AUSTIN, Texas--(BUSINESS WIRE)--Fitch Ratings has assigned an 'AA+' rating to the following Coastal Water Authority, Texas' (the authority) contract revenue bonds:
--$45 million contract revenue refunding bonds, series 2014 (City of Houston Projects).
The bonds will be sold via competitive bid on Dec. 3. Proceeds of the bonds will be used to refund the authority's contract revenue bonds, series 2004 for debt service savings, to fund a portion of the required reserve fund and to pay issuance costs.
In addition Fitch affirms the following:
--$38.3 million (pre-refunding) contract revenue bonds, series 2004 (City of Houston Projects) at 'AA+';
--$36.3 million outstanding contract revenue refunding bonds, series 2010 (City of Houston Projects) at 'AA+'.
The Rating Outlook is Stable.
SECURITY
The bonds constitute a special obligation of the authority payable from contract revenues pursuant to a projects contract between the authority and the City of Houston, Texas (the city). Pursuant to the contract, the pledged revenues include the debt service payments, bond reserve fund payments and any interest income earned on monies or investment securities held in the bond fund or bond reserve fund.
The city is obligated to make payments under the projects contract as an operations and maintenance (O&M) expense from the gross revenues of the city's water and wastewater system (the system), and payment by the city of its obligations under the projects contract is on parity with payment of all other O&M expenses of the system.
KEY RATING DRIVERS
OBLIGOR DRIVES RATING: The pledge securing the authority's contract revenue bonds is an O&M expense of the city's system and is superior to the pledged security on any of the system's revenue bonds. Consequently, the rating on the authority's bonds is directly tied to that of the system. Fitch currently rates the system's senior lien revenue bonds 'AA+' with Stable Outlook.
STRONG LEGAL PROTECTIONS: Legal protections are strong, with an unconditional obligation of the city to pay debt service requirements from gross system revenues. Payments are deposited directly to the Paying Agent.
ESSENTIALITY OF SERVICE: The authority operates and maintains the Trinity River Water Conveyance System (TRWCS), an essential function to the operation of the city's system.
EXPERIENCED MANAGEMENT: Both the authority and the system have a long and successful operating history.
RATING SENSITIVITIES
CHANGES TO OBLIGOR RATING: Either positive or negative changes to the credit quality of the system likely would translate into a corresponding change to the authority's ratings.
CREDIT PROFILE
The authority was created by the Texas Legislature in 1967 to serve as a conservation and reclamation district and political subdivision covering a part of southwest Liberty County, southwest Chambers County, and most of Harris County. Under the act, the primary purpose of creating the authority was to provide an agency to finance and construct a water conveyance and distribution system to transport surface water from Lake Livingston and the Trinity River into the above mentioned counties. The authority is also charged with conveying water to a point where it will be available for Galveston County, and its authorizing legislation was amended in 2005 with additional rights and responsibilities to enable the authority to carry out its purposes.
The authority is governed by a seven-member board of directors who serve staggered two-year terms. Three board members (one from each county) are appointed by the governor, with the consent of the state senate, and four are appointed by the mayor of the city, with the consent and approval of the city council.
ESSENTIAL HOUSTON PROJECT
The authority's primary project with the city is the TRWCS which collectively includes a number of essential projects that effectively transport the city's water allocations from the Trinity River and Lake Livingston to the Lynchburg Reservoir. This water accounts for approximately 75% of the city's total water production each year. Presently, the project has sufficient capacity to transport all of the water rights belonging to the city, thus any additional capital projects related to the TRWCS are anticipated to be minimal.
The city and authority entered into two contracts, one for the projects and one for operations. Under the projects contract, the city is obligated to repay debt service related to the authority's contract revenue bonds issued in conjunction with the TRWCS projects. The operations contract stipulates the authority's responsibility to operate and maintain the TRWCS. The city's payment obligation under this contract is on parity with its obligation to pay for debt service under the project's contract.
STRONG LEGAL COVENANTS
Pursuant to the projects contract, the city has an unconditional obligation to pay debt service requirements from gross system revenues. The pledged revenues are directly deposited as follows: (1) by the city into the bond fund at the securities depository and disbursed for payment of debt service; (2) into the reserve fund (if necessary); and (3) any unused revenue remains deposited in the bond fund. The authority is required to maintain a bond reserve fund with a minimum balance of average annual aggregate debt service funded with $4.3 million cash and $2.9 million surety. Additional parity obligations may be issued subject to amendment to the projects contract to provide an adjustment to pledged revenue.
ADEQUATE FINANCIAL MARGINS OF THE AUTHORITY
The authority maintains a healthy financial position overall and in the pledged TRWCS enterprise fund. As a single-purpose enterprise fund, the operations of the TRWCS are strategically intended to be on a break-even basis with maintenance of certain reserves for operations and debt service. As such, coverage is essentially sum sufficient and is projected to remain so through debt maturity. As of Dec. 31, 2013, the authority's liquidity position in the TRWCS enterprise fund was solid at 470 days cash on hand and 399 days of working capital, including the Operating Reserve. All required reserves are fully funded including an additional $3 million reserve that is restricted for repairs.
STRONG HOUSTON SYSTEM RATING ATTRIBUTES
The city system rating reflects its strong financial position resulting from a series of rate increases that were implemented to support the system's growing capital needs. The rate increases produced solid operating margins and above-average working capital and liquidity. At the close of fiscal 2013, the system had over 600 days cash on hand and just over 14 months in working capital.
Debt service coverage on the system's senior lien is very high at 8.5x in fiscal 2013, reflective of its closed lien position. All-in debt service coverage levels ranging from 1.5x to 1.6x between fiscal years 2011 to 2013 are slightly weaker than similarly rated credits, but an ample balance in the general purpose fund (GPF) and closed loop in the flow of funds largely offsets this weaker metric. The use of the GPF is restricted for system improvements and a limited portion for drainage purposes. The GPF had a balance of $508 million at the close of fiscal 2013, more than double the $250 million balance in fiscal 2011.
The system's updated projections through fiscal 2018 reflect that all-in annual debt service coverage will hover between 1.3x and 1.4x, which is marginally lower than the forecast from December 2013 due to lower than previously projected rate hikes tied to the regional inflation factor. It will be important for the system to meet or exceed these projections given the expected operating and capital pressures associated with the system's sizeable CIP.
BROAD AND DIVERSE SERVICE AREA
The city system serves the Houston-Sugar Land-Baytown metropolitan statistical area (MSA), the fifth largest MSA in the U.S. and second largest in Texas, with an estimated population currently at 6.3 million. Service is provided either directly or indirectly through wholesale contracts with municipalities, water districts, and water authorities.
The area economy fared better than many other large U.S. cities during the recession, as relatively high energy prices and favorable business climate provided some cushion against other recessionary forces. The MSA unemployment rate decreased to 4.9% in September 2014, compared with 6.1% a year prior. The MSA's rate remains marginally better than the state's 5% and well below the national average of 5.7%.
Additional information is available at 'www.fitchratings.com'
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.
Applicable Criteria and Related Research:
--'Revenue Supported Rating Criteria' (June 2014);
--'U.S. Water and Sewer Revenue Bond Rating Criteria' (July 2013);
--'2014 Water and Sewer Medians' (December 2013);
--'2014 Outlook: Water and Sewer Sector' (December 2013).
--'Fitch Rates Houston, TX Combined Utility System First Lien Bonds 'AA'; Outlook Stable' (February 2014).
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=930155
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