Fitch Affirms Pasadena, TX Water & Sewer Revs at 'AA-'; Outlook Stable

AUSTIN, Texas--()--Fitch Ratings affirms the 'AA-' rating on the following Pasadena, Texas (the city) water and sewer revenue bonds:

--Approximately $64.2 million waterworks and sewer system revenue bonds, series 2008 and 2010.

The Rating Outlook is Stable.

SECURITY

The bonds are secured by a first lien on and pledge of the net revenues of the city's combined waterworks and sewer system (the system).

KEY RATING DRIVERS

STRONG FINANCIAL METRICS: The system has continued to demonstrate financial stability with solid debt service coverage (DSC) and liquidity.

AMPLE RATE FLEXIBILITY: System rates remain competitive with those of nearby utilities and are well within Fitch's affordability threshold despite a recent rate hike.

LOW DEBT/MANAGEABLE NEEDS: The city's lack of a formal capital improvement plan (CIP) is a concern, but the system has ample water and wastewater treatment capacity to provide service to its mature service area. While the system's aging infrastructure will require additional investment, capital needs should be manageable.

DIVERSE AND STABLE SERVICE AREA: The system provides an essential service to a diverse customer mix in a broad and stable service area.

RATING SENSITIVITIES

MAINTENANCE OF STRONG FINANCIAL POSITION: The rating is sensitive to shifts in fundamental credit factors. Preservation of the system's strong financial profile is a key credit consideration. The Stable Outlook reflects Fitch's expectation that the system's financial metrics will remain adequate.

CREDIT PROFILE

Pasadena, with an estimated population of 152,000, is the largest suburb in the Houston metropolitan statistical area. Located in southeast Texas along the Houston Ship Channel, the system serves a mature and relatively stable service area that is nonetheless sensitive to economic cycles due to nondurable manufacturing concentration. The system provides service to nearly 35,000 water and more than 33,000 sewer connections.

STRONG FINANCIAL METRICS MAINTAINED

System-supported debt totals roughly $85 million and includes about $20 million of outstanding general obligation bonds issued to restructure a portion of the system revenue debt to contend with deteriorating system financial metrics. Annual DSC and system liquidity showed marked improvement subsequent to the restructuring and rate hikes. Since then management has remained more vigilant regarding rising costs and maintaining rates and fees to recover cost of service.

In fiscal 2008, the city began imposing a fixed monthly fee on customers with larger than standard residential lines to recover the additional costs related to higher volume connections. This fixed fee adds some stability to the system's revenue stream. The city reported ample senior lien DSC of 4x and all-in coverage of 2.2x in fiscal 2013. Liquidity has also remained solid since the restructuring and reached 516 days by the end of fiscal 2013.

Liquidity is projected to decline in the near term as capital needs have been met with reserves and recurring revenues. The system spent down $4.9 million in fiscal 2013 and another $17.1 million in fiscal 2014 bringing liquidity levels down to an estimated 200 days by close of fiscal 2014.

Although the system does not regularly prepare a five-year forecast, Fitch expects financial metrics will remain adequate for the rating. DSC for fiscal 2014 is expected to remain strong at 2.5x on a senior lien basis and an adequate 1.4x all-in. The fiscal 2015 budget projects similar operating performance and the budgeted capital outlays are reduced to $2.5 million.

AMPLE WATER SUPPLIES

Pasadena entered into a cost sharing agreement with the city of Houston for water supply, acquiring rights to 15 million gallons per day (MGD) from the southeast water plant, and subsequently entered into another agreement for an expansion project to provide another 25 MGD of surface water rights to meet long-term needs. The city also has a water supply contract with Clear Lake Water Authority and nine wells. Combined, the system's existing water supply is reportedly sufficient to serve its customers over the long term.

MANAGEABLE CAPITAL NEEDS EXPECTED

The city does not have a formal CIP beyond what is budgeted for fiscal 2015. Fitch views the absence of a formal CIP to cover repair and rehabilitation needs is viewed with some concern, but this is somewhat mitigated by the maturity of the service area and the system's ample treatment capacity and water supply. Management reports that some consideration is being given to issuing debt in the near to medium term, but timing and amounts are unknown at this time. Given the current system's ample capacity, Fitch expects that capital needs would be manageable.

Total outstanding long-term debt per customer has declined to a favorable $1,200 given the absence of debt issuance since 2010. Annual debt service as a percent of gross revenues is a manageable 21%. System debt amortizes at a slightly above average pace.

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 additionally informed by information from CreditScope and Texas Municipal Advisory Council.

Applicable Criteria and Related Research:

--'Revenue-Supported Rating Criteria', dated June 16, 2014;

--'U.S. Water and Sewer Revenue Bond Rating Criteria', dated July 31, 2013;

--'2014 Water and Sewer Medians', dated Dec. 12, 2013;

--'2014 Outlook: Water and Sewer Sector', dated Dec. 12, 2013.

Applicable Criteria and Related Research:

Revenue-Supported Rating Criteria

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=750012

U.S. Water and Sewer Revenue Bond Rating Criteria

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=715275

2014 Water and Sewer Medians

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=724358

2014 Outlook: Water and Sewer Sector

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=724357

Additional Disclosure

Solicitation Status

http://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=860194

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Contacts

Fitch Ratings
Primary Analyst
Gabriela Gutierrez, CPA
Director
+1-512-215-3731
Fitch Ratings, Inc.
111 Congress, Suite 2010
Austin, TX 78701
or
Secondary Analyst
Rebecca Moses
Director
+1-512-215-3739
or
Committee Chairperson
Doug Scott
Managing Director
+1-512-215-3725
or
Media Relations
Elizabeth Fogerty, New York, +1-212-908-0526
elizabeth.fogerty@fitchratings.com

Contacts

Fitch Ratings
Primary Analyst
Gabriela Gutierrez, CPA
Director
+1-512-215-3731
Fitch Ratings, Inc.
111 Congress, Suite 2010
Austin, TX 78701
or
Secondary Analyst
Rebecca Moses
Director
+1-512-215-3739
or
Committee Chairperson
Doug Scott
Managing Director
+1-512-215-3725
or
Media Relations
Elizabeth Fogerty, New York, +1-212-908-0526
elizabeth.fogerty@fitchratings.com