Fitch Ratings has assigned an 'AA+' rating to the following Marin Municipal Water District Financing Authority, California (the authority) water revenue bonds:
--$82 million subordinate lien water revenue and refunding bonds.
The bonds are expected to sell via negotiation on or around May 15, 2012. The proceeds will be used to refund series 2002A water revenue bonds and a portion of series 2004 certificates of participation.
The Rating Outlook is Stable.
The bonds are secured by installment payments to the authority from net revenues of the district after payment of senior obligations. Net revenues include connection fees.
KEY RATING DRIVERS
AFFLUENT CUSTOMER BASE PROVIDES RATE FLEXIBILITY: The district benefits from its location in the affluent, mature community of Marin County, its primarily residential customer base, and its low rates relative to income.
DIVERSE WATER SUPPLY: With 75% of its supply generated by local sources and 25% purchased from Sonoma County Water Agency (SCWA; rated 'AA+' by Fitch), the district's water supply sources are diverse. Its purchases have declined in recent years, limiting its exposure to rising imported water costs.
GOOD PROJECTED COVERAGE: While historical all-in coverage has dipped as low as 1.2x due to a decline in water sales as a result of the economic recession and weather, current and projected coverage is for 1.8x or greater with conservative assumptions. Fitch views positively the authority's demonstrated willingness to raise rates, as maintenance of ample coverage is dependent upon continued revenue enhancement.
LOW LIQUIDITY: Cash levels have declined over the past five years as the district has invested in capital projects, but have started to rebound. Fitch expects the authority to successfully implement its plan to expand liquidity to levels more commensurate with the rating level.
MODERATE DEBT AND LIMITED CAPITAL NEEDS: The district has continued to invest in repair and replacement projects through the recession predominately through pay-go sources, resulting in limited borrowing and moderate debt levels. Future needs relate primarily to ongoing maintenance over at least the 10-year horizon. However, amortization is very slow with just 17% of debt retired within 10 years.
AFFLUENT CUSTOMER BASE
The district customer base is primarily residential and its top 10 customers represent a very low 4.6% of total revenues. The district's location in affluent Marin County (rated 'AAA' by Fitch) is a credit positive. It is essentially a built-out community in the San Francisco metropolitan area, located just north of the Golden Gate Bridge, within commuting distance to the city and benefiting from a sound job base of its own. Rates are affordable at just 0.8% of median household income, demonstrating the ample capacity of the customer base to absorb increases.
DIVERSE WATER SUPPLY
The district provides water to 185,000 residents over 606 square miles in southern and central Marin County. The water system obtains 75% of its water supply from rainfall stored in seven reservoirs with a storage capacity of 79,566 acre-feet (af), equal to two years of demand. The remaining 25% of supply is imported from the Russian River through a contract with Sonoma County Water Agency (SCWA; rated 'AA+').
The contract provides for purchase of up to 14,300 af per year, although due to pipeline constraints, the deliveries have been limited to 8,000 af. However, district purchases have been below this level with a five-year average of 6,999 af and just 5,378 in 2011 due to wet weather and decreased demand. The district encompasses 80 square miles of watershed lands and operates three water treatment facilities and one recycling facility.
GOOD PROJECTED COVERAGE
District financial performance over the past five years has been mixed. Combined senior and subordinate debt service coverage increased to 2.2x in fiscal 2011 from a low 1.2x (or 1.25x coverage of senior only) in fiscal 2010 as a result of increased water purchase costs and lower water sales. District projections show coverage not less than 1.8x over the next five years using what Fitch considers relatively conservative assumptions, including increasing water purchase and personnel costs, as well as using 2010 water consumption less 2% as the base.
The district's demonstrated willingness to raise rates is a credit strength with 11.5%, 4%, and 6% annual increases, respectively, for fiscals 2011-2013 leading to solid revenue growth. Water purchase costs have varied significantly depending on weather and demand, with purchases of $4.96 million in 2011, down from $5.6 million in 2010 - a very dry year. The district has cut expenditures in the last few years by reducing staff through attrition, holding budgeted positions vacant and increasing employee's share of pension contributions. The district plans to raise rates about 5% each of the next 10 years. It expects SCWA rates to increase 5%-6% per year.
HEALTHY PAY-GO SPENDING; LOW LIQUIDITY
Capital spending on repair and replacement projects has continued during the recession and resultant period of lower water sales. Projects have primarily been funded from pay-as-you-go revenue and, while the authority's continued capital investment is viewed as a credit strength, liquidity levels have declined.
Cash levels have varied from a high of $45.3 million, equal to 523 days, in 2007 to just 67 days in 2010 before increasing to 119 days in fiscal 2011. The district continued to invest in capital projects during this period of lower consumption and increased imported water purchases. Fitch expects the trend of increasing balances to continue, boosted by reimbursement of some capital costs from the current bond issue. An inability by the authority to expand liquidity could place negative pressure on the rating.
MODERATE DEBT AND LIMITED CAPITAL NEEDS
Debt, which is currently low to moderate, is expected to increase with this issuance and then decline through about fiscal 2018 when the district expects additional borrowing. Because local supply is fully developed and the district purchases the rest of its water, capital needs are focused on repair and replacement. Projects include pipeline replacement, storage tank replacement and pump station repair.
The 10-year capital plan includes $218 million of projects, $45 million of which will be funded by dedicated fire flow fees, $18 million from reimbursement connection fees, $53 million pay-go, and $102 million long-term debt. Amortization is very slow with only 17% of principal retired within 10 years and 44% in 20 years, as the series 2012A are 40-year bonds.
SUBORDINATE LIEN ON PAR WITH SENIOR
2012 series A will be issued on subordinate lien to remaining 2004 certificates of obligation ($5.865 million) and 2010 series A bonds ($31.85 million). The senior lien will be closed with no further issuance allowed, including refunding bonds. The series 2012A will not have a debt service reserve and the district will use existing Ambac sureties to continue to satisfy the reserve account requirement of the senior lien. The subordinate lien covenants include a 1.25x rate covenant and 1.25x additional bonds test on a projected basis looking out five years. The subordinate bonds are rated on par with the senior as the senior lien is closed and rate covenants apply to both.
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 Tax-Supported Rating Criteria, this action was additionally informed by information from Creditscope.
Applicable Criteria and Related Research:
--'Tax-Supported Rating Criteria' (Aug. 15, 2011);
--'U.S. Local Government Tax-Supported Rating Criteria' (Aug. 15, 2011).
Applicable Criteria and Related Research:
Tax-Supported Rating Criteria
U.S. Local Government Tax-Supported Rating Criteria
Shannon Groff, +1-415-732-5628
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Andrew Ward, +1-415-732-5617
Jessalynn Moro, +1-212-908-0608
Sandro Scenga, +1-212-908-0278