Fitch Rates Modesto Irrigation District (CA) Electric Revs 'A+'; Outlook Stable.

SAN FRANCISCO -- Fitch Ratings assigns an 'A+' rating to the Modesto Irrigation District's (MID) $145 million of series 2006A certificates of participation (COPs). The Outlook is Stable. Fitch also affirms the 'A+' rating on MID's parity certificates of approximately $392 million and the senior lien revenue bonds. The COPs are secured by a leasehold interest in rental payments made by the Modesto Irrigations District from electric revenues. Approximately $78.5 million of the series 2006A bonds will be used to defease the remaining senior lien revenue bonds, and the rest of the proceeds will fund system improvements, primarily related to electric distribution. Following the defeasance of the outstanding senior lien bonds, the series 2006A and parity certificates will become the senior lien. The series 2006A certificates are scheduled to price in a negotiated sale on July 12 with Bear Stearns as the lead manager.

The 'A+' rating is supported by a power portfolio that includes an advantageous low-cost hydroelectric contract with the City and County of San Francisco (CCSF), formal risk management policies that serve to reduce the cost volatility associated with MID's reliance on natural gas and purchased power, management's commitment to cost recovery as evidenced by six years of annual rate increases needed to meet increased purchased power costs and ongoing capital needs, and a solid financial position with healthy cash reserves of over 222 days of operating expenses, projected debt service coverage of above 1.5 times (x) and stable revenue growth.

Credit concerns are limited, as reflected by the 'A+' rating. However, MID does confront ongoing cost exposure in its power supply portfolio as a result of its dependence on purchased power and natural gas-fired resources, 68% in 2005. The degree of dependence fluctuates with the amount of excess power available through its contract with CCSF, which is influenced by the variability of annual hydro conditions at the Hetch Hetchy Project. MID mitigates the cost volatility through its risk management practices and use of its rate stabilization fund.

MID's financial position is healthy and financial metrics are comparable to other 'A+' rated entities, with the exception of debt levels, which are high for a retail system with much of its generation and transmission needs financed off-balance sheet (MID is a participant in M-S-R Joint Action Agency and the Transmission Agency of Northern California). In fiscal 2005, debt service coverage was 1.61x and cash reserves totaled $135 million (including $53 million in its rate stabilization fund). While MID's equity to capitalization is low at 8%, its operating leverage has improved with a debt/funds available for debt service (FADS) of 8.2x, compared to debt/FADS of 23.5x in 2002. Additionally, MID has no additional debt plans for the electric system for the next five years.

MID is an integrated electric system providing electric service to approximately 108,000 customers, mostly residential and commercial users, in rural central California (90 miles east of San Francisco). Industrial users accounted for a relatively moderate 21% of operating revenues in 2005. The largest user, E&J Gallo Wines, accounts for 6% of operating revenues, and is under a long term contract with MID through 2008. Only around 20% of MID's power supply is provided by owned resources, including hydro and natural gas resources, and the remaining amount is purchased through long- and short-term contracts, including the CCSF contract.

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