SAN FRANCISCO — Fitch Ratings yesterday cut its outlook on the Truckee Meadows, Nev., Water Authority’s A-rated water revenue bonds to negative from stable ahead of a $31.4 million bond sale next week.
The action affects the new tax-exempt debt, which is expected to sell competitively on Jan. 28, as well as $463.2 million of parity debt. The bonds are rated AA-minus by Standard & Poor’s and A3 by Moody’s Investors Service. Both agencies reaffirmed the ratings with stable outlooks ahead of the deal.
“The negative outlook considers the deterioration in debt-service coverage that has occurred in recent years as a result of weak economic conditions and the possibility that the authority’s financial profile may erode further in the near term,” Fitch analysts Doug Scott and Robert Sakai wrote in a report.
Truckee Meadows provides water to about 300,000 people in Reno and Sparks. The area grew rapidly during the housing boom, but the local economy stalled when the housing market collapsed, denting the Water Authority’s revenues.
Fees from new connections fell “precipitously” to just 1% of revenue in fiscal 2009 from 22% in 2005, according to Fitch. The result is that the authority’s debt-service coverage ratio fell to 1.3 times in 2009 from 1.9 times or higher during the peak years of the housing boom.
The authority has cut capital and operating expenses and raised rates to keep its budget balanced, and expects the debt-service coverage ratio to stabilize near current levels, which meet the 1.25-times coverage ratio covenanted in its bond documents.
“We provide very conservative forecasts, so that there are no unexpected problems in the future,” said Jeff Tissier, chief financial officer at the Water Authority. “We try to under-promise and over-deliver.”
He said the agency is refunding bonds issued in 2001 to save about $500,000 over the next 18 months.
Fitch analysts said they don’t expect “material improvement” in the coverage ratio over the near term, despite a scheduled rate hike of 4.4% in June that follows a similar increase in June 2009.
“Even higher rates than the expected June 2010 increase may be needed to maintain current cash flows, which may be difficult for the rate base to absorb,” Scott and Sakai wrote.
While they expressed concern about the Water Authority’s declining operating margins and high debt levels, the analysts praised the agency’s “significant” reserves. Truckee Meadows had unrestricted cash balances of about $62 million and $18 million of indenture-required reserves at the end of fiscal 2009.
The agency’s “management has been extremely proactive in containing operating costs and cutting capital expenditures aggressively so that we can maintain our treasury and maintain healthy cash reserves,” Tissier said.