News Column

Fitch Upgrades Susanville PFA, CA's Water & Gas Utility Revs to 'A' & 'BBB+'; Outlook to Stable

May 15, 2014

NEW YORK--(BUSINESS WIRE)-- Fitch Ratings upgrades the following ratings for Susanville Public Financing Authority (Susanville PFA), CA:

--$9.1 million senior lien revenue refunding bonds to 'A' from 'A-';

--$25.1 million subordinate lien revenue refunding bonds to 'BBB+' from 'BBB'.

The Rating Outlook on all bonds is revised to Stable from Positive.

SECURITY

The bonds are secured by installment payments made by the city of Susanville, CA from its water and gas enterprise systems to the Susanville PFA, which has assigned those payments to the bond trustee. The payments from the city of Susanville are absolute and unconditional.

KEY RATING DRIVERS

STRONG CASH RESERVES: The upgrade on both series of bonds reflects continued positive cash flow and strengthened reserves at the gas system, which has strengthened the underlying credit quality of both the senior and subordinate lien ratings.

SENIOR/SURBORDINATE BOND STRUCTURE: Both series of bonds are secured by unconditional installment payments made by the City of Susanville's water and gas enterprise systems. However, subordinate lien bonds are effectively secured only by gas system revenues.

SHARED RATE STABILIZATION FUNDS: The two series of bonds share the benefit of each system's respective rate stabilization fund, which can be used to support a shortfall of either series of bonds. Debt service reserve funds are in place for each series but do not provide cross-support to the other series.

LIMITED SERVICE AREA: The systems operate in a limited and concentrated local service area economy. Wealth levels are below state and national averages and unemployment in the county is high at 10.6% in 2013. Government employment accounts for more than 50% of the city's work force.

STABLE WATER SYSTEM: The rating on the senior lien bonds reflects the modest but stable financial margins of the water system, low treatment and delivery costs, diverse but small customer base and very high debt burden.

GROWING GAS SYSTEM: The rating on the subordinate lien bonds reflects the positive cash flows at the gas system, system growth through continued conversion of customers to natural gas, risk of revenue variability, low commodity costs, and a debt burden which remains high since start-up financing of the system that began service in 2001.

RATING SENSITIVITIES

DECLINE IN RESERVE LEVELS: Depletion of the strong cash reserves at both systems could pressure the rating and/or outlook of either series of bonds.

INCREASED NATURAL GAS PRICES: Upward movement in the price of natural gas as compared to heating oil and propane over time could result in reduced revenues to the gas system given the city's use of a variable rate structure for certain large gas customers.

CREDIT PROFILE

UPGRADE REFLECTS IMPROVED CASH RESERVES AT GAS SYSTEM

The gas system has built its cash reserves from $84,000 at the end of fiscal 2010 to $3.2 million at the end of fiscal 2013, or 526 days operating cash. Stronger cash flow than originally projected has resulted from low natural gas prices and faster paced customer conversions within the city from traditional heating sources such as propane and heating oil.

The growth in gas reserves to such strong levels mitigates concerns regarding the impact to financial margins that could occur from the variable-rate structure and the potential use of water system rate stabilization funds for gas system purposes.

SENIOR/SUBORDINATE BOND STRUCTURE IS COMPLEX

While the senior and subordinate bonds enjoy a combined pledge of both systems, the difference in Fitch's two ratings reflects the structure of the payments and a dependence of the subordinate lien bondholders on payments from the city's natural gas system. Fitch views the natural gas system as weaker in credit quality than the water enterprise, largely because of its growth through the conversion of existing customers to natural gas, vulnerability to commodity price variability in its rate structure, and its slowly amortizing and escalating debt burden.

The bond repayment structure is complex. The installment sale agreements that the Susanville Public Financing Authority has with each enterprise system only requires each system to make payments equal to the debt service on one series (series 2010A debt service in the case of the water system and series 2010B debt service in the cash of the gas system). There is no requirement for either system to make additional payments in the event the other system does not make its full payment to the trustee. The only degree of cross-over support is from the rate stabilization funds.

LIMITED AND CONCENTRATED SERVICE AREA

The City of Susanville is located in northeastern California, approximately 85 miles northwest of Reno, Nevada and 135 miles northeast of Sacramento, California. Susanville is the county seat of Lassen County. Its location is fairly remote, and the local economy is concentrated in the employment provided by three prisons (two state and one federal).

Susanville has a city population of around 9,500 and much of the city's economy revolves around two large correction facilities with a combined prison population of around 6,500. The two prisons account for close to 50% of the city's employment. The prisons are not direct customers of either the water or gas enterprise systems. They have their own water and natural gas supplies, but they do use portion of the city's natural gas distribution system for transportation services.

