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Rating Action:

Moody's affirms A2 rating for Turlock Irrigation District (CA), Walnut Energy Center, and Tuolumne Wind; outlook stable

27 Sep 2016

Approximately $1 billion of debt securities affected

NOTE: On December 3, 2018, the press release was corrected as follows: At the end of the press release, Kurt Krummenacker was added as the second contact. Revised release follows.

New York, September 27, 2016 -- SUMMARY RATINGS RATIONALE

Moody's Investors Service, ("Moody's") has affirmed the A2 rating Turlock Irrigation District's (TID or the District) approximately $370 million of revenue refunding bonds. Concurrent with this action, Moody's has affirmed the A2 ratings on Walnut Energy Center Authority's (WECA) $240 million outstanding revenue bonds and Tuolumne Wind Project Authority's (TWPA) $380 million outstanding revenue bonds. The rating outlooks for TID, WECA and TWPA are stable.

The A2 rating affirmation considers TID's dominant market position as the sole provider of electricity within its designated service area, its unregulated rate setting ability, the board's willingness to raise rates and a strong liquidity position. The rating, however, is tempered by the below average economic profile of its service territory but also reflects TID's key financial metrics that we consider appropriate for a A-rated municipal power issuer.

TID is a well-established utility with exclusive right to provide electric and irrigation services in portions of Stanislaus, Merced and Tuolumne counties in California. TID's board of directors has shown willingness to raise base electric rates to maintain the utility's financial profile. Variable fuel costs are recovered under a Power Supply Adjustment clause that is reviewed semi-annually. TID's diverse and efficient power supply portfolio has allowed TID to keep system rates competitive. The largest contributor to TID's generation output from owned resources is the 250-megawatt combined-cycle Walnut Energy Center (WECA).

The A2 ratings affirmation for WECA and TWPA's revenue bonds reflects the unconditional obligation of TID to make payments in an amount equal to debt service obligations and operation and maintenance requirements. TID's payment obligations are on a take-or-pay basis and irrespective of the operational performance by either entity. TID is WECA and TWPA's sole off-taker.

RATING OUTLOOK

TID, WECA and TWPA's stable rating outlooks are based on the expectation that the utility will maintain its key financial credit metrics near current levels and that the board would, if needed, raise rates to maintain the District's credit profile.

FACTORS THAT COULD LEAD TO A UPGRADE

- TID's rating could be upgraded if the District's fixed charge coverage ratio exceed 1.75 times and system rates remain competitive after costs associated with take-or-pay projects are fully absorbed.

- An upgrade of TID would trigger ratings upgrades at WECA and TWPA.

FACTORS THAT COULD LEAD TO A DOWNGRADE

- It is unlikely that TID's rating will experience downward rating pressure in the short-term. TID's ratings could be negatively impacted if the District's financial profile deteriorates, such that its fixed charge coverage ratio falls below 1.25 times on a sustained basis or liquidity profile unexpectedly declines to less than 90 days, or if TIDs take-or-pay projects experience significant unexpected operating problems.

-A downgrade of TID would trigger ratings downgrades at WECA and TWPA.

Detailed Rating Considerations:

Revenue Generating Base

TID is a well-established utility that has the exclusive right to provide electric service within a 662 square-mile service area that includes portions of Stanislaus, Merced and Tuolumne counties in California. To provide electric service within its service territory, TID owns and operates an electric system which includes generation, transmission and distribution facilities. TID also supplies water for irrigation use within its boundaries, which consist of 308 square miles within its 662 square mile electric service area. The electric and irrigation utility system is operated and accounted for as a single entity and revenues from both systems are available to pay TID's obligations. However, the revenues derived by TID from its irrigation system amounted to only approximately 4% of total revenues for the year ended December 31, 2015.

Critical to the A2 rating is TID's 5-member Board of Directors' independent authority to establish retail electric rates at any time. The Board has shown willingness to raise rates over the past few years in order to maintain TID's financial profile, having increased electric rates system-wide by 2% in January 2015 and 4% in each of February 2012, January 2013 and January 2014. Timely and adequate adjustments to rates are essential to the continued maintenance of the current rating level.

TID's variable power costs are recoverable under a Power Supply Adjustment clause (PSA). The PSA takes into account variances in the District's net power supply cost, is reviewed twice-yearly and subject to change without Board review. Currently, the PSA is a credit to customers due to a favorable gas price environment.

TID's diverse power supply portfolio, which includes low cost hydro and efficient natural gas combined-cycle generation, has allowed the District to keep system rates competitive. In 2014, TID's retail customer paid on average approximately $13.53 cents per kilowatt hour of electricity, 10.7% lower than the average electric rate paid in California, on par with the rate charged by a neighboring public power utility and 18.6% lower than that charged by Pacific Gas and Electric Company.

TID generates approximately 60-65% of its total annual power supply with owned resources. The largest contributor to TID's generation from owned resources is the 250-megawatt Walnut Energy Center. This natural gas-fired, combined-cycle generating facility accounts for approximately 70% of TID's owned generation. Output from TID's 137-megawatt Tuolumne Wind Project and various hydroelectric facilities account for approximately 20% of total output from owned resources. TID is well positioned to meet regulatory requirements with respect to mandatory state renewable energy generation levels. TID's remaining annual power supply is purchased from third parties under various long and short-term power supply agreements. TID sells power in excess of the requirement of its retail customers into the wholesale power market primarily at the prevailing market price.

