Thu 22 Feb, 2024 – 11:03 AM ET
Fitch Ratings -Austin – 22 Feb 2024: Fitch Ratings has affirmed the ‘AAA’ rating on the following obligations issued by the Moulton Niguel Water District, CA (the district):
–$124.7 million certificates of participation (COPs) series 2019 and 2021;
–$56.6 million revenue refunding bonds series 2019.
Additionally, Fitch has affirmed the district’s Issuer Default Rating at ‘AAA.’ The Rating Outlook is Stable.
RATING ACTIONS
| Entity/Debt; | Rating; | Prior; |
| Moulton Niguel Water District (CA) [Water, Sewer] | LT IDR AAA Rating Outlook Stable Affirmed | AAA Rating Outlook Stable |
| Moulton Niguel Water District (CA)/Water & Sewer Revenues/1 LT | LT AAA Rating Outlook Stable Affirmed | AAA Rating Outlook Stable |
The ‘AAA’ COPs, revenue bond rating and ‘AAA’ IDR reflect the district’s ‘Exceptionally Strong’ financial profile in the context of its ‘Very Strong’ revenue defensibility, assessed at ‘aa’. The ratings also reflect the ‘Strong’ operating risk profile assessed at ‘a’. The district’s leverage, measured as net adjusted debt to adjusted funds available for debt service (FADS), was extremely low at 3.9x in fiscal 2023 and is expected to peak at 4.6x in fiscal 2025 in Fitch’s Analytical Stress Test (FAST) stress case.
However, leverage should generally trend down in the following years to a level supported by the current rating. Should the district fail to recognize the declining leverage trend, and FADS growth does not adequately support the new debt, the rating may face pressure.
SECURITY
The COPs (under an installment purchase agreement) and the bonds are secured by net revenues of the district’s water, recycled water and sewer systems, including property tax revenues.
KEY RATING DRIVERS
Revenue Defensibility – ‘aa’
Very Favorable Service Area, Affordable Rates for the Vast Majority of the Population
The district retains the legal authority to adjust rates as needed without external oversight. Fitch considers the monthly residential water and sewer bill affordable for approximately 94% of the service area population based on standard monthly usage of 7,500 gallons for water and 6,000 gallons for sewer. The very favorable service area is characterized by very strong income levels, a moderate unemployment rate relative to the nation and midrange customer growth.
With a largely built-out service area, the district has recently seen little to no growth in the customer bases as reflected in the five-year compound annual growth rate of 0% as of fiscal 2023. Income levels are about 81% above the national median as of 2022. The unemployment rate was 14% below the national average in 2022.
Operating Risk – ‘a’
Low Operating Cost Burden, Elevated Investment Needs, Supported by Adequate Capital Investment
In fiscal 2023, the system’s operating cost burden was considered low at $8,865 per million gallons (mg), consistent with the operating risk assessment. The life cycle ratio is elevated at 49% in fiscal 2023. Capex to depreciation has been strong, reflected in the five-year average of 175% from fiscal 2019 to fiscal 2023. Planned capital spending for the next five years should generally outpace historical depreciation, resulting in a stable to improving life cycle ratio.
The district’s adopted capital improvement plan (ClP) for fiscal 2024 through 2028 totals
$336 million and reflects a comprehensive list of projects. However, management expects actual capital spending to be lower and closer to a 60% execution rate, which has been included in the FAST analysis. The ClPis largely focused on repair and rehabilitation projects with a smaller portion of spending expected on regional projects completed in conjunction with South Orange County Wastewater Authority (SOCWA).
Debt financing is likely to account for between 35% and 40% of funding sources. The balance will be primarily funded on a pay-go basis, with grant monies providing a modest funding source, as well. Currently the district expects to receive nearly $12 million in grant money within the next one to two years.
Financial Profile – ‘aaa’
Exceptionally Strong Financial Profile
The district had extremely low leverage of 3.9x as of fiscal 2023. Over the last several years leverage generally trended higher, peaking at 4.6x in fiscal 2022 with the last debt issuance, but otherwise has registered below 4.0x each year. The upward trend is a result of additional debt over this period in conjunction with generally flat FADS. The liquidity profile is neutral to the overall assessment with current days cash on hand of 144 and coverage of full obligations (COFO) of 2.1x. Fitch-calculated total debt service coverage was 3.0x in fiscal 2023, which excludes fixed service expense.