STABLE WATER ENTERPRISE

Financial performance of the water system is modest but consistent. Debt service coverage has averaged 1.7x over the past three years, resulting in surplus revenues annually of between $0.33 million and $0.67 million. Liquidity is exceptionally strong with $4 million at the end of fiscal 2012, or 1,186 days operating cash. The rate stabilization fund, required to be maintained by the indenture, accounts for $3 million of the unrestricted cash. Without the $3 million reserve, cash levels are still strong at 304 days operating cash.

Debt levels are high at $2,320 per customer for a system with limited treatment operations. Amortization of outstanding debt is average, with 32% repaid in 10 years and 80% maturing in 20 years. Debt to net plant is 138%, reflecting the older age of the system assets and debt that exceeds net plant value. However, the enterprise fund does not anticipate additional debt issuance in the near future.

GAS ENTERPRISE GENERATING POSITIVE MARGINS

During its initial years, the start-up nature of the gas enterprise resulted in the need for the gas system to rely on the city's general fund and water fund for operating cash. In fiscal 2010, the system began to break even, including coverage of its debt obligations, no outstanding loans from the water system or general fund, and positive year end cash reserves.

The city has continued to build its reserves through consistent customer growth and lower than budgeted natural gas prices on the un-hedged portion of its portfolio. Unrestricted cash totalled $3.2 million at the end of fiscal 2013, including the $1.807 million rate stabilization fund required by the indenture.

Debt levels at the gas system are high and will remain high with the slow amortization, with 13% of principal repaid in 10 years and 40% in the next 20 years. Debt service coverage in fiscal 2013 was 1.53x. Coverage of maximum annual debt service with fiscal 2013 revenues was adequate at 1.26x, given the continued potential customer growth at the system.

RATE STRUCTURE RISK

The city's gas rates do not include a fuel cost adjustment to track movement in natural gas prices, as is typically done by investor-owned utilities. However, commodity price risk is reduced by the city's practice of forward hedging for much of its winter gas needs. While this may result in above-market prices given the nature of purchasing ahead, it provides a more known and stable gas cost to the utility.

The city's rate structure is exposed to variability in that 23% of its revenues are under variable rate pricing that allows customers to pay the lowest fuel cost of natural gas, propane, and fuel oil. The relatively low natural gas price environment seen in recent year is expected to continue, reducing any near-term risk from this rate structure.

Additional information is available at 'www.fitchratings.com'.

Applicable Criteria and Related Research:

--'U.S. Public Power Rating Criteria', March 18, 2014;

--'U.S. Water and Sewer Revenue Bond Rating Criteria', July 31, 2013.

Applicable Criteria and Related Research:

U.S. Public Power Rating Criteria

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=740841

U.S. Water and Sewer Revenue Bond Rating Criteria

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=715275

Additional Disclosure

Solicitation Status

http://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=830345

ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: HTTP://FITCHRATINGS.COM/UNDERSTANDINGCREDITRATINGS. IN ADDITION, RATING DEFINITIONS AND THE TERMS OF USE OF SUCH RATINGS ARE AVAILABLE ON THE AGENCY'S PUBLIC WEBSITE 'WWW.FITCHRATINGS.COM'. PUBLISHED RATINGS, CRITERIA AND METHODOLOGIES ARE AVAILABLE FROM THIS SITE AT ALL TIMES. FITCH'S CODE OF CONDUCT, CONFIDENTIALITY, CONFLICTS OF INTEREST, AFFILIATE FIREWALL, COMPLIANCE AND OTHER RELEVANT POLICIES AND PROCEDURES ARE ALSO AVAILABLE FROM THE 'CODE OF CONDUCT' SECTION OF THIS SITE. FITCH MAY HAVE PROVIDED ANOTHER PERMISSIBLE SERVICE TO THE RATED ENTITY OR ITS RELATED THIRD PARTIES. DETAILS OF THIS SERVICE FOR RATINGS FOR WHICH THE LEAD ANALYST IS BASED IN AN EU-REGISTERED ENTITY CAN BE FOUND ON THE ENTITY SUMMARY PAGE FOR THIS ISSUER ON THE FITCH WEBSITE.



Fitch Ratings

Primary Analyst

Hugh Welton

Director

Fitch Ratings, Inc.

33 Whitehall Street

New York, NY 10004

or

Secondary Analyst

Kathy Masterson

Senior Director

+1-512-215-3730

or

Committee Chairperson

Joanne Ferrigan

Senior Director

+1-212-908-0723

or

Media Relations

Elizabeth Fogerty, +1-212-908-0526

elizabeth.fogerty@fitchratings.com

Source: Fitch Ratings


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