Fitch Affirms Orange County Water District, CA Rev Bonds and COPs at 'AAA'; Outlook Stable

SAN FRANCISCO--()--Fitch Ratings has affirmed the following obligations of Orange County

Water District, CA (the district) at 'AAA':

--$53 million revenue refunding bonds, series 2013A;

--$286.4 million revenue certificates of participation (COPs).

The Rating Outlook is Stable.

In addition, Fitch Ratings has withdrawn its ratings for the following

Orange County Water District (CA) obligations due to prerefunding

activity:

--Revenue certificate of participation series 2003B (all maturities);

--Revenue refunding certificate of participation series 2007A (all

maturities).

The updated rating history for the above maturities is now reflected on

Fitch's web site at 'www.fitchratings.com'.

SECURITY

The bonds are payable from revenues of the district, net of all district

operations and maintenance (O&M) costs but excluding the basin equity

assessment and water purchase costs.

KEY RATING DRIVERS

STRONG FINANCIAL PROFILE: The district's financial performance is

exemplary, marked by strong financial policies, limited fixed

expenditures, and a history of increasing rates in line with operating

and capital costs.

SUBSTANTIAL RATE FLEXIBILITY: The district maintains substantial rate

flexibility relative to competing supplies from the Metropolitan Water

District of Southern California (MWD; water revenue bonds rated

'AA+'/Stable Outlook by Fitch).

STABLE REVENUES: District revenues are derived primarily from annual

assessments on groundwater users and property taxes, both of which have

proven stable over time.

MANAGEABLE CAPITAL PLANS: Capital plans are manageable and focus on

expansion of capacity.

DIVERSE SERVICE AREA: The service area is broad and diverse and is

characterized by high income levels and low unemployment.

RATING SENSITIVITIES

SHIFTS IN FUNDAMENTALS: The rating is sensitive to shifts in fundamental

economic, financial, debt and management credit factors. The Stable

Outlook indicates that Fitch views such shifts as unlikely.

CREDIT PROFILE

The district is located in the northern half of Orange County, CA (the

county, implied general obligation debt rated 'AA+'/Stable Outlook by

Fitch), encompassing approximately 350 square miles. It helps provide

the majority of the water supply demand for more than 2.3 million

people. Created by the state legislature in 1933, the district operates

under the direction of an elected and appointed 10-member board of

directors.

SUBSTANTIAL RATE FLEXIBILITY

The district's primary role is management of the Orange County

Groundwater Basin (the basin), which is a primary drinking water source

for numerous water purveyors in the county. The basin's groundwater

supplies 19 municipal and 110 private groundwater producers that pump

and deliver water to their customers and pay replenishment assessments

(RAs) and additional replenishment assessments (ARAs) to the district

based on groundwater extracted from the basin.

The district maintains substantial rate flexibility based on its limited

yet key role in regulating, protecting, and resupplying basin

groundwater. Competition is mitigated by the scarcity of alternative

water sources and relatively inexpensive price of groundwater supplies

compared to imported MWD water. Currently, MWD water is around $923 per

acre-foot (af) for local purveyors, while the cost of district basin

water (not including utility costs) is about $294 per af. Assessments

are expected to increase 16% and 17% in fiscals 2016 and 2017,

respectively, to fund increased debt service costs associated with the

Groundwater Replenishment System (GWRS) expansion before moderating at

about 4% each of the following two years. Groundwater assessment

delinquency rates are very low.

