approved rate increases for fiscals 2018 and 2019 are implemented.

RATING SENSITIVITIES

ACHIEVEMENT OF FINANCIAL FORECAST: Ross Valley Sanitary District's rating is sensitive to successfully achieving DSC ratios commensurate with the rating category. Financial results that fall well below the categorical medians could result in negative rating action.

CONSISTENT COMPLIANCE: Continued compliance with regulatory requirements will be essential to avoiding additional penalties, regulatory actions and mandated capital expenditures, which could pressure the rating.

CREDIT PROFILE

The district is located in Marin County (Issuer Default Rating 'AAA') and serves a population of approximately 50,000 across several communities including Fairfax, Ross, Larkspur, Kentfield, and Oak Manor. The district's system collects, pumps and transports wastewater. Treatment is provided by the Central Marin Sanitation Agency (CMSA), a joint exercise of powers authority by and among the district, San Rafael Sanitation District, Sanitary District No. 2 of Marin County and the City of Larkspur.

REGULATORY VIOLATIONS WEIGH ON OPERATIONS, DRIVE CAPITAL SPENDING

The district was subject to a number of regulatory actions in recent years in response to an excess of SSOs due to aging facilities. In an April 2012 settlement with the San Francisco Regional Water Quality Board (SFRWQCB) the district was required to complete two supplemental projects (in addition to other requirements, which have since been met). Since Fitch's last review in October 2014 the district completed one of the projects and is fully compliant on the second project, which the district anticipates will be complete by the end of calendar year 2016.

After the 2012 settlement, SFRWQCB issued a cease and desist order (CDO) in May 2013 after finding that the district had not allocated adequate resources to ensure proper operation, maintenance and repair of its system. One requirement of the CDO was development of an Infrastructure Asset Management Plan (IAMP), which the district reports is now used to develop its annual CIP. The IAMP includes a plan to replace or repair the district's pipelines and other wastewater collection facilities over the next five years. Accordingly, these regulatory projects drive the district's CIP and allow little flexibility in capital spending. It is expected the CIP will continue to be driven by these regulatory requirements through at least 2021.

WEAK DEBT PROFILE; ADDITIONAL BORROWING PLANNED

The district's debt to net plant increased from 14% in fiscal 2013 to 72% in fiscal 2015, over the categorical 'A' median of 67%. The dramatic increase is the result of borrowing necessary to comply with regulatory requirements called for by the CDO. To continue complying with all requirements the district anticipates borrowing up to $30 million within the next nine months, possibly as a state revolving fund loan. It is expected debt to net plant will remain elevated in the short term given the additional borrowing.

While debt per customer for fiscal 2015 was comparable to the category median, debt per capita was well over the median of $675, coming in at $1,056. Projected debt per customer and per capita are both expected to deteriorate over the next five years given the fully built out service area and the planned additional borrowing. By fiscal 2020 debt per customer is projected to be over $3,000, while the categorical median is $2,008. Likewise, by fiscal 2020, debt per capita is projected at $1,381 -- more than double the categorical median.

Existing debt amortizes slowly compared to similarly rated systems with just over 25% amortized in the next ten years, and just 65% amortized over the next 20 years. Category medians are 44% and 87%, respectively. All debt fully amortizes within 30 years.

ADEQUATE FINANCIAL FORECAST

The district's forecast appears reasonable, and assumes no growth in the customer base, only projecting an increase in sales revenue based on previously approved rate increases for both fiscal 2018 and 2019. Sales revenue is projected to be flat after 2019, but management indicated rate increases that at least keep up with the rate of inflation are likely to be implemented. Operating expenses include payments to CMSA for treatment costs and debt service. Increasing CMSA costs could pressure the district's finances as it does not have a pass-through mechanism built into the previously adopted rate plan. However, the district has incorporated CMSA's 10-year rate forecast into its projections.

Historical DSC was very strong due to low debt levels, but fiscal 2016 was the first year the full impact of the series 2013 and series 2014 bonds were reflected in the district's DSC ratio. Based on management's forecast, all-in DSC points to ending fiscal 2016 at a strong 2.9x and improving to 3x or higher through fiscal 2021. However, those coverage levels do not include the new debt the district plans to issue in fiscal 2017. Through fiscal 2021, Fitch calculates all-in DSC should remain at 2x or higher even after the new debt is factored in. Days cash on hand (DCOH) was a strong 327 days for fiscal 2015, and improved from 143 DCOH in fiscal 2012, but could decline as the district plans to cash fund a portion of its CIP.

AFFLUENT SERVICE AREA

The district serves a very affluent service area in Marin County, which is part of the diverse San Francisco Bay area employment market. The county unemployment rate as of August 2016 was 3.5%, compared to 5.6% for the state and 5.0% for the nation. MHI in Marin County is 160% of the state and 180% of the national rate. For 2015 the individual sewer bill equated to.7% of MHI, under Fitch's affordability threshold of 1%. This gives the district rate flexibility should rates need to be increased beyond fiscal 2019 to ensure DSC commensurate with similarly rated systems.