Fitch Affirms Truckee Meadows Water Authority, NV's Revs at 'AA-'; Outlook Stable

SAN FRANCISCO--()--Fitch Ratings affirms the following Truckee Meadows Water Authority, Nevada ratings:

--$418.7 million outstanding water revenue bonds at 'AA-';

--$160 million of bank notes corresponding to water revenue commercial paper notes, series 2006A and 2006B, at 'A+'.

The Rating Outlook is Stable.

SECURITY

The bonds are secured by a first lien on net revenues of the authority's water system (the system). The bank notes are secured by a subordinate lien on net system revenues after payment of the bonds as well as from any proceeds of obligations issued to refund any advances made under the restated reimbursement agreement; there currently are no bank notes outstanding.

KEY RATING DRIVERS

SOLID FINANCIAL PERFORMANCE: Debt service coverage (DSC) has stabilized at an adequate level following a period of weakness during the recent economic downturn, and unrestricted reserves remain very strong, providing significant operating flexibility.

MERGER CREDIT NEUTRAL: The utility expects to complete a merger with two Washoe County water enterprises by the end of the year. Combined financial performance is likely to be in-line with historical performance of the authority, given similar financial margins at the merging agencies. The merger will broaden Truckee Meadows' service area, increasing customer counts by about a quarter.

HIGH LEVERAGE: The authority's debt burden is significantly above average. The authority will assume and refinance about $36.1 million during the upcoming merger. Per customer debt ratios will decline significantly with the merger due to lower debt ratios at the merged entities, but debt will remain above average.

GOOD RATE FLEXIBILITY: Rates are low relative to median household income, suggesting the authority has adequate rate flexibility to implement planned inflation-like rate increases over the next five years. Rate increases have been approved through 2016.

SUFFICIENT WATER SUPPLIES: Water supplies are adequate to meet customer demand for the foreseeable future, despite current drought conditions, alleviating pressure to procure additional resources.

RECOVERING ECONOMY: The service area is large and diverse, but the economy is recovering very slowly from a deep economic downturn.

RATING SENSITIVITIES

DECLINE IN COVERAGE: The rating is sensitive to shifts in fundamental credit factors, including financial performance, the debt profile and rate setting behavior. The Stable Outlook means that Fitch does not expect such deterioration.

CREDIT PROFILE

The authority is a joint powers authority formed in 2000 between the cities of Reno and Sparks as well as Washoe County (the 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. It serves about 94,700 accounts and is currently merging with two county water agencies, which will expand the service area to include most of the county's urbanized areas and increase the customer base by about 25%.

ADEQUATE COVERAGE, STRONG LIQUIDITY

All-in debt service coverage has recovered from its recessionary lows due to modest rate increases and increased water usage. Coverage averaged 1.6x over the three fiscal years ended June 30, 2013, up from a low of 1.3x in fiscal 2009. Results were boosted by a cumulative 7.5% increase in rates over the period and a 9% jump in water sales volumes as a result of both economic recovery and weather. Senior DSC was healthy at 1.8x in 2013 and has averaged 1.9x over the past three years.

Free cash to depreciation was solid at 86% and has improved sharply from recessionary lows of less than half that level. Connection fee revenues remain subdued and well below prior peak levels. Little downside risk remains with connection fees providing just 2.3% of total system revenues in 2013, down from more than a fifth of revenues during the housing boom. With rates set to adequately provide needed coverage and capital investment without connection fees, the authority is well positioned to outperform if development resumes at even a fraction of its prior pace.

The authority maintains significant financial flexibility with a robust reserve position. The authority had $60 million of unrestricted cash and investments and $16.8 million of indenture-required restricted reserves at the end of fiscal 2013. The combined balance equaled a very high 715 days cash, well above the median for any rating category.

MERGER CREDIT NEUTRAL

The authority's financial forecast shows coverage improving slightly over the next five years, as it absorbs the Washoe County Community Services Department's water utility and the South Truckee Meadows General Improvement District. The authority's forecast appears reasonable, assuming a decline in water use to more typical levels, modest rate increases and connection fee revenues near recessionary lows.

The authority's financial plans and forecast include the merged districts with a target for completing the merger late in the current calendar year. The utility has spent several years analyzing the impact on its financial performance. However, the merger creates greater-than-normal uncertainty around the forecast. The rating could come under downward pressure if financial performance, particularly debt service coverage, slips due to the combination.

