Fitch Affirms 'AA' Rating on Nevada Irrigation District Joint Pwrs Auth, CA Water Sys Rev Bonds
AUSTIN, Texas--(BUSINESS WIRE)--Fitch Ratings affirms its 'AA' rating on the following Nevada Irrigation District Joint Powers Authority, California's water system revenue bonds, issued on behalf of the Nevada Irrigation District:
--$26.7 million water system revenue bonds, series 2011A.
The bonds were issued by the Nevada Irrigation District Joint Powers Authority and are secured by installment payments made to the Authority by the Nevada Irrigation District (NID). Payments are made from NID's system net revenues that include water operations, seven hydroelectric facilities, and tax receipts. The district's obligation to make installment payments from its net revenues is absolute and unconditional.
KEY RATING DRIVERS
FAVORABLE REVENUE DIVERSITY: Bonds are secured by a net revenue pledge from NID's mix of water system revenues (from both retail and irrigation customers), share of county tax receipts, and hydroelectric revenues.
STRONG OVERALL FINANCIAL MARGINS: Debt service coverage from combined water revenues, tax receipts, and hydroelectric revenues provided strong debt service coverage of 2.7x in fiscal 2012. Coverage is projected to remain at or above 2.0x in the five-year management forecast.
HYDROELECTRIC OPERATING RISK: The district has favorable contracts for its seven hydroelectric plants that provide revenues regardless of actual kilowatt hour (kwh) output from the plants, which depends heavily on regional hydrology conditions year to year. However, the district takes operational risk on the three largest plants. The plants must be operational for the district to receive payment.
AMPLE WATER SUPPLY: The district has ample and sufficient water rights to meet the demands of its raw water and treated water customers. The district has used its reserves and strong cash flow to increase water treatment plant capacity in recent years.
FERC RELICENSING IN PROCESS: The largest three hydroelectric projects are in the relicensing process with FERC. NID expects the new license to include additional capital requirements but the final requirements won't be known until the new license is issued.
STABLE RURAL REGIONAL ECONOMY: The local economy is predominantly agricultural but the labor and tax base is relatively diverse. The region did not experience intense growth prior to the recession and has not suffered significant tax base declines in recent years.
RATE CASE DECISIONS: The district is finalizing its rate case for fiscal 2014 and beyond. Water rate increases are needed to provide additional revenues for both operations and capital needs. The debt service coverage levels cited above rely on assumed annual rate increase going forward.
NID provides treated water and raw (untreated) water to a population of approximately 83,000 in Nevada and Placer counties, California. The service area is in the foothills of the Sierra Nevada Mountains located approximately 150 miles east of San Francisco. The local economy is rural with a concentration in ranching but the area also serves as a regional healthcare and retail hub.
STRONG WATER SYSTEM CREDIT CHARACTERISTICS
The district historically provided raw water to irrigation customers in the service area but as residential and commercial development occurred in the service territory around the cities of Grass Valley and Nevada City (not served directly by the district) the district began providing treated retail water service as well. Treated water customers account for 69% of water revenues in 2013, given the higher cost of the treated water product as compared to irrigation water. There is no significant customer concentration as a percentage of revenues.
Treated water sales declined in fiscals 2009 and 2010 as they did across the state. Treated water sales appear to have stabilized in 2011 and 2012 around 9.3 million gallons per day (mgd). For rate setting purposes, the district assumes flat consumption.
The district's water rights provides ample, high-quality water from the Sierra Nevada snowpack that flows down the middle and south forks of the Yuba River, and natural flows in the Bear River, Deer Creek, and several tributary systems. The district's water supply, along with its reservoir storage and the treatment capacity provided by its seven water treatment plants, provide sufficient cushion to meet existing demand and expected growth, even in dry hydrological conditions.
The water system is operated solely for water supply criteria, not flood control or other priorities that could affect water supply for the district's customers. Rates for both treated and untreated water are competitive and recover the cost of service for each product.
HYDROELECTRIC ASSETS SHOULD PROVIDE STRONG ADDITIONAL REVENUES
The district owns seven small hydroelectric projects. Net revenues of these projects are pledged to bondholders. The three largest projects were sold under cost based contracts to PG&E through July 1, 2013, which included payment of debt related to those projects that matured at the same time. New twenty-year contracts have been signed with PG&E that provide fixed payments for these three projects with annual escalation. The district retains operational control of the assets with the responsibility to make sure the assets are available in order to receive payment. Importantly, the flat payment of around $20 million per year initially is not reliant on hydro-flows through the project and actual kWh output, removing production risk from the district revenues.
While all net revenues of the hydroelectric system are available to bondholders, the district anticipates operating expenditures of around $12 million for all the hydroelectric assets and using remaining revenues to build reserves to fund capital needs related to relicensing of the largest three projects. License renewal applications are pending at FERC. Additional capital requirements anticipated with the new licenses are not expected to exceed $40 million. For current rate setting, the district is contemplating $3 million per year transfers from the hydroelectric project to support the water fund.
FINANCIAL PERFORMANCE IS STEADY
Transfers of $3 million annually in fiscal 2013 and beyond should provide at or above 2.0x debt service coverage to bondholders, although Fitch would also note that pledged coverage is substantially higher if revenues used for capital spending at the hydroelectric projects were included. Coverage without any hydroelectric revenues, in the event all seven projects were not operational, would be around 1.3x. Fitch believes the district has a long operating history of the projects and that non-operation of multiple projects for an extended period is highly unlikely. Liquidity in the water fund is very strong at $25.7 million, or 444 days operating cash.
PERIOD OF LARGE CAPITAL INVESTMENT ENDING
The district is in the midst of a period of strong capital investment, particularly in the years 2011 and 2010 when the district spent $31 million annually on capital, as compared to annual total revenues of around $29 million. The largest water treatment plant was just expanded to a capacity of 24 mgd and construction on the Banner Cascade Pipeline expanded raw water deliveries to the recently expanded water treatment plant and treated water delivery reliability.
Capital spending has been funded primarily from reserves accumulated during previous years for capital needs and 2011A bond proceeds. Capital needs for the water system over the next five years are estimated by the district to be much lower at $47 million. The rate forecast anticipates possible additional debt in fiscal 2016. Hydroelectric capital needs will be funded from excess hydroelectric project revenues.
Additional information is available at 'www.fitchratings.com'.
Applicable Criteria and Related Research:
--'Revenue-Supported Rating Criteria' (June 2013);
--'Water and Sewer Revenue Bond Rating Guidelines' (August 2013);
--'U.S. Public Power Rating Criteria' (December 2012).
For information on Build America Bonds, visit www.fitchratings.com/BABs.
Applicable Criteria and Related Research:
Revenue-Supported Rating Criteria
U.S. Water and Sewer Revenue Bond Rating Criteria
U.S. Public Power Rating Criteria