AUSTIN, Texas--()--Fitch Ratings assigns an 'AA' rating to the following Canadian River Municipal Water Authority, TX (CRMWA) revenue bonds:
--Approximately $46.2 million subordinate lien contract revenue refunding bonds (conjunctive use groundwater supply project), series 2012.
The bonds are expected to sell via negotiation the week of Dec. 17. Proceeds will be used to refund a portion of the authority's outstanding contract revenue bonds, series 2005 and to pay costs of issuance.
In addition, Fitch affirms the following ratings:
--$129.6 million senior lien contract revenue bonds (conjunctive use groundwater supply project) at 'AA' (pre-refunding);
--$81.6 million subordinate lien contract revenue bonds (conjunctive use groundwater supply project) at 'AA';
--$7.5 million contract revenue bonds (U.S. Bureau of Reclamation Prepayment Project) at 'AA'.
The Rating Outlook is Stable.
The bonds are secured by an irrevocable lien on and pledge of the project payments that is junior and subordinate to the first lien pledged to the senior lien bonds. Project payments are derived from the member cities pursuant to individual agreements relating to participation by members in each authority project financing. Project payments by member cities are an operating expense of their respective utility, payable prior to debt service on the member cities' own bonds.
KEY RATING DRIVERS
Good Financial Profile: The credit profiles of the two largest members' utility systems (Amarillo and Lubbock) are favorable. In addition, the authority has flexibility from its own healthy liquidity position.
Strong Legal Covenants: Legal protections are strong and include a step-up provision in the event of non-payment by one or more members. No member has ever defaulted on any of its payments to the authority in the authority's extended operating history.
Ample Water Supply: Existing and additional groundwater rights are estimated to ensure members' water needs are met for the next 130 years.
Essential Service: The authority provides an essential service to eleven member agencies.
WHAT COULD TRIGGER A RATING ACTION
Weakened Financial Profiles: Deterioration in the credit quality of Amarillo or Lubbock and/or deterioration in authority's own financial position likely would have an impact on the rating.
Fitch's analysis focuses on the systems of Amarillo and Lubbock, as these two cities are responsible for most of the authority's debt and operating charges.
AMARILLO EXHIBITS STRONG, CONSISTENT FINANCIAL PROFILE
Amarillo will account for around 41%, on average, of the debt service for this transaction. Amarillo has a strong water and sewer system characterized by sound liquidity, solid historical debt service coverage; it also benefits from a growing economy. Amarillo's combined water and sewer system has about $148 million in revenue debt outstanding.
Due to a 10% rate increase and all time high water sales resulting from severe drought conditions, the city saw record revenues in fiscal 2011 followed by the second best revenue total in fiscal 2012. Annual debt service (ADS) coverage on the system's own revenue bonds was a robust 3.9x for fiscal 2011, and coverage is expected to remain above 3.4x for fiscal 2012. For the same period, the system maintained close to $43 million in unrestricted cash and investment, equal to 464 days cash on hand (DCOH). The city has raised rates sufficiently so that the system typically recovers the full cost of service. For fiscal 2011, free cash flow was exceptionally strong, equaling 280% of depreciation.
Legal provisions associated with Amarillo's utility debt are sound, including a rate covenant that requires the city to set rates sufficient to cover maximum annual debt service (MADS) by at least 1.25x. The additional bonds test requires that historical net revenues equal at least 1.25x MADS on outstanding and proposed bonds. In the case of nonpayment of CRMWA debt service by all members, which is unlikely, Amarillo could pay all of the authority's obligations.
LUBBOCK FINANCIAL METRICS SOLID, IMPROVING
Lubbock accounts for around 37% of the debt service related to five of the eight series of authority bonds, including the current debt issuance. Lubbock is the largest of all the members in terms of population, having a stable and diverse service area. In recent years, Lubbock's water system financial margins have improved, due in part to record water sales coupled with rate increases. DCOH at nearly 555 has significantly improved after the enactment of 16%, 35%, and 13% water rate increases in fiscal years 2008, 2009 and 2011, respectively. Similarly, all-in ADS coverage improved to 1.9x in fiscal 2011 from a five-year low of 1.3x in fiscal 2008.
Lubbock expects to issue a significant amount of additional debt in the near future to complete its own major water projects. However, based on planned rate increases over the next several years, the city is forecasting relatively steady ADS coverage margins through fiscal 2018.
AUTHORITY SUPPLIES WATER TO MULTIPLE CITIES
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 include 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, including a surface water project (Lake Meredith), and a groundwater supply project. 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. However, members choosing to pay cash are not relieved of their obligation to pay authority operating expenses.
Member cities remit payments to the authority for their proportionate share of debt-financed projects 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. In addition, 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, the defaulting city's water rights will be transferred to those cities making up the payments. The agreements have been validated in the Texas courts.
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 Fitch's 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);
--'Water and Sewer Revenue Bond Rating Guidelines' (Aug. 3, 2012);
--'Tax-Supported Rating Criteria' (Aug. 14, 2012);
--'U.S. Local Government Tax-Supported Rating Criteria' (Aug. 14, 2012).
Applicable Criteria and Related Research:
Revenue-Supported Rating Criteria
U.S. Water and Sewer Revenue Bond Rating Criteria
Tax-Supported Rating Criteria
U.S. Local Government Tax-Supported Rating Criteria