Fitch Affirms Marin Municipal Water District Fin Auth, CA Water Revs at 'AA+'; Outlook Stable

SAN FRANCISCO--()--Fitch Ratings has affirmed its 'AA+' rating on the following Marin Municipal Water District Financing Authority, CA (the authority) obligations issued on behalf of the Marin Municipal Water District, CA (the district):

--$85 million subordinate lien water revenue and refunding bonds, series 2012.

The Rating Outlook is Stable.

SECURITY

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 (implied GO rating of 'AAA', Stable Outlook by Fitch), its primarily residential customer base, and its low rates relative to income.

ADEQUATE WATER SUPPLY; LIMITED STORAGE: With 75% of its supply generated by local sources and 25% purchased from Sonoma County Water Agency (SCWA; rated 'AA+', Stable Outlook), the district's water supply sources are adequate. Its purchases, which declined in recent years, limiting its exposure to rising imported water costs, have ticked up with the current drought. In addition, storage is limited, a vulnerability exposed by the recent drought.

GOOD COVERAGE: Coverage has improved in the last several years to healthy levels after dipping due to a decline in water sales as a result of the economic recession and weather. Fitch views positively the district's demonstrated willingness to raise rates, as maintenance of ample coverage is dependent upon continued revenue enhancement.

IMPROVED LIQUIDITY: Cash levels have also improved in the last few years as expected after a period of spending down on capital projects. Fitch expects the district to maintain these sound liquidity levels.

ELEVATED DEBT; SLOW AMORTIZATION: District debt levels are high and amortization is very slow. Capital needs relate primarily to repair and replacement projects, which can be deferred as needed.

RATING SENSITIVITIES

STABLE COVERAGE; LIQUIDITY: Achieving at least forecast debt service coverage levels and maintenance of sound cash balances are essential to maintaining the rating at this level.

CREDIT PROFILE

The district provides water to 185,000 residents over 147 square miles in southern and central Marin County. The district encompasses 80 square miles of watershed lands and operates three water treatment facilities and one recycling facility.

AFFLUENT CUSTOMER BASE

The district customer base is primarily residential and its top 10 customers represent less than 5% of total revenues. The district's location in affluent Marin County 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. Single-family residential rates, at $48.20 per month for 7,500 gallons of usage, are very affordable at just 0.5% of median household income, demonstrating the ample capacity of the customer base to absorb rate increases.

ADEQUATE WATER SUPPLY

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 the SCWA. The district takes the water through the North Marin Water District's aqueduct pursuant to a long-term contract.

The SCWA contract provides for purchase of up to 14,300 af per year, although, due to pipeline constraints, the deliveries have been limited to 8,500 af. However, district purchases have recently been below this level with a five-year average of 6,341 af and 5,873 af in 2013. Due to the ongoing drought, the district increased water purchases to maintain reservoir levels and projects fiscal 2014 purchases to reach approximately 7,425 af, a 26% increase over last year and close to the 8,500 af limitation. Management is including water purchases at this elevated level with annual 3% price increases in its financial forecast period through fiscal 2018; Fitch considers this to be a conservative assumption.

In response to the drought, the district called for a 25% voluntary reduction in usage, but does not expect to institute mandatory reductions. Reservoir levels as of April 3, 2014 were at 87% of normal. Management noted the creation of a drought resiliency task force to study future mitigation opportunities.

GOOD COVERAGE

District financial performance has improved in the past several years. Combined senior and subordinate debt service coverage increased to 2.9x in fiscal 2012 and 3.4x in fiscal 2013 from a low 1.2x in fiscal 2010. Coverage had dipped as a result of increased imported water purchase costs due to dry weather and lower water sales. District projections show coverage not less than 1.7x over the next five years using what Fitch considers relatively conservative assumptions, including drought level water purchase costs with annual price increases, as well as reasonable rate increases.

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. Rates remained flat in fiscal 2014, and the forecast includes annual increases ranging from 3.5% to 6.5% through fiscal 2018.

IMPROVED LIQUIDITY

Cash levels increased in each of the last three years to $32.8 million, or 245 days, at fiscal 2013 year-end. Prior levels have varied from a high of $45.3 million, equal to 523 days in 2007 to just 67 days in 2010. Capital spending on repair and replacement projects continued during the recession and resultant period of lower water sales. Projects were primarily funded from pay-as-you-go revenue which resulted in reduced liquidity levels. However, Fitch expects the district to maintain the currently sound liquidity levels given ongoing rate increases and availability of bond proceeds for capital.

ELEVATED DEBT AND LIMITED CAPITAL NEEDS

Debt levels increased as expected with the 2012 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 five-year capital plan includes about $89 million of projects, not including those funded by dedicated fire flow parcel tax of $75 through 2031. About half of the CIP will be funded with 2012 bond proceeds. The district does not plan to issue additional debt for at least five years. Amortization is very slow with only 47% of principal retired within 20 years, as the series 2012A are 40-year bonds.

SUBORDINATE LIEN

The series 2012A were issued on subordinate lien to the remaining 2004 certificates of obligation ($4.87 million) and 2010 series A bonds ($31.85 million). The senior lien is closed with no further issuance allowed, including refunding bonds, and rate covenants apply to both senior and subordinate. The series 2012A does not have a debt service reserve, and existing Ambac sureties and cash continue to satisfy the reserve account requirement of the senior lien. Covenants include a 1.25x rate covenant and 1.25x additional bonds test on a projected basis looking out five years.

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

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 3, 2013);

--'U.S. Water and Sewer Revenue Bond Rating Criteria' (July 31, 2013);

--'2014 Water and Sewer Medians', dated Dec. 12, 2013;

--'2014 Outlook: Water and Sewer Sector', dated Dec. 12, 2013.

Applicable Criteria and Related Research:

2014 Outlook: Water and Sewer Sector

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

2014 Water and Sewer Medians

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

U.S. Water and Sewer Revenue Bond Rating Criteria

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

Revenue-Supported Rating Criteria

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=709499

Additional Disclosure

Solicitation Status

http://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=826536

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Contacts

Fitch Ratings
Primary Analyst:
Shannon Groff, +1-415-732-5628
Director
Fitch Ratings, Inc.
650 California St., Fourth Floor
San Francisco, CA 94108
or
Secondary Analyst:
Andrew Ward, +1-415-732-5617
Director
or
Committee Chairperson:
Amy Laskey, +1-212-908-0568
Managing Director
or
Media Relations:
Elizabeth Fogerty, New York, +1-212-908-0526
elizabeth.fogerty@fitchratings.com

Sharing

Contacts

Fitch Ratings
Primary Analyst:
Shannon Groff, +1-415-732-5628
Director
Fitch Ratings, Inc.
650 California St., Fourth Floor
San Francisco, CA 94108
or
Secondary Analyst:
Andrew Ward, +1-415-732-5617
Director
or
Committee Chairperson:
Amy Laskey, +1-212-908-0568
Managing Director
or
Media Relations:
Elizabeth Fogerty, New York, +1-212-908-0526
elizabeth.fogerty@fitchratings.com