AUSTIN, Texas--(BUSINESS WIRE)--Fitch Ratings has affirmed its 'AAA' rating on the following Colleyville, Texas (the city) waterworks and sewer system (the system) bonds:
--$2,470,000 waterworks and sewer system revenue refunding bonds, series 2010
The Rating Outlook is Stable.
SECURITY
The bonds are secured by a pledge and first lien on net revenues of the system.
KEY RATING DRIVERS
CONSERVATIVE FINANCIAL MANAGEMENT: Conservative management is a positive credit factor, as evidenced by a stable operating history, historically strong debt service coverage and sound liquidity.
RATE FLEXIBILITY: Water and sewer rates remain well below 2% median household income (MHI) despite annual pass through rate hikes and above average water use. High wealth levels afford this flexibility given that the local MHI is nearly three times the national average.
LOW DEBT; LIMITED CAPTIAL NEEDS: The system features low leverage with rapid amortization, limited capital needs, and modest future debt plans.
RELIANCE ON WHOLESALE PROVIDER: The city is susceptible to operating cost pressure from Trinity River Authority (TRA), its wholesale water and wastewater provider. However, the city's policy is to pass-through rate hikes on an ongoing basis.
STRONG SERVICE AREA: The city's water and sewer system provides an essential service to a stable service area within the broad and diverse Dallas-Fort Worth metro area.
WHAT COULD TRIGGER A RATING ACTION
DECLINE IN DEBT SERVICE COVERAGE: Maintenance of adequate coverage ratios is essential to the current high rating level.
CREDIT PROFILE
The city is located in the Dallas Fort-Worth Metroplex, 11 miles northeast of Fort Worth and 22 miles northwest of Dallas. The system serves a population estimated at 22,000 with approximately 9,000 connections. The city is about 90% built-out and build-out is estimated at a population of 25,000.
SYSTEM OPERATIONS; RELIANCE ON TRA
Treated water is provided primarily by the TRA Tarrant County Water Project (approximately 60% of total supply) with the balance of supply coming from eight city wells. Under the contract with TRA (which extends through 2014), the city pays a participant share equal to just over 16% of TRA's operations and maintenance (O&M) expenses and debt service costs associated with the water project. For future water supply, the city may negotiate plans to extend service from TRA or may purchase treated water from the city of Fort Worth through an existing emergency interconnect with its neighboring city of North Richland Hills. Management reports a positive relationship with the TRA and the primary option is to renegotiate contract terms. The recent construction of a new groundwater storage tank on the western part of the city is projected to provide sufficient storage for full build-out.
The city's wastewater is treated by TRA's Central Regional Wastewater Project. The contract for wastewater treatment with TRA runs through 2025, and like the water contract the city makes equal monthly payments for TRA's O&M and debt service costs associated with the wastewater project based on its participant share (about 2% of projects costs). In both cases, the contract payments made by the city constitute an O&M expense of the system.
STRONG FINANCIAL METRICS
Annual debt service (ADS) coverage levels have remained consistently strong from fiscal 2007 - 2011, ranging between 1.8 times (x) to a high 4.7x and reflective of area weather volatility. The city annually budgets coverage levels at 1.2x, taking into account transfers out to the general fund. Five year projections from fiscal 2012 through 2016 anticipate coverage ranging from 1.2x to 2.3x, but given historical performance, Fitch expects actual results to be more favorable. Liquidity levels remained strong despite the $5 million water storage tank that was funded with available reserves. At the close of fiscal 2011, the city reported just over 300 days cash on hand and days of working capital. This represents nearly half of what was reported in fiscal 2007 but continues to exceed the city's policy of 90 days of working capital.
RATE FLEXIBILITY
It is the city's policy to pass through TRA rate increases and, as such, annual rate hikes have been implemented to maintain the system's strong financial metrics. Despite these pass-through adjustments, user charges are very low on an affordability basis (just 0.8% of MHI) given the city's high wealth levels that are approximately 3x the national average. User charges are also slightly below the average of seven other regional cities.
LOW LEVERAGE
The system's outstanding debt is low and future capital needs are limited. The most substantial needs are in conjunction with the expansion of state highway 26 which will require an estimated capital investment of $4 million to relocate utility lines. The timing of this project remains uncertain, but Fitch considers this to be manageable for the utility's current debt profile. Amortization of the system's existing $2.8 million outstanding debt is rapid with all principal retired in 2018.
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 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);
--'Water and Sewer Revenue Bond Rating Guidelines' (Aug. 10, 2011);
--'2012 Water and Sewer Medians' (Dec. 8, 2011);
--'2012 Outlook: Water and Sewer Sector' (Dec. 8, 2011).
Applicable Criteria and Related Research:
Revenue-Supported Rating Criteria
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=681015
U.S. Water and Sewer Revenue Bond Rating Criteria
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=647331
2012 Water and Sewer Medians
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=657111
2012 Outlook: Water and Sewer Sector
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=657110
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