AUSTIN, Texas--(BUSINESS WIRE)--Fitch Ratings downgrades the following North Texas Municipal Water District, TX (the district) revenue bonds:
--$50.2 million Panther Creek Regional System contract revenue bonds to 'A+' from 'AA-'.
The Rating Outlook is Stable.
RATING RATIONALE:
--The downgrade of the district to 'A+' from 'AA-' reflects a weakening of the city of Frisco, TX (the city or the participant) water and sewer system (the system) financial profile, particularly with regard to diminishing coverage and liquidity levels.
--City management is taking steps to evaluate additional rate increases, and there is significant rate flexibility given high median household income and comparable rates of other service providers in the area.
--The city's debt burden is expected to remain high but is somewhat offset by rapid amortization.
--Increases to cash management policy levels are under consideration.
--The Panther Creek Regional Wastewater System (PCRWS) provides an essential service to the city of Frisco, TX, a growing community with healthy economic underpinnings.
KEY RATING DRIVERS:
--Ability to implement rate increases sufficient to recover the district's cost of service is key to maintenance of the rating.
--City's ability to keep unrestricted operating funds above policy levels is fundamental to credit quality.
SECURITY:
The bonds are secured by a first lien on and pledge of the city of Frisco's system gross revenues and any future participant system revenues. The payments have a pledge that is on parity with all other contract payments made to the district and constitute an operating expense of the system.
CREDIT SUMMARY:
The downgrade reflects the continued deterioration of the city's financial profile over the past three years. With the decline in water and sewer system operating revenues in fiscal 2007 due to wet weather, net revenues available for debt service were insufficient and unrestricted cash was needed to ensure timely debt service payments. In fiscal 2008, a new water delivery point was added to the system, thus, reducing the amount of water previously delivered at two other sites and under a separate take-or-pay contract, the city was obligated to pay for the resulting superfluous supply at the original two delivery points that the city did not sell per the contract minimum. Additionally, system rates remained unchanged in fiscal 2008 despite the decline in operating revenues in fiscal 2007. Though the city was able to meet its NTMWD payment obligations, all-in ADS came in at just under 1.0 x thereby requiring the city to once again use unrestricted cash to pay a portion of debt service costs. As a result, rate increases were adopted for fiscal 2009; the average water bill was increased by 11% and the sewer bill was raised by 12%. Water rates had not been increased since 1994 and sewer rates had been increased only once (in fiscal 2007) since 1999. Despite the substantial rate increases, rates were not sufficient to offset the rise in fixed costs in fiscal 2009; all-in ADS came in at a lower 0.92x. The city was forced to draw on its unrestricted operating funds again, leaving reserves sufficient to cover just 42 days of operating expenses. Rate hikes totaling 26% for water and 13% for sewer, were adopted for fiscal 2010, bringing all-in ADS coverage levels above 1.0x for the year. Nevertheless, unrestricted cash ended at a five-year low of just three days of operating expenses. The average water and sewer bill was increased by 6% effective in Feb 2011. Per Frisco's fiscal 2011 budget, all-in ADS is projected to come in at 1.1x for the year.
The city plans to commence its annual rate study in May or June of this year recognizing the need to raise rates and pass-on annual district costs of service to ratepayers. Furthermore, while the city has a policy of maintaining 60 days of working capital in reserve, it plans to review its current policy and establish a higher liquidity target in the near future.
The city's system serves an estimated 40,000 water customers and 31,000 sewer customers. Water is supplied and sewer flows are treated by the district. Despite its recent customer rate increases, the city maintains significant rate flexibility. Frisco's combined utility service rates are affordable relative to city median household income levels, and should remain affordable for the foreseeable future.
Water and sewer system revenues support the debt service on approximately $118 million of outstanding certificate of obligation and general obligation bonds. When debt service payments made to the district on Frisco's portion of all outstanding contract revenue bonds are included in the city's outstanding debt, debt ratios are high with debt per capita at over $1,500 and debt to equity at nearly 15%; given the city's portion of planned district debt issuances over the next five-years is projected at just over $50 million, Frisco's debt ratios are forecast to remain elevated. The system currently has no future debt issuance plans of its own.
The fees imposed on Frisco by the district are set on a cost recovery basis; city monthly installments are comprised of district debt service payments, maintenance or replenishment of debt service reserve funds, and operations and maintenance costs for Frisco's allocable portion. The district provides water, sewer, and solid waste services to an estimated population of 1.6 million for 13 member cities including: Frisco, Plano, Richardson, McKinney, Allen, Garland, Princeton, Mesquite, Wylie, Rockwall, Farmersville, Forney and Royse City. NTMWD's service area encompasses 1,985 square miles and is governed by a 23 appointed member board, with at least one board member representing each community served. Service to members is governed by separate contracts with the district, with various revenues under those contracts used to secure separate debt securities issued by the district. Currently, the PCRWS only serves the community of Frisco, though it can and may add additional participants. The PCRWS was recently expanded from 5 to 10 million gallons per day (mgd) average capacity with proceeds from the series 2009 bonds.
Located approximately 20 miles north of Dallas, area transportation improvements and housing affordability have led to accelerated population growth in the city of Frisco over the past decade. Five-year population growth at the end of 2009 averaged a high 9.7%. Furthermore, wealth levels as measured by median household income are high at 2.0x and 1.9x state and national averages, respectively. Area unemployment levels at 6.9% as of December 2010 were below state (8%) and national (9.1%) levels for the same month.
Additional information is available at 'www.fitchratings.com'.
In addition to the sources of information identified in Fitch's U.S. Municipal Revenue-Supported Rating Criteria, this action was additionally informed by information from CreditScope.
Applicable Criteria and Related Research:
--'Revenue-Supported Rating Criteria', dated Oct. 8, 2010;
--'Water and Sewer Revenue Bond Rating Guidelines', dated Aug. 6, 2008;
--'2010 Water and Sewer Medians', dated Jan. 18, 2011;
--'2010 Water and Sewer Sector Outlook', dated Jan. 18, 2011.
For information on Build America Bonds, visit 'www.fitchratings.com/BABs'.
Applicable Criteria and Related Research:
Revenue-Supported Rating Criteria
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=564565
Water and Sewer Revenue Bond Rating Guidelines
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=395918
2010 Water and Sewer Medians
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=509146
2010 Water and Sewer Sector Outlook
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=499482
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