The economic barometers within TID's service territory continue to lag behind state and national averages. Unemployment rates range between 9-11% in Merced and Stanislaus counties (although down from 16% in 2011), which are considerably higher than some of the surrounding metropolitan areas. Moreover, per capita income is roughly 62%-73% of the state average and 65-76% of the national average based on 2014 Bureau of Economic Analysis, evidence of a lack of high-wage industries and jobs.

TID has a degree of concentration risk as its two largest customers, a cheese producer and poultry farm, account for approximately 9% of total retail revenues. TID's top ten customers account for 16% of total retail revenues. Stanislaus county ranks among California's top agricultural producing counties. Prominent farm commodities include almonds, walnuts and peaches. Drought conditions, however, pose downside risks.

Financial Operations and Position

TID's fixed charge coverage, as calculated by Moody's, improved to approximately 1.6 times in 2015 from 1.1 times in 2010 while liquidity, measured by adjusted days liquidity on hand, increased to 269 days from 172 days during the same timeframe. We anticipate TID's Board will continue to implement rate increases when needed to preserve the District's improved financial profile and that TID's fixed charge coverage will remain in excess of 1.4 times going forward.

TID's peers include Modesto Irrigation District (MID: A2 stable) and Imperial Irrigation District Electric Enterprise (IID: A1 stable). While these three public power entities share many of the same characteristics, including an unregulated rate setting ability and agrarian service territories, IID's stronger financial profile drives the one-notch rating difference.

LIQUIDITY

TID's liquidity profile is strong. Unrestricted cash balances as of December 31, 2015 totaled $166 million, up from $162 million the prior comparable period. In addition, TID had approximately $141 million of restricted cash including $51 million in a debt service reserve.

Debt and other

TID has a manageable debt profile. Debt outstanding as of June 30, 2016 included $370 million of revenue bonds at TID, $240 million of revenue bonds at WECA and $393 million of revenue bonds issued by TWPA. Although WECA and TWPA are separate legal entities from TID they are reported as part of TID because of the extent of their operational and financial relationship with TID, which includes oversight from the Same Board. Accordingly, all operations of WECA and TWPA are consolidated into TID's financial statements.

Management and Governance

A five member Board governs TID. The members are elected from geographic divisions of TID for staggered four-year terms. The Board appoints a general manager and certain other senior managers who are responsible for the day-to-day operations of TID. TID's Board has full and independent authority to establish revenue levels and rate schedules for all electric service. TID is not subject to retail rate regulation by any state or federal body, and is empowered to set retail rates effective at any time.

Legal Security

The outstanding revenue refunding bonds are secured by a pledge of net revenues after operations and maintenance expenses, and TID covenants to fix rates sufficient to yield 1.15x debt service coverage. The first priority subordinated revenue bonds are secured by a pledge of revenues after the revenue bond debt service has been paid and also benefits from a 1.25x debt service coverage test. TID is responsible for the debt service on WECA and TWPA through take-or-pay contracts and is therefore senior to both the revenue bonds and first priority subordinate bonds in the flow of funds since it is paid as part of TID's maintenance and operation expenses. There are separate cash funded debt service reserve funds for the revenue bonds and first priority subordinate bonds sized at average annual debt service and maximum annual debt service respectively. TID has covenanted not to issue any additional revenue bonds or any other debt that is secured by a pledge of net revenues prior to the subordinate bonds.

OBLIGOR PROFILE

TID is a well-established utility that has the exclusive right to provide electric service within a 662 square-mile service area that includes portions of Stanislaus, Merced and Tuolumne counties in California.

METHODOLOGY

The principal methodology used in this rating was U.S. Public Power Electric Utilities With Generation Ownership Exposure published in March 2016. Please see the Ratings Methodologies page on www.moodys.com for a copy of this methodology.

Regulatory Disclosures

For ratings issued on a program, series or category/class of debt, this announcement provides certain regulatory disclosures in relation to each rating of a subsequently issued bond or note of the same series or category/class of debt or pursuant to a program for which the ratings are derived exclusively from existing ratings in accordance with Moody's rating practices. For ratings issued on a support provider, this announcement provides certain regulatory disclosures in relation to the credit rating action on the support provider and in relation to each particular credit rating action for securities that derive their credit ratings from the support provider's credit rating. For provisional ratings, this announcement provides certain regulatory disclosures in relation to the provisional rating assigned, and in relation to a definitive rating that may be assigned subsequent to the final issuance of the debt, in each case where the transaction structure and terms have not changed prior to the assignment of the definitive rating in a manner that would have affected the rating. For further information please see the ratings tab on the issuer/entity page for the respective issuer on www.moodys.com.

Regulatory disclosures contained in this press release apply to the credit rating and, if applicable, the related rating outlook or rating review.

Please see www.moodys.com for any updates on changes to the lead rating analyst and to the Moody's legal entity that has issued the rating.

Please see the ratings tab on the issuer/entity page on www.moodys.com for additional regulatory disclosures for each credit rating.

Scott Solomon
Lead Analyst
Project Finance
Moody's Investors Service, Inc.
7 World Trade Center
250 Greenwich Street
New York 10007
US
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653

Kurt Krummenacker
Additional Contact
Project Finance
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653

Angelo Sabatelle
Associate Managing Director
Project Finance
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653

Releasing Office:
Moody's Investors Service, Inc.
250 Greenwich Street
New York, NY 10007
U.S.A
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653

No Related Data.
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