Fitch Affirms Moulton Niguel Water District, CA's Rev COPs at 'AAA'
Fitch Ratings affirms the following ratings on Moulton Niguel Water District, CA's (the district) debt obligations:
--$85.3 million revenue certificates of participation (COPs) at 'AAA'.
The Rating Outlook is Stable.
The COPs are paid from purchase payments made by the district under the installment purchase agreement. Payments are secured first by property tax revenues and secondly from net revenues of the district's water, recycled water, and sewer systems. Revenues include amounts transferred from the rate stabilization fund, federal subsidies on the 2009 COPs (Build America Bonds), interest, rental income, and connection fees.
KEY RATING DRIVERS
STRONG FINANCIAL PERFORMANCE: Solid debt service coverage levels and well above-average liquidity reflect sound financial planning and policies. However, financial results may be pressured in future years from planned capital outlays.
AFFLUENT SERVICE AREA: The district's role as the water and wastewater service provider to an affluent service area provides a high degree of revenue flexibility.
LOW RATES: Property taxes contribute a significant portion of revenues resulting in lower utility rates than surrounding areas.
MANAGEABLE DEBT: The district's debt profile is moderate but should improve over the near term as no additional borrowing is planned.
EXPOSURE TO IMPORTED WATER: The district relies upon costly imported water from the Metropolitan Water District of Southern California for 100% of supply.
WHAT COULD TRIGGER A RATING ACTION
NARROWED MARGINS: While current financial results are very strong and Fitch expects a continuation of such results, weakened debt service coverage and liquidity levels to policy minimums could place pressure on the rating.
STRONG FINANCIAL PROFILE TEMPERED BY OUTYEAR PROJECTIONS
The district's financial performance has been very strong, with historical debt service coverage ranging from 2.0x to 4.7x from fiscal years 2005 to unaudited 2012. Coverage remained strong at 2.5x and 2.9x in fiscals 2011 and 2012 (unaudited), respectively, as the 2009 debt rolled on and maximum annual debt service was reached. Similarly, liquidity measures have been very strong, with well over two years of cash on hand since fiscal 2005. At the end of fiscal 2012 (unaudited), unrestricted cash and investments totaled more than $130 million, equal to an impressive 893 days cash on hand.
Fitch expects continued favorable results given the district's conservative planning and budgeting, as well as its comprehensive reserve policy that sets minimum targets for three general reserves and three capital reserves. However, the district is forecasting coverage levels to dip below the policy target of 1.75x and a drawdown in liquidity over the next couple of years based on limited rate increases and significant pay-as-you-go capital funding. The district has typically well outperformed projections, but negative rating pressure could develop if actual results approximate projections.
LOW RATES DESPITE COSTLY IMPORTED WATER
The district is a member agency of the Metropolitan Water District of Orange County (MWDOC) from which it receives 100% of its potable water supply. MWDOC, in turn, imports water that it buys primarily from the Metropolitan Water District of Southern California (MWD; revenue bonds rated 'AA+' by Fitch). MWD's significant water supply challenges and cost pressures on imported water are expected to continue and to impact the cost of operations of underlying retailers to some degree.
Nevertheless, the district's rates are among the lowest in the area, benefiting from the receipt of property tax revenues, which account for about one-third of total district revenues. Even with three years of annual rate increases of 16.2% through fiscal year 2011, the current average monthly water bill using 1,600 cubic-feet of water is $36, significantly less than the water portion of bills for other entities, which also are highly dependent on imported water from MWD; wastewater charges are also low.
FAVORABLE DEBT PROFILE
District debt levels currently are moderate, but given the district's lack of planned borrowing, debt is expected to decline over the next five year period to under $900 per customer. The district's capital needs focus on repair and replacement and the 10 year capital improvement program (CIP) totals $241 million, about $141 million of which covers the five year period through fiscal 2018.
The district expects to finance the CIP predominantly with cash and unspent 2009 bond proceeds (about $20 million). Approximately one-half of the cost over the next five years is regional in nature, including a $26 million joint project with Irvine Ranch Water District (revenue COPs rated 'AAA' by Fitch) to convey untreated, less costly water from MWD to treat locally and thus increase water supply reliability.
AFFLUENT SERVICE AREA
The district provides water, wastewater, and recycled water services to approximately 167,000 residents in southern Orange County. The district encompasses 36.5 square miles and includes the cities of Aliso Viejo, Laguna Niguel, significant portions of Laguna Hills and Mission Viejo, and small portions of Dana Point and San Juan Capistrano. Wealth levels in the area are very high, with median household income approximately 1.6x the state and 1.9x the national average. The Orange County unemployment rate, at 7.9% as of July 2012, was below that of the state and slightly below the national level. Assessed value (land only) declined just 7.8% through fiscal 2011 before increasing slightly in fiscal 2012.
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
U.S. Water and Sewer Revenue Bond Rating Criteria
2012 Water and Sewer Medians
2012 Outlook: Water and Sewer Sector
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San Francisco, CA 94108