Fitch Rates Corpus Christi's (TX) $75MM Revs 'AA-'; Outlook Stable
Source: Business Wire
--$12.1 million series 2010A;
--$62.9 million series 2010 (taxable Build America Bonds - direct subsidy).
The bonds are expected to sell via negotiation on July 20 and are being sold to finance utility system improvements.
In addition, Fitch affirms the following ratings:
--$429.8 million in outstanding utility system revenue bonds at 'AA-'.
The Rating Outlook is Stable.
RATING RATIONALE:
--The utility's service area is stable and growing modestly.
--The city has secured long-term water supplies from multiple surface water sources.
--The utility's cash position improved last fiscal year and is projected to reach historical norms over the medium term.
--The sizeable capital improvement plan (CIP) will be almost entirely debt financed, further increasing the already high debt per customer burden.
--Additional rate increases will be required to fund the CIP, further increasing relatively high user rates, although past annual increases are indicative of the city's willingness to raise rates for needed capital improvements.
--Based on the city's conservative forecast assumptions, debt service coverage is projected to decline to the minimal level required for the issuance of additional bonds.
KEY RATING DRIVERS:
--The maintenance of adequate debt service coverage and liquidity levels are integral to maintaining credit quality.
SECURITY:
The bonds are secured by the net revenues of the city's combined utility system (the utility).
CREDIT SUMMARY:
Corpus Christi is the eighth largest city in Texas, with a population of over 280,000. The area economy is relatively diverse and stable, and unemployment rates at 7.1% as of May 2010 remain below county (7.5%), state (8%) and national (9.3%) averages. Major components of the economy include petrochemical, tourism, health care, and agriculture.
Water supply is derived from Lake Corpus Christi and Choke Canyon reservoirs in the Nueces River Basin and a 101-mile pipeline from Lake Texana, all of which contribute to a firm water supply yield that is expected to meet requirements through 2050. The gas utility serves all city residents and a few areas immediately outside the city limits, while the service area for the wastewater system is primarily within city limits.
Audited fiscal 2009 results indicate adequate ADS coverage at 1.8 times (x) priority lien debt service, which is above the fiscal 2008 margin of 1.5x. Nevertheless, ADS coverage remains lower than what it was at the start of the decade, when coverage was a high 4.0x. Given the scope of borrowings planned, coverage is projected to fall further and dip to 1.3x by fiscal 2011. Fitch is concerned that, despite the city's conservative forecast assumptions, rate increases beyond those already anticipated or a reduction in capital spending may be necessary to maintain operations at adequate levels. Currently, the city expects rate hikes averaging almost 6% through fiscal 2013. Because existing residential charges are approaching 2% of median household income, rate hikes beyond those already forecast may substantially burden system customers. Fiscal 2009 unrestricted cash and investments in relation to operating expenditures rebounded to 172 days cash on hand from 51 days cash on hand in fiscal 2008. Liquidity levels should further improve given that the CIP is anticipated to be predominantly debt funded.
The utility's sizable CIP and debt load continue to be a major credit risk. Including this issuance, the utility will have $505 million in priority lien bonds. In addition, more than $190 million of debt incurred by other authorities to provide water supply and transmission via the pipeline project is treated as a contractual operations and maintenance (O&M) expense, receiving payment from gross revenues prior to revenues being made available for system revenue bond debt service. The utility system also has $64 million in subordinate obligations outstanding through an agreement with the U.S. Department of the Interior (Bureau of Reclamation) for the city's remaining share of the Choke Canyon reservoir project.
As a result, debt ratios are high and are expected to continue to rise. The utility's three-year CIP covering fiscal years 2010-2012 totals more than $260 million, which is anticipated to be almost entirely debt financed. Projected CIP costs have stabilized after rising notably in recent fiscal years, climbing from an estimated $188 million six fiscal years ago. Future CIP totals are expected to moderate as the utility completes certain major projects. Given the tightening financial margins of the utility, continued reductions in CIP costs and projected debt issuances would be viewed favorably by Fitch.
The following sector credit profile is provided as background for investors new to the municipal market.
Water and Sewer Utility Revenue Bonds:
Municipal water and sewer utilities in the U.S. are enduring natural monopolies that typically have autonomous rate setting ability and provide highly essential services. The bonds are secured by a pledge of net revenues generated by the water and/or sewer system; and typically include structural legal protections such as rate covenants, debt service reserve requirements, and anti-dilution tests. As such, the sector exhibits extremely strong credit characteristics with minimal defaults. Reflective of this strong performance, the average water and sewer revenue bond rating is 'AA' with 86% at or above 'AA-' and approximately 2% rated 'BBB+' or below. Those with low investment-grade or below-investment-grade ratings generally have substantial capital programs, a high degree of leverage or weak financial flexibility as reflected in low cash levels, narrow debt service coverage and/or limited rate-raising flexibility.
Applicable criteria available on Fitch's web site at www.fitchratings.com:
--'Revenue-Supported Rating Criteria (Dec. 29, 2009);
--'Water and Sewer Revenue Bond Rating Guidelines' (Aug. 6, 2008).
Additional information is available at www.fitchratings.com.
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Contact:
Fitch Ratings, Austin
Julie Seebach, 512-215-3740
Mark Campa, 512-215-3727
or
Media Relations:
Cindy Stoller, 212-908-0526, New York
Email:
cindy.stoller@fitchratings.com
