Fitch Affirms Moulton Niguel Water District, CA's Rev COPs at 'AAA'; Outlook Stable

Fitch Ratings has affirmed its 'AAA' rating on the following obligations issued by the Moulton Niguel Water District, CA (MNWD):

-Approximately $80.1 million revenue certificates of participation (COPs).

The Rating Outlook is Stable.

SECURITY

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

SOLID FINANCIAL PERFORMANCE: Solid debt service coverage (DSC) levels and exceptionally strong liquidity reflect the district's sound financial planning and policies.

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 minimal additional borrowing is expected.

EXPOSURE TO IMPORTED WATER: The district relies upon costly imported water from the Metropolitan Water District of Southern California (MWD, revenue bonds rated 'AA+' with Stable Outlook by Fitch) for 100% of potable water supply.

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.

RATING SENSITIVITIES

NARROWED MARGINS: While current financial results are sound and Fitch expects a continuation of such results, weakened debt service coverage and liquidity levels to policy minimums could place pressure on the rating.

CREDIT PROFILE

MNWD provides water, wastewater and recycled water services to approximately 168,000 residents in southern Orange County. Encompassing 37 square miles, the district 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.

SOLID FINANCIAL PROFILE CONTINUES

The district's financial performance continues to be healthy, with all-in DSC ranging from 3.8x to 2.2x over the past five years. However, coverage has declined in recent years as the 2009 COPs contributed to the doubling of debt service costs in fiscal 2011. Fiscal 2013 finished with all-in DSC at a five-year low of 2.2x which is considered solid by Fitch but is below the 'AAA' median level of 2.6x. As a positive, the system is not reliant on connection fees for coverage; DSC without connection fees is more in line with the rating category median. Also somewhat mitigating the below-average coverage, the district's unrestricted cash finished fiscal 2013 at the equivalent of approximately 870 days of operational expenditures ('days cash'). The district's cash balances have been exceptionally strong in each of the last five years.

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. Unaudited results for fiscal 2014 point to an improvement in both DSC and cash balances. 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 MWD. 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 after three years of significant annual rate increases of 16.2% through fiscal 2011, based on Fitch's standard usage assumption of 7,500 gallons per month, the current average monthly water bill is $24, or 0.5% of median household income (MHI). Although actual usage is slightly higher, bills are still significantly less than the water portion of bills for other entities in the region. Wastewater charges are also well below average.

MANAGEABLE CAPITAL NEEDS & DEBT

Over the next five years (fiscal 2015 to 2019), the district anticipates spending about $146 million to address its capital needs. Although some new debt is possible, the district expects to finance capital projects predominantly with cash and unspent 2009 bond proceeds. About 43% is allocated to large projects related to district's proportional share in other regional joint powers authorities (JPAs). Another 41% is expected to be spent on refurbishment and replacement of existing infrastructure. Lastly, about 16% is allocated to improvements to the headquarters and field office facilities.

Current debt levels are mostly favorable with a debt per capita of approximately $1,200 in fiscal 2013, which is consistent with Fitch's 'AAA' media level. Debt amortization is mixed with a fairly quick 51% scheduled to amortize over the next 10 years but then slows over the 20-year period to 75%.

MWD POSITIONED TO WITHSTAND STATE DROUGHT

Water is provided to MWD from two independent supply sources. Supply fluctuations occur on the in-state water supply, the State Water Project (SWP). The Colorado River supplies, banking arrangements, and MWD's substantial storage facilities help balance this fluctuation risk. Consequently, MWD has sufficient supplies to meet customer demands despite statewide drought concerns. For more information on MWD, see Fitch's press release entitled, 'Fitch Rates Metro Water Dist of Southern California Rev Rfdg Bonds 'AA+'; Outlook Stable' (July 2, 2014).

AFFLUENT SERVICE AREA

Orange County (implied ULTGO 'AA+'; Outlook Stable) benefits from a large, diverse and wealthy economic base. Its proximity to the Los Angeles, Riverside and San Diego areas provides ready access to the substantial southern California economy. Additionally, the county has consistently attracted an outsized share of the region's wealth. County and the city of Laguna Niguel wealth levels are high with MHI approximately 42% and 90% above the national average, respectively. Unemployment rates have historically bested those of the region, state, and nation, and continue to do so at 5.7% for the county and 4.5% for the city of Laguna Niguel in July 2014.

Additional information is available at 'www.fitchratings.com'.

Applicable Criteria and Related Research:

--'Revenue-Supported Rating Criteria' (June 2014);

--'U.S. Water and Sewer Revenue Bond Rating Criteria' (July 2013);

--'2014 Water and Sewer Medians' (December 2013);

--'2014 Outlook: Water and Sewer' (December 2013).

Applicable Criteria and Related Research:

Revenue-Supported Rating Criteria

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=750012

U.S. Water and Sewer Revenue Bond Rating Criteria

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=715275

2014 Water and Sewer Medians

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=724358

2014 Outlook: Water and Sewer Sector

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=724357

Additional Disclosure

Solicitation Status

http://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=902534

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