Fitch Rates Truckee Meadows Water Authority, Nevada, Water Revs 'A'; Outlook to Negative
Source: Business Wire
-- $31.4 million water revenue refunding
bonds, series 2010, rated 'A';
-- $463.2 million of parity water revenue bonds (pre-refunding), affirmed at
'A'.
The 2010 bonds are scheduled to sell competitively on Jan. 28. Proceeds will be used to refund a portion of the authority's outstanding series 2001A bonds for interest savings and pay costs of issuance.
The Rating Outlook is revised to Negative from Stable.
RATING RATIONALE:
-- The Negative Outlook considers the
deterioration in debt service coverage (DSC) that has occurred in recent
years as a result of weak economic conditions and the possibility that the
authority's financial profile may erode further in the near term.
-- Capital costs are substantially lower but debt levels remain high.
-- Legal provisions are sound with strong operating, rate stabilization, and
capital reserves.
-- While the authority benefits from an adequate portfolio of water
supplies, there are ongoing disputes regarding certain Truckee River water
rights.
-- The service area is large and diverse, although local economic conditions
are weak.
WHAT COULD TRIGGER A DOWNGRADE?
-- Continued deterioration in the authority's financial metrics, including specifically DSC falling below the rate covenant.
SECURITY:
The bonds are secured by a first lien on net revenues of the authority's water system (the system).
CREDIT SUMMARY:
The authority is a joint powers authority formed in 2000 between the cities of Reno and Sparks as well as Washoe County. The authority purchased the water assets of Sierra Pacific Power Company and undertook water utility operations beginning June 2001, primarily in the Reno and Sparks areas. Until recently, the service area was a rapidly growing residential region, but with the national housing collapse, along with weak local economic conditions, growth has virtually stalled.
From fiscals 2004-2007, the authority posted DSC of 1.9 times (x) or higher. In fiscal 2008, however, DSC dropped to 1.6x and fell further to 1.3x in fiscal 2009, just above the authority's 1.25x rate covenant. DSC traditionally has been boosted by system development charges (SDCs), which equaled as much as 22% of operating revenues in fiscal 2005. But given the recent level of diminished growth, SDC revenues have dropped precipitously and accounted for just 1% of operating revenues in fiscal 2009.
The authority has responded to declining revenues by making cuts in both operating and capital expenditures. In addition, a 4.5% rate hike was enacted in June 2009 and an additional increase of 4.4% is expected for June 2010. While these measures, along with savings from the current transaction, should help to stabilize DSC, no material improvement is expected over the near term. Indeed, Fitch is concerned that even higher rates than the expected June 2010 increase may be needed to maintain current cash flows, which may be difficult for the rate base to absorb.
The rapid decline in DSC is a key rating driver, but some concern is offset due to the significant reserves maintained by the authority. For fiscal 2009, the authority had unrestricted cash balances of nearly $62 million along with close to $18 million in indenture-required reserves. Combined, these funds equaled 715 days cash for the year. Unrestricted cash balances are expected to be drawn down somewhat over the next few years for capital spending, but reserves should remain healthy overall and continue to provide flexibility for the authority.
Capital estimates are significantly reduced from just a few years ago. Currently, the fiscal 2010-2014 capital improvement program (CIP) totals $100 million, down from $443 million for the fiscal 2007-2011 CIP. The scale-back in expenditures is largely attributable to the authority's suspension of purchases of additional water rights. Based on its current portfolio, the authority believes it has sufficient water supplies to serve existing customers as well as any growth that may occur over the next several years. Based on these revised expenditures, the authority is forecasting that the vast majority of funding will be derived from equity sources. This should limit increases to the authority's debt profile over the next several years, although debt levels will remain well above comparably rated credits.
Two matters involving the authority's water sources present some uncertainty. First, implementation of the Truckee River Operating Agreement among the authority and various Truckee River stakeholders continues to proceed, although the process has been slow and is not expected to be fully resolved in the near term. Also, a lawsuit filed in 2006 challenges the authority's current practice of using its Donner Lake water primarily for storage. While the authority believes its usage is legal, an adverse ruling, which could occur over the next year or two, could impact the authority's flexibility and future storage needs. Fitch will continue to monitor these concerns.
Retail service is provided to about 93,300 accounts representing a residential population of over 300,000. With the recession, the county's economy, which has been fueled by legalized casino gambling and construction activity, has weakened substantially. This has led to a high degree of job losses and rising home foreclosure activity. For the most recently reported month (November 2009), unemployment within the county was 11.3%, compared to the state and national averages of 11.9% and 9.4%, respectively.
These rating actions reflect the application of Fitch's current criteria which are available at 'www.fitchratings.com' and specifically include the following reports:
-- 'Revenue-Supported Rating Criteria' (Dec.
29, 2009);
-- 'Water and Sewer Revenue Bond Rating Guidelines' (Aug. 6, 2008).
Additional information is available at 'www.fitchratings.com'.
Contact:
Fitch Ratings
Cindy Stoller, +1-212-908-0526 (New York)
cindy.stoller@fitchratings.com
Doug Scott, +1-512-215-3725 (Austin)
Robert Sakai, +1-415-732-5628 (San Francisco)
