AUSTIN, Texas--(BUSINESS WIRE)--Fitch Ratings affirms the following bonds issued by North Fort Bend Water Authority, TX (the authority):
--$279.8 million in outstanding water system revenue bonds at 'A+'.
The Rating Outlook is Stable.
The bonds represent senior lien obligations of the system payable from pledged revenues. Pledged revenues include net operating revenues of the system after payment of operations and maintenance (O&M) expenses plus amounts transferred to the revenue fund from the coverage fund.
KEY RATING DRIVERS
ADEQUATE FINANCIAL CUSHION: Authority operations are expected to produce only a modest financial cushion on an ongoing basis, although significant reserves exist and are required under the indenture. The board has increased charges as necessary to ensure full cost recovery.
STRONG REVENUE ENFORCEMENT CAPABILITIES: The oversight of groundwater pumping by the Fort Bend Subsidence District (FBSD) ensures timely recovery by the authority of pumpage fees, currently the authority's primary source of revenues. In addition, the authority may remove customers from the authority's groundwater reduction plan (GRP) for failure to pay pumpage and surface water fees, which would require those entities to develop water supplies on their own to meet FBSD groundwater reduction requirements. Fitch believes this would be impractical for most customers.
WEAK DEBT PROFILE: The cost associated with construction of the authority's system is significant and will lead to a further escalation in debt per customer levels, which are currently around two times Fitch's 'A' category median. In addition, the maturity schedule of the authority's debt is slow.
AFFORDABLE CHARGES: The cost to customers of the authority's operations is manageable and is expected to remain affordable with the build-out of the authority's system.
ESSENTIAL SERVICE: The authority is the sole provider of surface water supplies to an area that is required to reduce groundwater pumping pursuant to strict guidelines developed by the FBSD.
IMPLEMENTATION OF RATE HIKES: The rating assumes the authority's ability to increase rates sufficiently to fund its sizable capital needs, maintain sound reserves, and generate at least sum-sufficient debt service coverage.
The authority was created in 2005 as a wholesale water provider to assist utilities and individuals reliant on groundwater supply in converting to alternative water supplies in accordance with regulatory requirements. Predominantly residential in nature, the authority's service territory includes around one-third of the population within Fort Bend County, or around 180,000 residents. The area has experienced extensive land subsidence as a result of groundwater pumpage. As a result, the FBSD promulgated strict requirements for pumpers to convert to alternative sources of supplies (i.e. surface water) either individually or collectively in stages.
SIGNIFICANT CAPITAL NEEDS PRECIPITATED BY LAND SUBSIDENCE
The authority has adopted and the FBSD has approved the authority's GRP, which incorporates construction of the authority's system and purchase of treated water from the city of Houston for sale to groundwater users within the authority's service area. The authority also has contracted to include certain pumpers outside its service area for inclusion in the GRP. Beginning March 2011, the authority began selling surface water to certain entities within its service area.
The GRP is designed to meet increasingly stringent pumping restrictions in two parts. The first, which was originally intended for 2013 but pushed back to 2014 by regulators, requires groundwater withdrawals by major pumpers within the county to be limited, either individually or collectively, to no more than 60% of total water use. The second part of the plan, intended for completion by 2025, limits pumping to 40% of total water use. The authority reports that it is currently in compliance with the 2014 requirement.
Planning for part two of the conversion plan, scheduled for completion in 2025, is currently underway and is estimated to cost between $750 million and $1 billion. The authority expects to issue debt to construct such capital, payable from a combination of GRP fees collected by the authority and sales of surface water upon construction of the system. The scope of the project includes the shared construction cost of an additional water treatment plant in Houston. Further details of the authority's latest capital plan were not made available to Fitch as it is in progress with anticipated completion within a year.
RATES EXPECTED TO REMAIN AFFORDABLE
While the capital costs associated with the GRP are large and amortization of this and the outstanding bonds is slow with less than 70% of principal maturing in 20 years, pass-through costs to end users are manageable. GRP fees currently equal $1.80 per 1,000 gallons of water pumped but are expected to jump to around $2.20 per 1,000 gallons by 2014. The cost for surface water users is only marginally higher. Consequently, a typical residential customer using 10,000 gallons per month currently pays costs from the authority at a rate of around 0.25% of median household income (MHI), well below Fitch's affordability threshold of 2%.
ADEQUATE FINANCIAL PROFILE, LEGAL PROVISIONS
As a wholesaler, the authority's financial margins are limited. All-in annual debt service (ADS) coverage is currently at, and is expected to remain near, the sum sufficient rate covenant. Fitch deems legal provisions to be sufficient overall as they include a coverage reserve equal to 25% of maximum ADS in addition to a cash-funded debt service reserve fund and an additional reserve equal to two months of budgeted O&M expenditures. Due in part to these reserve requirements, liquidity was very strong at end of fiscal 2012 with enough cash to cover 1,440 days of operations and over 660 days of working capital. However, these figures are declining as operating costs increase with the purchase of surface water supplies from the city of Houston.
The contract between Houston and the authority provides that the authority is entitled to take 19.5 million gallons per day (mgd) of water from the city, which is estimated to meet the authority's needs through 2019.
STRONG LOCAL ECONOMY
The county's unemployment and wealth levels are strong. As of May 2013, the county's unemployment rate of 5.8% was below that of the state's (6.5) and nation's (7.3). Income levels were very strong with MHI at 162% and 156% of the state and national levels.
Additional information is available at 'www.fitchratings.com'
In addition to the sources of information identified in Fitch's Revenue-Supported Rating Criteria, this action was informed by information from CreditScope and IHS Global Insights.
Applicable Criteria and Related Research:
--'Revenue-Supported Rating Criteria', dated June 3, 2013;
--'U.S. Water and Sewer Revenue Bond Rating Criteria', dated July 31, 2013;
--'2013 Water and Sewer Medians', dated Dec. 5, 2012;
--'2013 Outlook: Water and Sewer Sector', dated Dec. 5, 2012.
Applicable Criteria and Related Research:
Revenue-Supported Rating Criteria
U.S. Water and Sewer Revenue Bond Rating Criteria
2013 Water and Sewer Medians
2013 Outlook: Water and Sewer Sector