HIGH DEBT DECLINING SLOWLY

Leverage is expected to remain high for at least the next decade, driven by the 2001 purchase of the water utility from the Sierra Pacific Power Company. The authority's $500 million of outstanding debt equals $5,262 per customer, almost three times the median for 'AA' category water and sewer agencies. Debt-to-net plant assets are also elevated at 74%, compared to an 'AA' category median of 49%. Amortization is somewhat slow in the early years of repayment with 31% of debt repaid in 10 years, but accelerates thereafter with a very typical 79% repaid in 20 years.

The upcoming merger will result in a 7.2% increase in direct debt but lower debt ratios with the expanded customer base. The utility will assume $26.1 million of revenue bonds and a $10 million state loan. It plans to refinance the revenue bonds with commercial paper. Debt is projected to decline to about $3,850 per customer in five years, a little less than twice the median projected debt for rated utilities.

The utility's 2015 - 2019 capital improvement program (CIP) totals a manageable $105.9 million and will require no additional borrowing. The authority has scaled back purchases of additional water rights with growth no longer occurring at the rapid pace of the housing boom years. Based on its current portfolio of ground water and significant surface water rights, 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.

The authority's water supply position is solid, albeit vulnerable to periodic droughts. The utility gets the bulk of its supplies from surface water fed by snow melt in the Sierra Nevada Mountains via the Truckee River, which flows out of Lake Tahoe. Total available supplies (119,000 acre feet per year) are about 160% of 2013 usage (74,000 acre feet). The authority does not expect current drought conditions to significantly reduce customer deliveries in the upcoming year due to excess capacity, ample stored water supplies and the availability of ground water to offset reductions in surface water deliveries. The authority's drought planning is thorough and built around a nine-year dry period that matches its drought of record. A continuation of the current drought beyond this year could require mandatory conservation measures, but a temporary decline in water sales is unlikely to put downward pressure on the rating if the authority adjusts rates to maintain adequate financial performance as it has in the past.

ECONOMIC CONDITIONS REMAIN WEAK IN SERVICE AREA

The authority's service area is weaker than the average rated system with a concentrated economy and high joblessness. The county's economy, which historically was fueled by legalized casino gambling and construction activity, was hard hit by the housing bust and is recovering only very gradually. The Washoe County unemployment rate has been falling for four years, but remained significantly above the national average 9.1% in January 2014 with job growth continuing to lag the nation. The gaming industry continues to dominate the economy, but the utility's direct exposure is limited with the top 10 customers - mostly casinos and hotels - providing a moderate 10% of revenues.

Additional information is available at 'www.fitchratings.com'

In addition to the sources of information identified in the Revenue-Supported Rating Criteria, this action was informed by information from CreditScope and IHS Global Insights.

Applicable Criteria and Related Research:

--'Revenue-Supported Rating Criteria' (June 3, 2013);

--'U.S. Water and Sewer Revenue Bond Rating Criteria' (July 31, 2013);

--'2014 Water and Sewer Medians' (Dec. 12, 2013);

--'2014 Outlook: Water and Sewer Sector' (Dec. 12, 2013).

Applicable Criteria and Related Research:

Revenue-Supported Rating Criteria

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=709499

U.S. Water and Sewer Revenue Bond Rating Criteria

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

2014 Water and Sewer Medians

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=724358

2014 Outlook: Water and Sewer Sector

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=724357

Additional Disclosure

Solicitation Status

http://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=825495

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Contacts

Fitch Ratings
Primary Analyst
Andrew Ward, +1 415-732-5617
Director
Fitch Ratings, Inc.
650 California Street, 4th Floor
San Francisco, CA 94108
or
Secondary Analyst
Douglas Scott, +1 512-215-3725
Managing Director
or
Committee Chairperson
Jessalynn Moro, +1 212-908-0608
Managing Director
or
Media Relations:
Elizabeth Fogerty, +1 212-908-0526
elizabeth.fogerty@fitchratings.com

Sharing

Contacts

Fitch Ratings
Primary Analyst
Andrew Ward, +1 415-732-5617
Director
Fitch Ratings, Inc.
650 California Street, 4th Floor
San Francisco, CA 94108
or
Secondary Analyst
Douglas Scott, +1 512-215-3725
Managing Director
or
Committee Chairperson
Jessalynn Moro, +1 212-908-0608
Managing Director
or
Media Relations:
Elizabeth Fogerty, +1 212-908-0526
elizabeth.fogerty@fitchratings.com