Fitch Rates Central Arizona Water Conservation District, AZ Revenue Bonds 'AA'; Outlook Stable
Fitch Ratings has assigned a 'AA' rating to the following bonds:
--Approximately $50 million water delivery operation and maintenance
(O&M) revenue bonds, series 2016.
Bonds are expected to price during the week of Jan. 18, 2016. Proceeds
will finance transmission projects related to power delivery, pay costs
of issuance, and fund a debt service reserve fund.
The Rating Outlook is Stable.
SECURITY
Bonds are payable from gross revenues only from two distinct revenue
streams at the district - fixed operating & maintenance charges and bond
replacement charges. The district's other revenue streams, including
charges for federal debt repayment, power delivery and ad valorem taxes,
are not pledged to bondholders.
KEY RATING DRIVERS
LARGE REGIONAL WHOLESALE SUPPLIER: Central Arizona Water Conservation
District (CAWCD) distributes approximately 1.5 million acre-feet of
water through the Central Arizona Project (CAP). The project provides an
essential surface water supply in the state and water sales exhibit a
high degree of consistency from year to year.
CONTRACT STRENGTH AND CUSTOMER DIVERSITY: Raw water is delivered in
accordance with 63 long-term contracts to a service area of 5.3 million
people, or 80% of the state's population. Payments from customers must
be received prior to water delivery or CAWCD has the right to withhold
water delivery. Pledged revenues for deliveries to 11 Indian communities
(around 50% of total pledged revenues) are paid by the federal
government.
HEALTHY OVERALL FINANCIAL PERFORMANCE: The district's overall financial
performance is healthy with stable water delivery revenues, robust
reserves and healthy debt service coverage. Variations in total debt
service coverage of the federal repayment obligation have occurred due
to declines in power revenues provided by excess energy sales.
LIMITED REVENUE PLEDGE: Bondholders have a limited pledge on district
general fund revenues, which includes only O&M charges and the bond
replacement charge. The majority of district revenues are restricted for
specific obligations such as the federal repayment obligation,
operations or capital investment.
MANAGEABLE DEBT POSITION: Debt-to-plant is high at 86%, as is typical
for a wholesale entity, but debt per capita is low at $222, reflecting
the large service area. The district has manageable capital needs and
funds most of its required capital from ongoing revenues provided by the
replacement charge and tax revenues.
RATING SENSITIVITIES
REVENUE PROTECTION IN WATER SHORTAGE: Low water levels in Lake Mead
could trigger a shortage allocation as early as 2017, which would reduce
the Central Arizona Project (CAP) allocation from 1.5 million acre-feet
(MAF) to 1.18 MAF. The Stable Outlook reflects Fitch's expectation that
the annual cost-based rate-setting process will protect revenue
stability by recovering full costs through a higher charge per acre-foot
of water sales.
CREDIT PROFILE
CAWCD was created by the Arizona legislature in 1971 to operate the
Central Arizona Project (CAP) and repay the federal government for
construction costs. The CAP transports 1.5 MAF of Arizona's allocation
from the Colorado River to three counties in central and southern
Arizona. The CAP is defined to include a 336-mile aqueduct, the New
Waddell Dam, modified Roosevelt Dam and the Bureau of Reclamation's
24.3% share, or 547 megawatts (MW), of the Navajo Generating Station
(NGS). The CAWCD and the Bureau of Reclamation entered into a Master
Repayment Agreement that governs CAWCD's rights to operate, deliver
water and collect revenues from the project and repay the federal
government for reimbursable costs of the CAP. The reimbursable costs
generally account for the portion of the project not allocated to the
Indian communities.
ESSENTIAL COMPONENT OF ARIZONA'S WATER SUPPLY
The CAP is an essential component of Arizona's water supply that was
built in order to alleviate the state's previous over-pumping of its
groundwater supplies. The CAP now accounts for 39% of the state's water
supply, and groundwater has declined to 40% with other surface sources
and limited re-use providing the remaining supplies. The CAP provides
strong water availability to support compliance with Arizona's Assured
Water Supply program, which began in 1980 and requires new development
in the state to demonstrate access to a continuous 100-year water supply.
CAWCD distributes CAP water to four customer groups: municipal and
industrial (33% of sales in 2014), Indian communities (35%), agriculture
(26%) and underground storage (6%). The municipal and industrial
customer class includes 52 purchasers with 100-year entitlement
contracts. The largest purchasers include the cities of Tucson, Phoenix,
Scottsdale and Mesa. The next largest customer group is the 11 Indian
communities that have long-term contracts with the Bureau of Reclamation
for CAP water. Largest purchasers include the Gila River Indian
Community and the Ak-Chin Indian Community. Indian communities can use
their allocations for any purpose, including agriculture or leasing
water rights to other parties.
