OREANDA-NEWS. Fitch Ratings has assigned an 'AAA' rating to the following California Municipal Finance Authority (the authority) bonds issued on behalf of Anaheim, CA (the city):

--\$114.2 million revenue bonds, series 2015-A.

The bonds are expected to sell via negotiated sale the week of April 6. Proceeds will finance the acquisition and construction of certain capital improvements to the water system; retire subordinate water revenue anticipation notes; refund a portion of the outstanding Anaheim Public Financing Authority revenue bonds, series 2008 (Water System Project) issued on behalf of the city; and prepay an outstanding state loan.

In addition, Fitch affirms the following ratings issued by the Anaheim Public Financing Authority, CA on behalf of the city at 'AAA':

--\$83.9 million water revenue bonds.

The Rating Outlook is Stable.

SECURITY
The bonds are issued by the authority and secured by purchase payments made by the city in accordance with the installment purchase agreement. Payments from the city to the authority are absolute and unconditional. Payments are required to be made only from net revenues of the city's water system (the system). The rating therefore reflects the credit quality of the system.

KEY RATING DRIVERS

STABLE SOURCE OF SUPPLY: The city's water supply is primarily provided by the Orange County Water District (OCWD; 'AAA'/Outlook Stable). Capital needs of OCWD appear manageable, and cost increases are expected to be moderate, which should provide the city with relative cost stability compared with much of Southern California. The city's available water supply is expected to be sufficient for peak demand.

FAVORABLE RATE STRUCTURE: The system's water rate structure includes a unique direct pass-through of purchased water costs and debt costs, providing strong and timely cost recovery from ratepayers.

RATE FLEXIBILITY: The city's advantageous water supply is reflected in its very low water rates as compared with other regional providers and in relation to wealth levels for the service area.

STRONG FINANCIAL PERFORMANCE: The water system enjoys a strong financial position, with debt service coverage (DSC) expected to remain above 2.0x and adequate liquidity levels given revenue stability.

STABLE CUSTOMER BASE: The customer base is stable in a service territory that is largely developed. Limited growth pressures are a positive credit factor given the scarcity of new water supplies in California.

EXPOSURE TO WATER COST PRESSURE: There is uncertainty as to the availability and price of the portion of water supply provided by the Metropolitan Water District of Southern California (MWD; revenue bonds rated 'AA+' by Fitch) which typically accounts for at least a quarter of the system's annual water supply.

RATING SENSITIVITIES

SUSTAINED FINANCIAL METRICS AMID INCREASING DEBT: Maintenance of strong debt service coverage and liquidity commensurate with the high rating level is essential to the rating, given an incremental increase in capital needs and planned debt issuance over the intermediate term.

PRESSURE FROM STATEWIDE DROUGHT: Pressure on financial margins could occur if water sales fall below assumed levels if severe multi-year water rationing were to be implemented. However, the Stable Outlook reflects the expectation that the system's adopted drought rate structure will prevent financial deterioration during a sustained drought.

CREDIT PROFILE
The water system serves the city of Anaheim ('AA+'/Outlook Stable) as well as a small portion of the unincorporated area outside the city. The system currently serves a population of approximately 350,000 and has sufficient supply to serve the anticipated build-out population of 400,000.

The system serves a diverse mix of customers, with residential users accounting for 59% of revenues and usage. No single customer accounts for more than 5% of revenues and the top 10 comprise about 12%. Customer growth has been moderate, averaging 0.2% annually over the past five years, which is a credit positive given the scarcity of additional water supplies in Southern California.

STABLE SOURCE OF SUPPLY; EXPOSURE TO MWD COSTS
The city of Anaheim's water supply is derived primarily from the OCWD, which despite fluctuations in availability is viewed positively given its low cost. Anaheim received between 63%-76% of its water supply from OCWD over the five years ending fiscal 2014. OCWD has incrementally increased the proportion of pumping allowed in each of the past four years.

Anaheim pays OCWD a per acre-foot charge that covers the cost of capital improvements at the district and the purchases of replenishment water. OCWD has limited future capital needs, and its rate increases are expected to be moderately sized.

The city's remaining supply (about 24% in fiscal 2014) is provided by the MWD. The cost of untreated MWD water is more than double that received from OCWD; as such, the system faces ongoing cost pressure related to the MWD's water supply. The city renewed its 10-year purchase agreement with MWD effective Jan. 1, 2015. The purchase agreements MWD has with its members establish capped amounts for access to MWD's Tier I water (lower cost than Tier II); Anaheim received an increase in this amount from its previous purchase order. However, the purchase order now includes a take-or-pay provision for an average of 4,830 million gallons per year over the 10-year period. The take-or-pay component of the contract should not materially dictate Anaheim's water purchases in that the minimum required amount is below Anaheim's historical annual purchases from MWD.

FAVORABLE RATE STRUCTURE AND RATE FLEXIBILITY
Fitch views favorably the system's rate structure, which provides for automatic rate adjustments not subject to further City Council approval designed to fully recover capital and debt service as well as purchased water costs. The system has three rate components: a base charge and base commodity charge, a water commodity adjustment to recover actual cost of purchased water from MWD and OCWD along with electricity charges for pumping, and a water system reliability adjustment for capital cost recovery. Despite recent rate increases, Anaheim's water rates are low for the region and compared to Fitch's affordability threshold of 1% of median household income, reflecting its access to OCWD's water supply in a region predominately served by the MWD. The city has already established drought rates by ordinance that it could implement if needed.

STRONG FINANCIAL PERFORMANCE
Fitch views the system's financial profile as strong. Coverage levels of all obligations have been greater than or equal to 2.4x over the past six audited fiscal years through 2014. DSC equaled 3.2x in fiscal 2014, or 2.8x less connection fees. Projected DSC through fiscal 2020 is anticipated to remain at least equal to the city's target of 2.0x, despite additional borrowing plans expected in fiscal 2017.

Liquidity has declined from a high \$31 million, or 285 days in fiscal 2009 to \$22.4 million, or 166 days at the end of fiscal 2014 due to capital outlays. However, Fitch views reserves as adequate given the revenue stability provided by the system's rate structure. Furthermore, cash levels are expected to increase modestly through the forecast period.

GROWING CAPITAL PLAN
While the system has historically had very little debt, recent issuances have been used to fund the majority of the system's capital needs, increasing long term debt by 40% over the last five years. The system's five-year capital plan has an estimated cost of \$105 million and will be funded with roughly 70% debt and 30% pay-go.

The city plans to issue an additional \$30 million in parity bonds in fiscal 2017, which will push debt per customer to a high \$2,535 in the next five years (compared with a median of \$1,341 for Fitch's 'AAA' rated water utilities). The rising debt burden is a concern and continued escalation in the system's debt profile beyond the capital plan period, without offsetting strengths in other key metrics, could apply pressure to the current rating.