STRONG FINANCIAL PROFILE

District financial metrics are healthy. Approximately 67% of revenues

are derived from the assessments and 16% from property taxes, which have

been quite stable. Fitch calculated debt service coverage (DSC) has

typically exceeded 2.0x on a senior lien basis and a minimum of 1.4x for

all debt obligations. DSC fell in fiscal 2012 to 2.2x on a senior basis

and 1.4x on an all-in basis, primarily due to the purchase of a large

quantity redirected here of available MWD low-cost replenishment water (versus untreated

full service MWD water). Discretionary purchased water costs, which are

treated as an O&M expense for Fitch coverage calculations, nearly

doubled for 2012, rising to $29 million, well above the prior five-year

average of $11 million. Less these costs, as per the indenture, all-in

coverage for fiscal 2012 was 2.5x. Senior and all-in DSC for fiscal 2014

were a still healthy 2.4x and 1.5x respectively, despite $45 million in

purchased water costs due to basin overdraft as a result of the drought

and availability of supplemental water from MWD. Less these costs,

all-in coverage for fiscal 2014 was 3.4x.

The basin is primarily recharged with water from the Santa Ana River

watershed, but the district also purchases water from MWD when available

for replenishment purposes. The district's practice is to build up

reserves and purchase the replenishment water when available.

Projections show a return to historical coverage levels beginning in

fiscal 2015 and through at least fiscal 2019.

Liquidity is substantial as a result of the district's conservative

fiscal management and prudent reserve policies. Cash and working capital

remained in excess of 880 days over the past six years, only dipping to

still very high levels of over 600 days in fiscals 2012 and 2014 when

the district made large MWD water purchases. Cash levels are expected to

increase to historical norms going forward, only dropping in years in

which higher than average amounts of MWD water is purchased.

The district prudently maintains its board-approved policies to sustain

reserves for various purposes. These consist of a replacement and repair

reserve (balance as of 12/31/14 at $76.9 million), an operating budget

reserve ($19.7 million), a toxic cleanup reserve ($4 million), a general

contingency reserve ($3 million), and a water fund for purchase of

replenishment water ($10.5 million), which has been drawn down from

about $59 million over the last few years due to large MWD water

purchases.

MANAGEABLE CAPITAL NEEDS

Future capital needs are manageable and generally serve to expand the

district's ability to provide additional supplies, enhancing its revenue

base. The five-year CIP through fiscal 2019 totals $241 million and

focuses on both expansion and rehabilitation. Capital concerns are

minimal and relate primarily to continued protection of the basin from

groundwater contamination, which the district aggressively pursues. The

district recently entered into negotiations with Poseidon regarding

possible construction of a desalination plant to produce an estimated

50,000 acre-feet per year (af/yr). While financing is uncertain at this

point, management does not anticipate bearing the debt burden and as,

such, the project is not expected to have a negative impact on the

district's debt profile.

Recent capital needs have focused on the district's $482 million GWRS

completed in 2008, and its $137.5 million expansion, estimated to be

completed in spring 2015. Upon completion, the recharge capacity of the

GWRS will reach 103,000 af/yr, allowing for more groundwater pumping

from the basin. Over the long-term, management plans to ultimately

expand the capacity to 130,000 af/yr at an estimated cost of $100

million.

Despite the costs, the incremental increases to assessments to fund the

GWRS project are relatively minor and are not expected to affect the

district's cost competitiveness. Basin production was more than 331,156

acre-feet of water in fiscal 2014 and is expected to remain at about

this level through fiscal 2019. It had previously expected to increase

to about 350,000 af by 2016 due to the GWRS expansion, but the drought

has been longer and more severe than anticipated.

DIVERSE AFFLUENT SERVICE AREA

The county benefits from a large, diverse, and wealthy economic base as

well as its proximity to Los Angeles, Riverside, and San Diego.

Unemployment rates have historically been lower than the region, state,

and nation and continue to be low at 5% in November 2014. Wealth

indicators, as measured by median household income, are high at 123% and

143% of the state and nation, respectively.

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 2014);

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

--'2015 Water and Sewer Medians' (December 2014);

--'2015 Outlook: Water and Sewer Sector' (December 2014).

Applicable Criteria and Related Research:

2015 Outlook: Water and Sewer Sector



http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=818410

Revenue-Supported Rating Criteria

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=750012

U.S. Water and Sewer Revenue Bond Rating Criteria

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

2015 Water and Sewer Medians

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=818409

Additional Disclosure

Solicitation Status

http://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=979060

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