LIMITED BONDHOLDER PLEDGE; STRONG RATE SETTING
The district's water rates consist of 1) fixed operations, maintenance
and replacement charges, 2) pumping energy charges and 3) capital
charges. Pledged revenues are limited to the fixed O&M rate and the bond
replacement charge (initially estimated at $2.60 per acre-foot)
component of the overall 'Big R' charge. The bond replacement charge is
sized to provide sufficient revenues to pay level debt service on the
series 2016 bonds. Remaining replacement charges are sized sufficient to
pay for ongoing capital improvements needed on the CAP.
The operations, maintenance and replacement charges are established each
year by dividing forecasted costs by the amount of acre-feet scheduled
for delivery to all customers, although the rate is paid directly only
by the district's municipal and industrial customers, the Indian
communities and excess water users. The operations, maintenance and
replacement charges attributable to agricultural water sales are covered
by the district's property tax revenues. In the event of a shortage
declaration on the Colorado River, the CAP allocation would decrease by
320,000 acre-feet in a Tier I declaration. If this occurs, the
established operations, maintenance and replacement rate would increase
to compensate.
Pumping energy charges are paid by all customers and directly recover
energy costs related to the transmission of CAP water through the
aqueduct. Pumping energy charges in 2015 are roughly equal to the
operations, maintenance and replacement charges. Energy charges
represent a significant cost of CAP operations. The final charge, the
capital charge is assessed on water sales to municipal and industrial
customers and excess water users to repay Arizona's repayment obligation
to the federal government for a portion of the CAP construction costs.
The Indian communities are not assessed this charge, since Arizona is
not repaying the amount of construction costs attributable to the
federal share of the CAP.
The overall cost of delivered untreated water to municipal and
industrial customers in 2015 was $179 per acre-foot, which includes the
$22 per acre-foot capital charge. The charge to the Indian communities
was $157 per acre-foot and the charge to agriculture purchasers was $75
per acre-foot, which represents just the pumping energy charge.
IMPORTANCE OF NAVAJO GENERATION STATION
The Bureau of Reclamation is the largest owner (547 MW) of NGS, a 2,250
MW coal-fired generation plant located in northeastern Arizona on the
Navajo reservation. NGS provides 90% of the CAWCD's power supply.
Furthermore, the owned capacity exceeds the district's own energy
requirements and revenues from excess energy sales are used to pay a
portion of the federal repayment obligation. These revenues declined
from $46.8 million in fiscal 2011 to less than $30 million in fiscals
2012-2014 as a result of lower natural gas commodity prices and
softening energy prices across the region. As a result, the district
capital charge has increased from $15 in fiscals 2010-2013 to $22 per
acre-foot in fiscal 2015. NGS's ability to remain operational and meet
increasing U.S. environmental standards affecting coal-fired generation
plants will have a direct impact on the district's financial margins and
the overall cost of water.
HEALTHY OVERALL FINANCIAL MARGINS
Overall financial performance of the district's general fund is healthy.
Fitch calculated total debt service coverage of the federal repayment
obligation (including tax receipts) was 2.25x in fiscal 2014. Mid-year
results in fiscal 2015 indicate still strong coverage of approximately
1.8x. Such strong coverage levels reflect the district's practice of
collecting replacement revenues typically sufficient to fund ongoing
capital needs from rates and tax receipts that were increased in fiscal
2013 to bolster reserves. The bond funding of transmission-related
projects is atypical, and reflects the large cost of the projects and
the potential impact to rates if funded on a pay-as-you-go basis.
Total debt service coverage levels have fluctuated, declining to a
low-point of 1.29x in fiscal 2012. The lower coverage reflects a decline
in excess power sales revenues, driven by the expiration of a contract
with Salt River Project (SRP) and declining energy market prices. Excess
power revenues are used to repay the district's federal repayment
obligation; the revenues offset the amount of repayment that must be
collected in district capital charges. Excess power revenues declined
from $46.8 million in fiscal 2011 to $21.6 million in fiscal 2012, then
improved to around $29 million in fiscals 2013 and 2014. They are
expected to remain around this level, based on a minimum contractual
payment under a new contract with SRP.
The district has very strong liquidity levels. Reserves of $119 million
of general fund unrestricted cash and investments at the end of fiscal
2014 equaled 235 days operating cash. This does not include other
strategic reserves that are board-designated. Total strategic reserves
were $201 million at the end of fiscal 2014, which is slightly below the
district's target of $221 million. In addition to its strategic
reserves, the district began funding an extraordinary cost reserve when
it raised its tax rate in fiscal 2013. The extraordinary cost reserve is
building cash to mitigate potential future energy costs, including NGS
related or other unanticipated costs.
Additional information is available at 'www.fitchratings.com'.
In addition to the sources of information identified in Fitch's
Revenue-Supported Rating Criteria, this action was additionally informed
by information from Creditscope.
Applicable Criteria
Revenue-Supported Rating Criteria (pub. 16 Jun 2014)
https://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=750012
U.S. Water and Sewer Revenue Bond Rating Criteria (pub. 03 Sep 2015)
https://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=869223
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