OREANDA-NEWS. Fitch Ratings has affirmed the 'AA' rating on the following Nevada Irrigation District Joint Powers Authority, California's (the JPA) revenue bonds, issued on behalf of the Nevada Irrigation District, California (the district):

--$23.25 million revenue bonds series 2011A.

The Rating Outlook is Stable.

SECURITY

Bonds were issued by the JPA and are payable from installment payments made to the JPA by the district. Payments are due from the district'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

STRONG FINANCIAL MARGINS: Strong debt service coverage reflects the additional benefit to bondholders of the electric fund revenues that increased with a new contract in July 2013. Future debt service coverage from pledged revenues is expected to remain over 2.0x. Strong debt service and robust cash reserves are viewed as mitigating the district's hydroelectric operating risk.

HYDROELECTRIC OPERATING RISK: The district takes operational risk on the three largest hydroelectric projects, the full output of which is sold to Pacific Gas & Electric (PG&E, Fitch Issuer Default Rating 'BBB+'/Stable). Payment by PG&E is only due if the three projects are at 100% availability, regardless of hydrological conditions. The three largest plants provide around 33% of total revenues beginning in fiscal 2014, the first full year of the new contract for those three projects.

UNCERTAIN CAPITAL NEEDS: The district has water-related capital needs that are manageable. While the district knows there will be capital requirements for the hydroelectric projects dictated by the new Federal Energy Regulatory Commission (FERC) licenses, the magnitude of the capital spending will not be known until the final licenses are received. Since revenues related to the hydro assets are fixed under long-term contract, increased capital spending will result in reduced cash flow in the electric fund.
DECLINING WATER REVENUES FROM DROUGHT: The district has approved a package of five annual 6% water rate increases through fiscal 2018. However, the district is reviewing its cost of service analysis internally to assess the need for rate restructuring to adapt to lower water sales related to the California drought. The district is required by state mandate to reduce its water sales by 36%.

RATING SENSITIVITIES

REVENUE AND CAPITAL PRESSURE: Nevada Irrigation District's water revenues are declining from lower water sales and in the next few years capital needs on the hydroelectric system could also lower financial margins given the limited revenue flexibility of the hydroelectric system. Significantly reduced financial margins than currently forecasted or lower liquidity levels could place downward pressure on the rating.

CREDIT PROFILE

The district provides treated 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.

The district's water rights provide ample, high-quality water from the Sierra Nevada snowpack that flows down the middle and south forks of the Yuba River along with natural flows in the Bear River, Deer Creek, and several tributary systems. The district also owns seven hydroelectric generation projects.

WATER REVENUES DECLINES EXPECTED FROM MANDATORY CONSERVATION

The district's treated water sales declined in the past decade, which is consistent with other California utilities as a result of the economic recession, conservation efforts, and variable weather conditions. Treated water sales also fell 17.6% in fiscal 2014 with increased conservation efforts in light of the current drought.

In May 2015, as a response to the Governor's recent executive order to reduce annual water usage in the state by 25%, the State Water Resource Control Board adopted rules requiring mandatory reductions in water usage for all of California's water providers. The district's required reduction in treated water sales is 36% over 2013 levels. To achieve this, the district enacted mandatory conservation measures. As of August 2015, the district is reporting water sales 36% below 2013 levels (this includes the 17.6% decline mentioned above). Fiscal 2015 revenues are expected to decline below budgeted levels as a result given the district's volumetric rate structure. Budgeted 2016 water revenues are being revised downward.

FAVORABLE FIXED HYDROELECTRIC CONTRACT BUT DISTRICT TAKES OPERATIONAL RISK

The district owns seven small hydroelectric projects, with net revenues of these projects pledged to bondholders. The full output of the three largest projects is sold under a twenty-year contract with PG&E, effective July 1, 2013. The contract provides fixed payments with annual escalation but is contingent on the projects meeting an availability standard. 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 payment from PG&E is not reliant on hydro-flows through the project and actual kWh output, removing hydrology risk from the district's electric revenues.

STRONG FINANCIAL PERFORMANCE; ELECTRIC PROVIDES MOST NET REVENUES

The mix of revenues from water sales ($18.9 million in fiscal 2014), the district's share of the county's property tax ($10.1 million) and electric revenues ($21.5 million) provide a favorable diversity in district revenues. However, as water revenues experience declines from state mandated conservation, the electric system will move into the position of providing the bulk of net revenues for bondholders.

Debt service coverage was exceptionally strong in fiscal 2014 at 7.0x but is expected to stabilize at around 3.0x by fiscal 2016. The decline in coverage from the one-time high in fiscal 2014 will occur as the district takes on the operating expenses related to maintenance work at the hydro-electric projects that had previously been paid for by PG&E under the prior contract. Even with this increase, management's financial projections show the electric fund should generate net revenues of around $6 million following a $3 million transfer to the water fund. Strong electric fund cash flow will offset declining net revenues from the water fund. However, if water revenues are lower as a result of conservation, debt service coverage could be lower.

Liquidity for the combined funds is robust at $37.1 million at the end of fiscal 2014, or 457 days cash on hand. Most of the balance ($25.3 million) is in the electric fund. Management indicated that some of these balances may be spent down in the upcoming years on capital. Fitch would view modest liquidity at the district as a concern given the operating risk on the hydroelectric assets. The district conservatively budgets for only 85% of the PG&E contract revenues for this reason.

UNCERTAIN CAPITAL NEEDS

The district recently completed a period of strong capital investment, particularly in the years 2010 and 2011 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 expanded to a capacity of 24 million gallons per day and construction of 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. However, the district's debt levels are low with 10% debt to plant. Capital needs over the next five years are estimated by the district to be manageable at $92 million. The district anticipates issuing new debt of around $20 million in fiscal 2016 to pay for a portion of the capital plan.

However, the five year forecast does not include capital projects for the electric system. The extent of required capital spending will be determined when the district receives final FERC operating licenses for the largest three projects. License renewal applications are pending at FERC. Additional capital requirements anticipated with the new licenses are expected to result in $3 million annual carrying costs for the district. The magnitude and pace of additional capital needs for the electric system and new debt issued to fund those needs could pressure future debt service coverage and liquidity levels.