AUSTIN, Texas--()--Fitch Ratings affirms the following Cleburne, Texas (the city) revenue bonds at 'AA-':
--$4.3 million waterworks and sewer system (the system) revenue refunding bonds, series 2010;
--$10.2 million waterworks and sewer system revenue refunding and improvement bonds, series 2006.
The Rating Outlook is Stable.
The bonds are secured by a first lien on net revenues of the water and wastewater system.
KEY RATING DRIVERS
SOUND FINANCIAL PROFILE: Financial performance is sound and is expected to remain adequate through the forecast period.
LIMITED RATE FLEXIBILITY: The city prudently adopted a series of annual rate increases to counter the anticipated rise in fixed costs. Rates are high relative to median household income levels (MHI), which may limit future rate flexibility.
HIGHLY LEVERAGED: Leverage ratios are high, but are somewhat mitigated by relatively modest near to mid-term capital needs.
CONCENTRATED CUSTOMER BASE: The top 10 water users account for more than 20% of total water sales, although these have had stable water usage.
AMPLE REGIONAL ECONOMY: The city benefits from its location within the Dallas-Fort Worth regional economy. Prospects for future growth are positive given the expansion of State Highway 21 currently underway, scheduled for completion in 2014.
Located in the Dallas-Fort Worth metroplex, Cleburne is 30 miles south of Fort Worth and 55 miles southwest of Dallas. As the former site of Santa Fe Railroad's shop yard, the city's economy diversified into manufacturing and distribution after the yard's closing in the 1980s with further diversification into natural gas extraction given its location over the Barnett Shale formation. As the seat of Johnson County, its estimated 2012 population of 30,000 is approximately 20% above its 2000 census level. Given the expansion of State Highway 121 (that will connect the city to Fort Worth) that is currently underway, growth is anticipated to accelerate in the medium term.
SOUND FINANCIAL METRICS
Financial performance has been solid with all-in debt service coverage ranging between 1.8x and 2.4x, before transfers, in the last five audited fiscal years. The city's internal goal is to maintain 1.4x coverage with ongoing revenues and 1.6x including the rate mitigation fund. The strong coverage levels reflect a series of rate hikes that were implemented ahead of the rising debt service costs resulting from recent debt issuance.
The city projects the strong fiscal 2012 all-in debt service coverage of 2x to decline to about 1.4x in fiscal 2013 as additional debt service costs are rolled in. Moreover, the city's five year forecast (2013-2017) all-in ADS coverage from net revenues before transfers is projected to range between 1.4x and 1.6x. After transfers to the general fund and performance contract, the projected coverage is a low 1x to 1.2x. Fitch notes that the city's forecasted all-in ADS coverage is below the median for the 'AA' rating category; however, actual results have typically been higher than forecast.
System liquidity has improved over the past two fiscal years commensurate with rate hikes. At the close of fiscal 2011, the city had a high 328 days of cash on hand. Liquidity is enhanced by the rate mitigation fund which is funded with revenues in excess of 45 days of operating reserves and totals $2.9 million. To date the city has not drawn on the rate mitigation fund. Liquidity levels are expected to remain healthy, but lower than current levels, as the city utilizes cash to fund planned capital outlays.
HIGH, DECLINING CUSTOMER CONCENTRATION
The system's top 10 water customer concentration in fiscal 2011 at nearly 25% is considered high and the top 2 individually comprise more than 5% each. However, this customer concentration has diversified over the last eleven years (from 32% in fiscal 2000). Moreover, Fitch notes that the top two users' accounted for a lower percentage of total consumption in fiscal 2011 (13%, compared with 18% in fiscal 2000) while their combined consumption increased 5%, reflective of the stability of these enterprises and economic diversification over those years.
AMPLE WATER SUPPLY
The waterworks and sewer system provides treatment, distribution, collection and disposal services within Cleburne's city limits and certain outlying areas. In fiscal 2011, the city served 11,473 water and sewer customers. Lake Pat Cleburne is the city's primary water source, which it supplements with raw water transported from Lake Aquilla via a 34-mile pipeline. A local well field provides additional water for peaking purposes. The city's water supply will be adequate through 2045-2050 due to its remaining water rights with the Brazos River Authority, newly acquired rights for return flows from its wastewater treatment plant in the Brazos River basin, and an active water reuse program. However, additional conveyance, distribution and treatment works will be required at a later date to deliver these supplies to the city.
DECLINING RATE FLEXIBILITY
Water and sewer rates are high at more than 2% of median household income, compared to the category 'AA' median of 1.5%; however, rates reportedly are competitive with certain neighboring providers. The city currently projects annual rate hikes for both water and wastewater at roughly 2.5% through fiscal 2020, which will push the average monthly service bill further above the median level. Fitch notes this as a credit concern, but also observes that the city consistently has demonstrated the willingness to raise rates as needed to pay for capital and preserve financial margins.
HIGHLY LEVERAGED SYSTEM WITH MODEST CAPITAL NEEDS
Leverage ratios are high, with outstanding long-term debt per customer of roughly $3,400, more than twice the 'AA' category median. Amortization is rapid with 65% and 100% of debt amortizing in the next 10 and 20 years, respectively. The city is currently updating its capital improvement plan and is currently projecting high priority needs totaling about $7 million for the next three fiscal years.
A larger $14 million project for water reuse is currently in the planning and design stage. Although sources have not been identified, the city projecting that available cash will be utilized for the next three years, and future debt proceeds for the larger reuse project. The city recently completed a $14.5 million water treatment plant expansion project that increased its total treatment capacity to 20 million gallons per day (mgd) from 15 mgd.
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. 8, 2012);
--'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
U.S. Water and Sewer Revenue Bond Rating Criteria
2012 Water and Sewer Medians
2012 Outlook: Water and Sewer Sector