OREANDA-NEWS. Fitch Ratings assigns the following ratings to the Truckee Meadows Water Authority, Nevada's (TMWA, or the authority) debt:

--Approximately \$30 million water revenue refunding bonds series 2015A.

The bonds are scheduled to sell via negotiation on or about April 29, 2015. The proceeds will be used to refund the authority's series 2005A bonds and to pay cost of issuance.

In addition, Fitch affirms the following ratings:

--\$406.6 million senior lien water revenue bonds at 'AA-';
--\$160 million of bank notes corresponding to water revenue commercial paper (CP) notes, series 2006A and 2006B, at 'A+'.

The Rating Outlook is Stable.

SECURITY
The bonds are secured by a first lien on net system revenues. The bank notes are secured by a third lien on net revenues.

KEY RATING DRIVERS

SOLID FINANCIAL PERFORMANCE: Debt service coverage (DSC) has stabilized at an adequate level following a period of weakness during the recent economic downturn, and unrestricted reserves remain very strong, providing significant operating flexibility.

MERGER YIELDS SOME GAINS: The utility completed a merger with two smaller Washoe County water enterprises at the end of 2014. The merger improved credit quality marginally, but not sufficiently to raise the rating. The combination broadened TMWA's service area, while improving its supply portfolio, liquidity and debt ratios. However, financial performance is likely to remain in line with past performance and to drive the rating, along with still-high debt ratios.

HIGH LEVERAGE: The authority's debt ratios improved with the merger, but debt remains significantly above average. Debt should moderate somewhat over the next five years, as amortization outpaces very slim issuance plans.

GOOD RATE FLEXIBILITY: Rates are low relative to median household income, suggesting the authority has adequate rate flexibility to implement planned inflation-like rate increases over the next five years.

SUFFICIENT WATER SUPPLIES: The water supply portfolio appears healthy and improves with the addition of groundwater rights from the merged utilities. The Lake Tahoe-Truckee region is currently suffering a severe drought, but the utility has only requested moderate conservation from customers due to its comprehensive long-term drought planning, significant water storage and supply redundancy.

LARGE, DIVERSE SERVICE AREA: The authority is the monopoly provider of essential water services to a large service area with a diverse payer mix. The economy is somewhat weak and concentrated in gaming and tourism industries but has improved significantly in recent years.

RATING SENSITIVITIES

DECLINE IN COVERAGE: The rating is sensitive to changes in financial and debt ratios, particularly DSC levels. Upside potential exists over time if financial results remain solid and debt begins to moderate.

CREDIT PROFILE
The authority is a joint powers authority formed in 2000 between the cities of Reno and Sparks as well as Washoe County (the county). The authority purchased the water assets of Sierra Pacific Power Company and undertook water utility operations beginning June 2001, primarily in the Reno and Sparks areas. The South Truckee Meadows General Improvement District and the Washoe County water utility merged into TMWA on Dec. 31, 2014, consolidating water agencies that serve about 95% of Washoe County's 433,700 residents. The merged entity has about 120,600 customer accounts.

ADEQUATE COVERAGE, STRONG LIQUIDITY
Financial performance has been healthy. TMWA's senior and all-in DSC were healthy at 1.8x in fiscal 2014. Consolidated financials for the three merged entities show senior DSC of 2x, benefiting from very low debt and debt service at the agencies folded into TMWA. Pre-merger free cash-to-depreciation was strong at 101% and has improved sharply from recessionary lows. Connection fee revenues are improving but remain well below prior peak levels. With rates set to provide sound senior coverage of at least 1.5x without connection fees, the authority is well positioned to outperform if development resumes at a more robust pace. The 1.5x coverage target continues to drive the authority's finances and the rating.

The authority maintains significant financial flexibility with a robust reserve position, which improved further with the merger. TMWA had \$63 million dollars of unrestricted cash and investments and \$12.3 million of available restricted reserves at the end of fiscal 2014. The combined balance equaled a very high 636 days cash, well above the median for any rating category. TMWA projects that it will have about \$97.2 million of available reserves at the end of the current fiscal year, which would equal about 782 days cash. Management plans to spend reserves down somewhat over the next five years as it largely cash funds capital spending. However, management plans to keep cash in excess of a year's operating expense, maintaining its strong liquidity position.

Rate discipline and rate flexibility both appear solid. The utility's board improved financial performance by increasing rates significantly in the aftermath of a connection fee collapse during the recession. Recent rate increases have been much smaller, but adequate to meet financial targets. The utility's rates remain quite affordable with 7,500 gallons of water costing just 0.7% of median household income. The utility expects very low, inflation-like rate increases over the next five years, suggesting continued rate flexibility.

HIGH DEBT DECLINING SLOWLY
Debt ratios improve noticeably with the merger, but remain high and a drag on the rating. Debt is elevated due to the authority's initial acquisition of the water utility from the Sierra Pacific Power Company. The utility assumed just \$36.2 million of debt in the merger, while expanding its customer counts by a quarter. TMWA took over payments on a \$9.1 million subordinate state loan and refunded \$26.1 million of bonds with subordinate CP.

The authority's \$519.6 million of outstanding debt equals \$4,307 per customer, more than double the \$1,934 'AA' category median for water and sewer agencies. The utility plans to primarily cash fund its five-year \$163.9 million 2016-2020, taking just \$15 million of additional debt. Debt per customer would decline to less than \$4,000 per customer in five years - roughly twice the 'AA' category per customer median for water and sewer agencies. Amortization is somewhat slow in the early years of repayment with 32% of debt repaid in 10 years, but accelerates thereafter with a very typical 81% repaid in 20 years.

SOLID SUPPLY POSITION, DROUGHT ONGOING
The utility benefits from significant surface water rights fed by runoff from the nearby Sierra Nevada Mountains and very robust drought planning. The merger somewhat improves the utility's supply position by bringing ground water rights of 25,000 acre feet (af) per year and 1,500 af of surface water rights (well in excess of usage by acquired customers). The additional rights bring the utility's water rights to 176,050 af of surface and groundwater rights, roughly double total system demand. Management believes it will be able to improve system-wide supply resilience by using more surface water in wet years and saving greater amounts of groundwater for dry years.

The Truckee Meadows region and nearby Lake Tahoe are currently experiencing an extreme drought. The utility's stored supplies and groundwater rights have allowed it to limit rationing to more manageable levels than many nearby water agencies. It has asked users to voluntarily conserve 10% in the current year. The authority's storage and water rights are built to assure adequate supplies in a nine-year drought, a year longer than the worst drought the utility has experienced. A longer than expected or more severe drought than envisioned by water supply planners could cause significant financial deterioration and reductions in credit quality if TMWA failed to appropriately adjust rates to offset sales declines, although such deterioration does not appear imminent.

SIGNIFICANT SERVICE AREA WITH CONCENTRATED ECONOMY
The authority's service area is weaker than the average rated system with a concentrated economy and high joblessness. The county's economy, which historically was fueled by legalized casino gambling and construction activity, was hard hit by the housing bust and is recovering only very gradually. The Washoe County unemployment rate has been falling for five years, but remained significantly above the national average 7.4% in January 2015. The gaming industry continues to dominate the economy, but the utility's direct exposure is limited with the top 10 customers - mostly casinos and hotels - providing a moderate 9.8% of pre-consolidation revenues. Concentration is likely to fall with the merger.