OREANDA-NEWS. Fitch Ratings has assigned an 'AAA' rating to the following bonds issued by the Moulton Niguel Water District, CA (the district):

--Approximately \$14.5 million 2015 revenue refunding bonds.

Bond proceeds will be used to refund the series 2003 certificates of participation (COPs) for debt service savings, fund a debt service reserve, and to pay for the cost of issuance. The bonds are expected to price via competitive bid on or around May 20.

In addition, Fitch has affirmed its rating on the following:

--Approximately \$80 million (pre-refunding) revenue COPs.

The Rating Outlook is Stable.

SECURITY

The COPs (under an installment purchase agreement) and the bonds 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.

IMPORTED WATER EXPOSURE, MANDATORY RESTRICTIONS: 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 the district's potable water supply. Further, the state has imposed mandatory restrictions that will require the district to cut consumption by double-digits this year. Despite the supply challenges, the district's rate structure is expected to adequately recover operating costs.

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 DSC and liquidity levels to policy minimums could place pressure on the rating.

DROUGHT PRESSURES: Although the district appears poised to withstand the effect of a decrease in water sales revenues over the short term, further cuts beyond those currently expected could pressure operational revenues. Reduction in expenditures and/or further rate increases may be necessary to maintain current DSC margins and thereby maintain rating stability.

CREDIT PROFILE

The district provides water, wastewater and recycled water services to approximately 169,000 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.

SOUND FINANCIAL PROFILE CONTINUES

The district's financial performance continues to be healthy, with all-in DSC finishing at 2.4x in fiscal 2014, which was an increase over fiscal 2013's five-year low of 2.2x. While these levels are slightly below Fitch's 'AAA' median of 2.8x, they are still considered to be solid by Fitch. Somewhat mitigating the below-average coverage, the district's unrestricted cash finished fiscal 2014 at the equivalent of approximately 890 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. Going forward, management's forecasts demonstrate coverage levels dipping to 2.0x next year as a result of the drought and then rebounding to 2.8x by 2019. However, a drawdown in liquidity to policy minimums is expected to occur over the next few years as the district spends down unrestricted cash to fund its capital projects. If projected increases in DSC fail to materialize while, at the same time, capital spending erodes liquidity, negative rating pressure could result. However, at this point in time, Fitch expects rating stability over the near to intermediate term.

LOW RATES DESPITE COSTLY IMPORTED WATER

The district is a member agency of the Municipal Water District of Orange County (MWDOC) from which it receives 100% of its potable water supply. MWDOC, in turn, imports water that it buys from the MWD. MWD's water supply challenges and cost pressures are expected to continue and to impact the cost of operations of underlying retailers to some degree, including the district.

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 combined monthly bill is a low \$48, or 0.6% of median household income (MHI). Although actual usage is higher, bills are still significantly less than other entities in the region.

MANAGEABLE CAPITAL NEEDS AND DEBT

Over the next five-years (fiscal 2016 - 2020), the district anticipates spending about \$114 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 36% is allocated to large projects related to the district's proportional share in other regional joint powers authorities. Another 50% is expected to be spent on refurbishment and replacement of existing infrastructure. Lastly, about 14% is allocated to improvements to the headquarters and field office facilities. The district's current capital plan is the same as reviewed by Fitch at its last rating affirmation in October 2014.

Fiscal 2014 debt levels were mostly favorable with a debt-per-capita of approximately \$1,136, which is consistent with Fitch's 'AAA' median. Inclusive of the debt service savings associated with the series 2015 bonds, debt amortization is mixed with a somewhat quick 45% scheduled to amortize over the next 10 years but then it slows over the 20-year period to 74%.

DISTRICT POSITIONED TO WITHSTAND MANDATORY WATER CUTS

On April 18, 2015, as a response to the Governor's recent executive order to reduce annual water usage by 25% over 2013 levels, the State Water Resource Control Board (SWRCB) issued a revised plan for mandatory water cuts for all of California's water providers. The district's required reduction is 20% over 2013 levels. To achieve this, the district has updated its SWRCB-approved water budget based rate structure (the alternate plan), which charges higher rates to water customers who use more than budgeted allowances. The approved alternate plan was derived taking into account concerns regarding the recent court ruling in San Juan Capistrano, which essentially requires that rates charged to customers recover the cost of the water provided (as opposed to additionally charging penalties for over use). Even with such cuts in effect, due primarily to the rate structure, new conservation requirements, and a large fixed-revenue component (including tax revenues), the district forecasts a \$500,000 net revenue increase assuming year-over-year water sales reductions of 25%. However, longer-term drought risk could still result in financial revenue pressures.

AFFLUENT SERVICE AREA

Orange County (the county, implied unlimited tax general obligation 'AA+'/Stable Outlook) 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 88% above the national average, respectively. Unemployment rates have historically bested those of the region, state, and nation, and continue to do so at 4.6% for the county and 4.2% for the city of Laguna Niguel as of February 2015.