Fitch Rates Canadian River Municipal Water Authority, Texas' Contract Revenues; Outlook Stable
Source: Business Wire
-- $5.9 million series 2010 (conjunctive use
groundwater supply project);
-- $10.7 million series 2010 (U.S. Bureau of Reclamation prepayment
project).
The bonds are expected to sell via negotiation on or about Jan. 14, 2010. Proceeds will be used to refund a portion of the authority's outstanding debt for interest savings without extension of the debt.
In addition, Fitch affirms the following ratings on the authority's outstanding contract revenue bonds:
-- $146.5 million conjunctive use
groundwater supply project (prior to the refunding) at 'AA-';
-- $10.3 million U.S. Bureau of Reclamation prepayment project (prior to the
refunding) at 'AA-';
-- $275,000 Lake Meredith salinity control project at 'AA-';
The Rating Outlook is Stable.
RATING RATIONALE:
-- The credit profile of Amarillo's utility
system (the largest member relating to the current offerings) is favorable.
-- Legal protections are strong and include a step-up provision in the event
of nonpayment by one or more members.
-- The authority provides an essential service to member agencies.
-- Apart from member agencies, the authority has some additional flexibility
from its own liquidity position.
-- The authority has a long and successful operating history.
-- The credit profile of Lubbock's water utility (one of the largest members
along with Amarillo on certain outstanding authority debt being affirmed) is
also good, although Lubbock's metrics have weakened in recent years.
KEY RATING DRIVERS:
-- Deterioration in the credit quality of
Amarillo likely would have an impact on the current offering as well as all
outstanding authority bonds.
-- Deterioration in the credit quality of Lubbock likely would have an
impact on the outstanding authority debt where Lubbock is a participant.
-- Continued exemplary payment performance by members is key to maintenance
of the 'AA-' rating.
SECURITY:
The bonds are secured by an irrevocable first lien on and pledge of payments derived from member cities pursuant to individual agreements relating to participation by members in each authority project financing. Project payments by member cities are an operations and maintenance expense of their respective utility, payable prior to debt service on the member cities' own bonds.
CREDIT SUMMARY:
The authority was organized in 1953 as a conservation and reclamation district to provide a source of water supply for its 11 member cities in the panhandle and south plains regions of Texas. The members are Amarillo, Borger, Brownfield, Lamesa, Levelland, Lubbock, O'Donnell, Pampa, Plainview, Slaton, and Tahoka. In addition to the water supplied by the authority, some member cities augment water resources through their own water supply projects. The authority functions as a wholesale provider of raw water, with the member cities providing for treatment and distribution separately.
The authority has undertaken three major projects to address the quantity and quality of water supplied to its member cities. A separate contractual agreement for each project governs the payments made by member cities to secure the authority's debt, to provide for payment of the authority's operating costs, and to regulate the allocation of water. Members may elect, on a project-by-project basis, to participate in the authority's bond financings or to make a cash deposit in escrow for their share of project construction costs. Members choosing to pay cash are not relieved of their obligation to pay operating expenses.
Member cities remit payments to the authority for their proportionate share of debt-financed projects, which is a fixed cost, as well as their share of operations and maintenance costs for pumping and transporting water. Payments by members to the authority, whether for debt service or operations of the authority, are a contractual operating expense of the cities' utility systems; the members are obligated to make up for nonpayment by defaulting members on a pro rata basis. In the event of nonpayment by a member city, that city's water rights will be transferred to those cities making up the payments. The agreements have been validated in the Texas courts.
Amarillo will account for around 53%, on average, of the debt service for these two transactions. Amarillo has a very strong water and sewer system characterized by sound liquidity, solid historical debt service coverage, and a stable and growing economy. Amarillo's combined water and sewer system has about $37 million in revenue debt outstanding. Legal provisions associated with the city's debt are good, including a rate covenant that requires the city to set rates sufficient to cover annual debt service (ADS) by at least 1.25 times (x). The additional bonds test requires that historical net revenues equal at least 1.25x maximum annual debt service (MADS) on outstanding and proposed bonds. In the case of nonpayment of debt service by all members, which is unlikely, Amarillo could pay the obligations. Amarillo's utility covered ADS on its own system revenue bonds by 4.5x for fiscal 2008; coverage is expected to remain above 2.0x through fiscal 2010. For the same period the system maintained close to $32 million in unrestricted cash and investment, equal to 350 days cash. The city has raised rates sufficiently so that the system typically recovers the system's full cost of service, and for fiscal 2008 free cash flow was exceptionally strong, equaling nearly 300% of depreciation.
Lubbock did not participate in the series 1999 bond financings relating to the U.S. Bureau of Reclamation prepayment project and conjunctive use groundwater supply project, which will be refunded by the current offerings. Instead, the city funded its proportionate share of project costs from its own resources. Consequently, Lubbock is not considered in the analysis related to the current offerings, but Lubbock does account for around 37% of the debt service related to three of the six remaining series of authority bonds. Lubbock is the largest of all the members in terms of population, having a stable and diverse service area. Lubbock's water system, while historically producing sound margins, has experienced softening in recent years as the city has issued a sizeable amount of debt related to new supplies. This has led to rising fixed costs, narrowing debt service coverage and declining liquidity. A significant amount of additional debt is planned over the next couple of years to complete the city's major water projects, which are forecasted to lead to continued tightening in debt service coverage almost annually through fiscal 2014 before beginning to rebound in fiscal 2015. As debt is being issued, the city has been, and is expected to continue, implementing ongoing rate hikes to accommodate the rising fixed costs. This has included a 42% rate increase in May 2009 and an additional 56% hike to base charges is budgeted for December 2010. As a result of the city's actions to date, reserve levels were increased by $3 million for unaudited fiscal 2009.
Applicable criteria available on Fitch's website at www.fitchratings.com:
-- 'Water and Sewer Revenue Bond Rating Guidelines', (Aug. 6, 2008).
Additional information is available at 'www.fitchratings.com'.
Contact:
Fitch Ratings
Cindy Stoller, +1-212-908-0526 (New York)
cindy.stoller@fitchratings.com
Julie Seebach, +1-512-215-3740 (Austin)
Doug Scott, +1-512-215-3725 (Austin)
