EXISTING REVENUE BONDS DOWNGRADED TO A2
First Priority Subordinated Revenue Refunding Bonds, Series 2011
Expected Sale Date
SUBORDINATED REVENUE BONDS
NEW YORK, Jul 19, 2011 -- Moody's assigns A2 ratings to Turlock Irrigation District's 213M First Priority
Subordinated Revenue Refunding Bonds, Series 2011. At the same time, Moody's has
downgraded the rating of existing revenue bonds, as well as the long term debt
obligations of Tuolumne Wind Project Authority and Walnut Energy Center
Authority, to A2. The rating outlook is stable.
The downgrade reflects Moody's expectations of declines in debt service coverage
to levels, resulting from additional leverage being undertaken by TID in order
to finance additional generation capacity, which are more consistent with an A2
The A2 rating of Turlock Irrigation District ("TID") reflects its
dominant market position as a provider of electricity to a service area of
nearly 100,000 retail customers. Moody's notes that the unregulated ability to
set rates is an important credit strength which insulates the utility from cost
Turlock Irrigation District is a publicly owned utility which
provides electricity and irrigation services to a 662 square mile service
area located in Stanislaus, Merced and Tuolumne Counties in California.
USE OF PROCEEDS:
The proceeds of the bond issue will be used to refund existing
subordinated revenue notes, fund the debt service reserve and pay
transaction costs associated with the bond issuance.
The First Priority Subordinated Revenue Refunding Bonds, Series 2011, are
secured by a pledge of revenues after operations and maintenance expense and
revenue bond debt service from TID, which covenants to fix rates which will be
sufficient to yield 1.15x debt service coverage on the First Priority
Subordinated Revenue Refunding Bonds, as well as 1.15x debt service coverage on
any outstanding Revenue Bonds.
For additional revenue and subordinated bond indebtedness, TID is also required
to meet a 1.15x debt service coverage test.
A debt service reserve will be established with a funding requirement of average
annual debt service.
KEY RATING FACTORS
MACRO FUNDAMENTALS CONTINUE TO BE CHALLENGING THOUGH NO FURTHER
TID is a well established utility and has exclusive jurisdiction in its 662
square mile service area located in Stanislaus, Merced and Tuolumne Counties in
California to provide electric service. TID also supplies wholesale water and
irrigation services within its irrigation district boundaries.
TID's key credit strengths are its ability for cost recovery through
an unregulated rate-setting mechanism in combination with its dominant market
position. Over time TID has demonstrated the ability and willingness to raise
rates, which is a key support for the A2 rating.
The service area continues to exhibit weakness which is reflected in the A2
rating. Moody's Economy.com notes that "The economy will be among the last
to exit recession as the jobless rate stays above 18% through 2011. The metro
area will lag the nation through the forecast horizon as an unfavorable
industrial structure weighs on growth."
Moody's expects this weakness to limit load demand growth, particularly in the
commercial and industrial customer segments, however further notes that this is
not expected to materially increase retail bad debts expense due to TID's policy
of holding deposits against certain retail customers.
DEBT SERVICE COVERAGES EXPECTED TO DECLINE
TID has undertaken considerable increases in leverage in recent years as a
result of [i] capacity expansions to meet increased load demand and [ii]
purchases of renewable assets in order to meet mandated renewable generation
levels. Despite the revenue growth which has occurred in 2010, the net effect of
these factors has been a decline in debt service coverage levels.
Over the next few years, further weakness is expected as additional debt service
related to [i] the Tuolumne Wind Project and [ii] debt service brought forward
relating to the Almond Power Plant expansion, increases TID's consolidated debt
service, such that Moody's expects debt service coverage levels to decrease to
around 1.1x - 1.2x over 2012 - 2013, which is more consistent with an A2 rating
TID expects to implement rate increases in 2012 and 2013. Moody's views these
rate increases as necessary to preserve TID's financial profile.
REASONABLE CAPITAL REQUIREMENTS AND WELL POSITIONED TO MEET MANDATED
RENEWABLE GENERATION LEVELS
TID is well positioned to meet regulatory requirements with respect to mandatory
renewable energy generation levels. Following its acquisition of the Tuolumne
Wind Project in 2009, TID currently sources approximately 25% of its generation
through renewable sources, which is supportive of its A2 rating.
As any state regulatory requirement with regards to renewable generation levels
will apply across California, any cost increases as a result of regulatory
requirements will be applicable to all utilities and hence is not expected to
materially alter TID's cost competitiveness.
TID's major capital expenditures currently relate to the expansion of the Almond
Power Plant from 50MW to 224MW - this expansion is currently on time and budget
and is scheduled to be complete before the peak of 2012. Following the
completion of this expansion, TID will not require any major capital
expenditures related to increasing generation capacity over the next few years,
which is supportive of the rating.
ABOVE AVERAGE LIQUIDITY SUPPORTS A2 RATING
At December 31, 2010 TID reported 123M of unrestricted cash in
operating accounts and rate stabilization funds, equivalent to 165 days of cash
on hand, which is considered above average for its A2 rating.
At the same date, net working capital was negative, reflecting short term
financing in place. Moody's expects this to reduce as TID replaces shorter tenor
financing with longer tenor financing as part of upcoming financings.
Pledges on TID's cash under derivative agreements entered into for the purposes
of hedging gas supply costs are not required absent a material downgrade in
TID's credit quality, which is positive for its liquidity profile as it
increases the certainty of cash balances being available when required.
The outlook of TID is stable, reflecting the appropriateness of its financial
profile for the A2 rating level.
What Could Change the Rating -UP
It is unlikely that TIDs rating will be upgraded in the short term, given the
continued economic challenges the service area is facing as well as the
expectations of declines in debt service coverage levels.
What Could Change the Rating-DOWN
The rating could be downgraded if TID fails to increase rates in order to
maintain its financial profile or encounters a material reduction in days cash
The principal methodology used in this rating was U.S. Public Power Electric
Utilities published in April 2008. Please see the Credit Policy page on
www.moodys.com for a copy of this methodology .
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MOODY'S ASSIGNS A2 RATING TO TURLOCK IRRIGATION DISTRICT'S SUBORDINATED REVENUE BONDS; OUTLOOK STABLE
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