The FAST considers the potential trend of key ratios in a base case and stress case over a five-year period. The stress case is designed to impose capital costs 10% above expected base case levels and evaluate potential variability in projected key ratios. The FAST reflects Fitch’s view of a reasonable scenario, which is generally informed by publicly available and/or management provided information with respect to capital expenditures, user charges and rate of revenue and expenditure growth.
In the base case scenario, the leverage ratio is projected to increase to 4.4x in fiscal 2025, then decrease to 3.5x through fiscal 2028. In the stress case, the leverage ratio is expected to increase to 4.6x in fiscal 2025, then decline to 3.9x through fiscal 2028. Liquidity is expected to remain neutral to the assessment over the five-year horizon.
Asymmetric Additional Risk Considerations
No asymmetric additive risk considerations affected this rating determination.
RATING SENSITIVITIES
Factors that Could, Individually or Collectively, Lead to Negative Rating Action/Downgrade
–Sustained actual and projected leverage exceeding 4.0x in Fitch’s base and stress case, assuming stability in the revenue defensibility and operating risk assessments.
Factors that Could, Individually or Collectively, Lead to Positive Rating Action/Upgrade
The ratings are at the highest level on Fitch’s scale and cannot be upgraded.
PROFILE
The district provides water, wastewater and recycled water services to approximately 171,000 residents in southern Orange County, CA (IDR AAA/Stable). Encompassing 37 square miles, the district’s service area 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.
The district is a customer agency of the Municipal Water District of Orange County (MWDOC). MWDOC purchases treated and untreated water from the Metropolitan Water District of Southern California (IDR AA+/Stable). Around 80% of the district’s supply is provided through purchased water and the balance is provided by the district’s recycled water system. Based on the current supply portfolio the district has adequate supply through at least 2045.
The district continues to work toward increasing recycled water production and supply redundancy. The district is also a member of the SOCWA. Through this regional partnership, the district owns about 22.7 million gallons per day (mgd) capacity in four wastewater treatment facilities, and utilizes three of the treatment facilities to process approximately 11 mgd of wastewater.
Sources of Information
In addition to the sources of information identified in Fitch’s applicable criteria specified below, this action was informed by information from Lumesis.
REFERENCES FOR SUBSTANTIALLY MATERIAL SOURCE CITED AS KEY DRIVER OF RATING
The principal sources of information used in the analysis are described in the Applicable Criteria.
ESG CONSIDERATIONS
The highest level of ESG credit relevance is a score of ‘3’, unless otherwise disclosed in this section. A score of ‘3’ means ESG issues are credit-neutral or have only a minimal credit impact on the entity, either due to their nature or the way in which they are being managed by the entity. Fitch’s ESG Relevance Scores are not inputs in the rating process; they are an observation on the relevance and materiality of ESG factors in the rating decision. For more information on Fitch’s ESG Relevance Scores, visit https://www.fitchratings.com/topics/esg/products#esg-relevance-scores.
FITCH RATINGS ANALYSTS
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PARTICIPATION STATUS
The rated entity (and/or its agents) or, in the case of structured finance, one or more of the transaction parties participated in the rating process except that the following issuer(s), if any, did not participate in the rating process, or provide additional information, beyond the issuer’s available public disclosure.
APPLICABLE CRITERIA
U.S. Water and Sewer Rating Criteria (pub. 03 Mar 2023) (including rating assumption sensitivity)
U.S. Public Sector, Revenue-Supported Entities Rating Criteria (pub. 12 Jan 2024) (including rating assumption sensitivity)
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Solicitation Status
Endorsement Policy
ENDORSEMENT STATUS
Moulton Niguel Water District (CA) EU Endorsed, UK Endorsed
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Link to original article: https://www.fitchratings.com/research/us-public-finance/fitch-affirms-moulton-niguel-water-district-ca-cops-revs-at-aaa-outlook-stable-22-02-2024