Fitch Affirms North Texas Municipal Water District Contract Revs at 'A+'; Outlook Stable

AUSTIN, Texas--()--Fitch Ratings affirms the following North Texas Municipal Water District (NTMWD), TX (the district) revenue bonds at 'A+':

--$3.2 million Panther Creek Regional Wastewater System (PCRWS) contract revenue bonds, series 2006;

--$16.7 million PCRWS contract revenue bonds, series 2009.

The Rating Outlook is Stable.

SECURITY

The bonds are secured by a first lien on and pledge of the city of Frisco's (the city) water and sewer system (the system) gross revenues and any future participant revenues. The pledge is on parity with all other contract payments made by the city to the district and constitutes an operating and maintenance (O&M) expense of the city's system.

KEY RATING DRIVERS

RATING TIED TO RETAILER: The rating is based on the credit fundamentals of the single contract participant, Frisco, TX's system.

ESSENTIALITY OF SERVICE: The PCRWS provides an essential service to the city, providing the system with ample capacity for growth.

SOUND CONTRACT PROVISIONS: Contract provisions feature binding obligation through bond maturity and the district's right to terminate service for non-payment. Covenants are somewhat weak with regard to setting rates at sum sufficient, but debt service effectively has a prior lien given PCRWS costs are an O&M expense of the system.

MANAGEABLE CAPITAL NEEDS: Capital needs of the system are manageable, although costs will be primarily debt financed.

ADEQUATE FINANCIAL PROFILE: The system's financial profile is characterized by volatile debt service coverage (DSC) and free cash to depreciation. Capital contributions are on the rise as the city expansion resumes rapid growth

AMPLE RATE FLEXIBILITY: Despite large rate hikes, the city maintains ample rate flexibility relative to its wealth levels.

RATING SENSITIVITIES

FRISCO'S FINANCIAL FLEXIBILITY MAINTAINED: The city system's maintenance of adequate DSC and liquidity given the system's rising cost of service and history of maintaining thinner margins is a key credit consideration.

ADDITION OF NEW PARTICIPANTS: Since the rating is based on the sole participant, the addition of a new participant with weaker credit fundamentals could put negative rating pressure on the credit.

CREDIT PROFILE

The contract revenues securing the bonds are entirely dependent on the city's system for payment. Located approximately 20 miles north of Dallas, area transportation improvements and housing affordability have led to accelerated population growth in the city over the past decade. The city's population grew at a very rapid compound annual growth rate of 13% from the 33,714 count in the 2000 census to 116,989 in 2010. With an estimated population in 2014 of roughly 137,000, the city continues to grow at a very rapid pace. Wealth levels are high as measured by median household income (MHI) at 2.1x and 2x the state and national medians, respectively. Area unemployment levels of 3.7% as of November 2014 were below state (4.6%) and national (5.5%) levels for the same month.

VOLATILE COVERAGE EXPECTED TO REMAIN ADEQUATE

The city's water and sewer enterprise experienced the growing pains of a rapidly expanding population during the last two decades. Commensurate with its rapid growth, the city collected ample connection fees to add customers to its base but has not kept constant pace with the growing cost of service that the added demand generates. DSC excluding connection fees has been volatile in the last five years ranging from a low 0.7x in fiscal 2009 to a high 1.8x in fiscal 2011. Audited fiscal 2013 DSC was a solid 1.4x (excluding connection fees), but most recent 2014 unaudited results point to 0.9x coverage due to an increase in debt service requirements. A large rate increase implemented for fiscal 2015 is projected to generate better coverage.

Connection fees are on the rise and, over the last five fiscal years, have helped to boost cash balances from what was previously experienced. Unaudited results for fiscal 2014 point to 180 days cash on hand, this is a marked improvement from a low 86 days in fiscal 2010.

The city forecast anticipates DSC to range from 1.0x to 1.3x from fiscal years 2015-2019 and assumes planned rate hikes at 7% for fiscal 2016 followed by annual 4% rate increases from 2017-2019. The forecast conservatively assumes zero connection fees in these coverage levels.

