AUSTIN, Texas--(BUSINESS WIRE)--Fitch Ratings downgrades its rating on the following Fort Worth, Texas (the city) outstanding revenue bonds:
--$530.7 million water and sewer system (the system) revenue bonds to 'AA' from 'AA+'.
The Rating Outlook is Stable.
SECURITY
The bonds are secured by a first lien on the net revenues of the combined water and sewer system including any additional pledged revenues. Pledged revenues exclude impact fees.
KEY RATING DRIVERS
WEAKENED FINANCIAL METRICS DRIVE DOWNGRADE: The downgrade reflects weak financial performance stemming from the city's lack of willingness to raise rates in the current fiscal year to offset reduced water sales. Given this unwillingness, Fitch is concerned that the city may be reluctant to implement the magnitude of rate increases needed to regain historical margins.
INCREASING PURCHASED WATER COSTS: The city's cost of purchased water is forecast to increase by approximately 9.5% annually over the next five years, which could result in rate pressure or narrowed financial margins.
MODERATELY HIGH DEBT BURDEN: System debt levels are moderate but high when taking into consideration off-balance-sheet debt of Tarrant Regional Water District (the district) and Trinity River Authority (the authority). Debt levels are projected to remain at similar levels over the forecast period. However, the debt load is offset by rapid direct debt amortization, with principal payout at 71% and 100% in 10 and 20 years, respectively.
LARGE AND DIVERSE REGIONAL ECONOMY: Fort Worth is a major anchor in the Dallas-Fort Worth regional economy, with a population of roughly 6.5 million.
RATING SENSITIVITIES
WEAKENED FINANCIAL RESULTS: A change in liquidity or total coverage levels could result in a change in the rating.
CREDIT PROFILE
WEAKENED BUT ADEQUATE FINANCIAL PROFILE
The system's financial operations are pressured and are now below Fitch's 'AA' category medians. Following one of the driest years on record, system financial performance dipped in fiscal 2012 as the city spent most of the year with water use restrictions in place leading to reduced system revenues. A few one-time expenditures did not help to offset the decline in water sales. Consequently, senior lien debt service coverage (DSC) dropped to 1.6x in fiscal 2012 (1.2x net of transfers out) and total DSC declined to 1.4x for the year (1.1x net of transfers out). Furthermore, the city failed to raise rates for fiscal 2013 after a year of weak financial performance.
City financial projections point to total DSC improving to over 2.0x by fiscal 2016. The forecast assumes additional annual rate hikes averaging 4% for water and 5% for sewer during fiscal years 2013 through 2017 and accounts for increased debt service costs from planned debt issuances. While there is some concern that DSC levels have been declining since fiscal 2006, the city has expressed its commitment to maintaining all-in coverage at its policy of 1.5x or above before transfers by adjusting rates as needed.
Liquidity levels were also affected by the drought, declining to 88 days cash on hand in fiscal 2012. While cash and investments levels are below Fitch's 'AA' category medians, the city annually contributes an impressive $50 million on average, or close to 40% of capital spending, in equity funding towards capital needs, resulting in a reduced liquidity position. Fitch will continue to monitor the system's financial performance. Some level of at least moderate rate increases during the forecast period will be necessary to preserve existing margins and allow for continued cash-funded capital spending. Maintenance of good DSC given below-average liquidity is a key credit consideration.
MANAGEABLE CAPITAL NEEDS BUT ABOVE-AVERAGE DEBT LOAD
The system's fiscal years 2014?2018 capital improvement plan (CIP) totals a manageable $693 million, with 42% devoted to water projects and 58% devoted to sewer projects. Approximately 63% of the CIP is projected to be funded with future debt, with the remainder to be funded from cash from operations. The system's leverage ratios are moderate, with debt per customer at $1,568 and debt to net plant at 38%.
Direct debt levels are projected to remain at similar levels over the next five years given upcoming debt plans and rapid principal amortization. However, including district and authority obligations supported by the system, system debt levels increase by around 60% and exceed category 'AA' rating median levels. Fitch expects this level to rise, as the district has significant additional debt plans.
WATER SUPPLY AND RISING RATES
All of the city's water is purchased from the district. Fort Worth is the district's largest customer, accounting for 58% of the district's sales. The district's debt burden is estimated to increase by 94% over the fiscal years 2013 - 2017, translating into higher purchased water costs for the city.
The district's proposed rate increases for the city average 9.5% over the next five years. Purchased water costs comprise one-third of the city's operating expenses. Thus, as the district ramps up its capital plan, rate adjustments will be necessary to support rising wholesale pass-through costs.
The combined water and sewer monthly bill of $62.46 (assuming usage of 7,500 gallons per month for both water and sewer) equals a moderate 1.5% of median household income, providing the system sufficient rate flexibility. The city council has typically adjusted rates when necessary, and it will be important that this continue in order to keep purchased water costs from eroding financial performance and to ensure adequate funding of capital.
SERVICE AREA
The system provides retail service to the city and a portion of the surrounding area through over 200,000 separate user accounts. The system continues to record steady customer growth, averaging 3% annually over the past five years. With an estimated 2012 population of about 754,000, Fort Worth's population continues to grow (up 3.3% annually since 2006). In addition, the city's extraterritorial jurisdiction is sizable and provides opportunity for future annexation and growth.
The metropolitan area employment base is extensive, and while military-related spending still accounts for an estimated one-quarter of the economy, recent gains in other sectors, such as services, construction, and trade have helped diversify the labor force. The city's unemployment rate at 6.7% for January 2013 is slightly below county (6.8%) and state (6.9%) levels, and well below the national unemployment rate for the month (8.5%). City wealth levels approximate those of the state but are about 5% below the national average.
Additional information is available at 'www.fitchratings.com'. The ratings above were solicited by, or on behalf of, the issuer, and therefore, Fitch has been compensated for the provision of the ratings.
In addition to the sources of information identified in the U.S. Municipal Revenue-Supported Rating Criteria, this action was additionally informed by information from Creditscope and the Municipal Advisory Council of Texas.
Applicable Criteria and Related Research:
--'Revenue-Supported Rating Criteria' (June 12, 2012);
--'U.S. Water and Sewer Revenue Bond Rating Criteria' (Aug. 3, 2012);
--'2013 Water and Sewer Medians' (Dec. 5, 2012);
--'2013 Outlook: Water and Sewer Sector' (Dec. 5, 2012).
Applicable Criteria and Related Research
2013 Outlook: Water and Sewer Sector
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=695755
2013 Water and Sewer Medians
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=695756
U.S. Water and Sewer Revenue Bond Rating Criteria
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=684901
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.