Fitch Rates Marin Muni Water Dist Fin Auth, CA's 2016 Water Rev Bonds 'AA'; Outlook Stable

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

--$36.2 million revenue refunding bonds, series 2016.

In addition, Fitch affirms its 'AA' rating on the following outstanding obligations:

--$84.4 million water revenue and refunding bonds, series 2012.

The bonds are expected to sell via negotiation on or around Nov. 15. Proceeds will be used to advance refund water revenue bonds, series 2010.

The Rating Outlook is Stable.

SECURITY

The bonds are secured by installment payments to the authority from net revenues of the district, including connection fees, after payment of senior obligations. The senior lien is closed with no outstanding debt.

KEY RATING DRIVERS

LOWER COVERAGE; ADEQUATE LIQUIDITY: The district achieved lower than historical debt service coverage (DSC) in fiscals 2015 and 2016 (1.2x as calculated by Fitch) which required the use of rate stabilization funds (RSFs). However, the district recently implemented significant rate increases which should lead to improvement in coverage. Liquidity is sound but slightly below categorical medians.

ELEVATED DEBT: Already high debt levels will rise in the near term given additional anticipated borrowing and very slow amortization of current debt.

AFFORDABLE RATES: The district's rates are affordable relative to its resource base even with recent and planned rate increases through the forecast period.

AFFLUENT CUSTOMER BASE: The district benefits from its location in the affluent, mature community of Marin County (implied GO rating 'AAA'/Stable Outlook), its primarily residential customer base, and its moderate rates relative to income.

ADEQUATE SUPPLY; LIMITED STORAGE: The district's water supply sources are adequate, with 75% of its supply generated by local sources and 25% purchased from Sonoma County Water Agency (SCWA; water revenue bonds rated 'AA+'/Stable). However, storage is limited, a vulnerability exposed by increased water purchases related to the drought.

RATING SENSITIVITIES

SIGNIFICANT ADDITIONAL LEVERAGE: Adoption of an updated capital investment plan by the Marin Municipal Water District that requires significant additional leverage over the next 10-year period, without offsetting credit strengths, could result in negative rating action.

ADEQUATE COVERAGE; LIQUIDITY: Achieving debt service coverage levels of 1.5x and maintaining sound cash balances are essential to maintaining the rating at the current 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.

REDUCED COVERAGE, ADDITIONAL DEBT

Fitch calculated all-in fiscal 2015 DSC declined to just 1.2x, including the use of $1.4 million in RSFs, well below expectations, after several years above 2x. Fiscal 2015 revenues decreased 12.5%, due in part to reduced demand related to the state drought, while purchased water costs remained elevated due to reduced local supply.

For fiscal 2016, the district met the mandatory conservation level required by the State Water Resources Control Board of 20% (as compared with the same period in 2013). It achieved DSC of 1.2x after using only $200,000 in RSFs versus an expected $3.9 million. The RSF fund now has a balance of approximately $5.7 million. The district's updated forecast, which includes planned debt issuances and rate increases of 7% in each of fiscals 2018-2021, projects DSC ranging from 1.6x-2.0x, which is higher than the previously articulated target of 1.5x.

Cash levels increased over the past five years to about $38 million, or 248 days, at fiscal 2016 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 on a pay-as-you-go basis continued during the recession and resultant period of lower water sales. Free cash to depreciation has declined in the past two years to 85% and 14% in fiscals 2014 and 2015, respectively, indicating the district is not generating sufficient cash to cover ongoing maintenance needs.

AFFLUENT CUSTOMER BASE

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 San Francisco and benefiting from a sound job base of its own. The district's customer base is primarily residential and its top 10 customers represent less than 5% of total revenues.

AFFORDABLE RATES DESPITE SIZEABLE RECENT HIKES

Effective Jan. 1, 2016, the district implemented a 50% increase to its bimonthly base service charge, added a watershed management fee of $8.45, and increased the tier 1 consumption rate by 1.9%. As a result, total single-family residential rates increased 21.7% and an additional 4% effective May 2016. However, charges remain affordable at $60.93 for 7,500 gallons of usage per month, equal to 0.7% of median household income. The district expects to seek approval for subsequent annual 7% adjustments, subject to another rate study to be undertaken by the end of calendar year 2016.

Given the relative affordability of current rates, the district likely retains some rate flexibility. However, the district's rate history has been mixed. Rates were held flat over fiscals 2013-2015 versus expectations of annual increases ranging from 3.5% to 6.5%. Previous adjustments included 11.5% in 2010, 4% in 2011, and 6% in 2012.

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. Reservoir levels as of the end of October 2016 were at 77% of capacity and 118% of normal.

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. The five-year average of purchases is 6,463 af. However, annual purchases vary considerably due to weather variability and demand, with a 17-year low of 5,300 af reached in 2016 after a rising to 8,200 af two years prior.

ELEVATED DEBT TO INCREASE

Debt levels are currently higher than category medians, and are expected to remain so. The fiscal 2017-2021 CIP totals $152 million. CIP projects include a large storage tank project and seismic upgrades to two treatment plants, among other projects. The district currently has approximately $125 million principal outstanding and anticipates issuing up to an additional $80 million in two tranches over the next several years. Debt to net plant of 36% will increase to approximately 55%, above the category median of 47%. Amortization of current debt is very slow with only 42% of principal retired within 20 years compared to 'AA' medians of 84%.

SENIOR LIEN CLOSED, NO SENIOR DEBT OUTSTANDING

The senior lien is closed with no outstanding debt or further issuance allowed, including refunding bonds, and rate covenants apply to both senior and subordinate. Series 2012 bonds were originally issued on a subordinate lien to the 2004 certificates of obligation and 2010 bonds ($31.85 million pre-refunding); however, the 2004 series have matured and 2010 will be refunded with this issuance. The series 2012 and 2016 bonds do not have associated debt service reserves. Covenants include a 1.25x rate covenant and additional bonds test on a projected basis for parity debt and 1.0x for subordinate debt looking out five years.

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

Applicable Criteria

Revenue-Supported Rating Criteria (pub. 16 Jun 2014)

https://www.fitchratings.com/site/re/750012

U.S. Water and Sewer Revenue Bond Rating Criteria (pub. 03 Sep 2015)

https://www.fitchratings.com/site/re/869223

Additional Disclosures

Dodd-Frank Rating Information Disclosure Form

https://www.fitchratings.com/creditdesk/press_releases/content/ridf_frame.cfm?pr_id=1014441

Solicitation Status

https://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=1014441

Endorsement Policy

https://www.fitchratings.com/regulatory

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Contacts

Fitch Ratings
Primary Analyst
Shannon Groff, +1-415-732-5628
Director
Fitch Ratings, Inc.
650 California Street, 4th Floor
San Francisco, CA 94108
or
Secondary Analyst
Andrew Ward, +1-415-732-5617
Director
or
Committee Chairperson
Douglas Scott, +1-512-215-3725
Managing Director
or
Media Relations
Alyssa Castelli, New York, +1-212-908-0540
alyssa.castelli@fitchratings.com

Contacts

Fitch Ratings
Primary Analyst
Shannon Groff, +1-415-732-5628
Director
Fitch Ratings, Inc.
650 California Street, 4th Floor
San Francisco, CA 94108
or
Secondary Analyst
Andrew Ward, +1-415-732-5617
Director
or
Committee Chairperson
Douglas Scott, +1-512-215-3725
Managing Director
or
Media Relations
Alyssa Castelli, New York, +1-212-908-0540
alyssa.castelli@fitchratings.com