RATE FLEXIBILITY

The city maintains significant rate flexibility in terms of affordability. Although rate hikes were not approved for a number of years, the city's management has recently made significant strides, implementing annual rate hikes for six consecutive years since fiscal 2009. Moreover, the city completed a thorough rate study of the basis of the fiscal 2015 rate increase, which was a significant 14% average increase for both water and sewer service. Despite the recent rate hikes, Frisco's combined utility service rates at $72 for 7,500 gallons remain very affordable relative to city MHI levels at less than 1%, well below Fitch's affordability threshold of 2%.

SYSTEM RELIANCE ON NTMWD

The city's system serves an estimated 47,000 water customers and 45,000 sewer customers. The city operates the assets of the water distribution and wastewater collection system. Treated water is purchased from the district under a take or pay contract that runs into perpetuity or until all of the district's water-related bonds are repaid. Under its water contract, the minimum the city is obligated to pay is based on the highest historical volume used, thereby providing incentive for promoting water conservation. The district is obligated to develop additional water supply as needed for all of its 13 member cities.

The city's wastewater is treated by the district, currently in one of three treatment plants operated by the district. The fees imposed on Frisco by the district are set on a cost recovery basis, with city monthly installments comprising district debt service payments; maintenance or replenishment of debt service reserve funds; and operations and maintenance costs for Frisco's allocable portion. Payments to the district accounted for 65% of total system operating expenses (excluding depreciation) in fiscal 2014.

SYSTEM CAPITAL ASSETS AND RELATED DEBT

The city has approximately $123 million in outstanding certificates of obligation (COs) and general obligation bonds (GOs) issued for system infrastructure as of fiscal 2013. System debt is repaid from net system revenue and is subordinate to district payments. The city's direct system debt ratios (including only the outstanding GOs and COs) are moderate with debt per customer at $1,400. Frisco's system capital needs are predominantly growth related. About $15 million in debt issuances are projected annually to fund its $61 million five-year capital program.

The district currently reports a small $7 million bond sale in fiscal 2017 for PCRWS improvements. Currently, the PCRWS serves only the community of Frisco, though it can and may add additional participants. The PCRWS was expanded from 5 million to 10 million gallons per day (mgd) average capacity with proceeds of the series 2009 bonds. The plant design may be expanded to 30 mgd. The next expansion to 15 mgd is projected for 2035.

DISTRICT SERVICES AND GOVERNING BODY

The district provides water, sewer, and solid waste services to an estimated population of 1.6 million for 13 member cities: Frisco, Plano, Richardson, McKinney, Allen, Garland, Princeton, Mesquite, Wylie, Rockwall, Farmersville, Forney and Royse City. NTMWD's service area encompasses 2,200 square miles and is governed by a 25 appointed-member board, with at least one board member representing each community served. Service to members is governed by separate contracts with the district, with various revenues under those contracts used to secure separate debt securities issued by the district.

Although the district was essentially organized to produce financial results on a cost recovery basis, the district's operations remain strong, keeping pace with the growing demand of its member cities and full regulatory compliance. Strong budgetary oversight is evident in the district's ability to maintain costs that remain affordable to end users. The district reports an open dialogue with the city to enable timely planning for rate adjustments.

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 and the Municipal Advisory Council of Texas.

Applicable Criteria and Related Research:

--'Revenue-Supported Rating Criteria' (June 2014);

--'Water and Sewer Revenue Bond Rating Guidelines' (July 2013);

--'2015 Water and Sewer Medians' (December 2014);

--'2015 Outlook: Water and Sewer Sector' (December 2014).

Applicable Criteria and Related Research:

2015 Outlook: Water and Sewer Sector

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=818410

2015 Water and Sewer Medians

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=818409

Revenue-Supported Rating Criteria

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

Additional Disclosure

Solicitation Status

http://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=980162

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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
Major Parkhurst
Director
+1-512-215-3724
or
Committee Chairperson
Doug Scott
Managing Director
+1-512-215-3725
or
Media Relations:
Elizabeth Fogerty, +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
Major Parkhurst
Director
+1-512-215-3724
or
Committee Chairperson
Doug Scott
Managing Director
+1-512-215-3725
or
Media Relations:
Elizabeth Fogerty, +1-212-908-0526
elizabeth.fogerty@fitchratings.com