AUSTIN, Texas--(BUSINESS WIRE)--Fitch Ratings assigns an 'A+' rating to the following Corpus Christi, Texas (the city) revenue bonds:
--Approximately $102.6 million utility system junior lien revenue improvement bonds series 2015C;
--Approximately $46.3 million utility system junior lien revenue refunding bonds series 2015.
The bonds are scheduled to sell via negotiated sale the week of June 22. Bond proceeds of the 2015C bonds will be used to finance the construction, improvement, expansion, and repair of the city's combined utility system and pay costs of issuance. Proceeds of the 2015 revenue refunding bonds will refund outstanding bonds for level savings.
In addition, Fitch affirms the rating on the following bonds:
--$343.3 million in outstanding utility system revenue bonds (priority lien) at 'AA-';
--$439.5 million in outstanding junior lien utility system revenue bonds at 'A+'.
The Rating Outlook is Stable.
The junior lien bonds are payable from net revenues of the city's combined waterworks, wastewater and gas system (the utility) after payment of the priority lien bonds. The city has legally closed the priority lien. The bonds will not have a debt service reserve fund, since the junior lien ordinance has a springing reserve requirement.
KEY RATING DRIVERS
ADEQUATE FINANCIAL PROFILE: Debt service coverage (DSC) and liquidity metrics are currently average and consistent with the rating level but liquidity levels are low. The one-notch distinction on the junior lien revenue bonds reflects a position subordinate to the priority lien bonds in the flow of funds.
LIMITED RATE FLEXIBILITY: Additional rate increases will be needed to cover current and future debt service requirements. The city's decision to reduce the 2015 proposed rate increase indicates that rate flexibility may be limited.
STRONG WATER SUPPLY INVESTMENTS: The city has proactively secured long-term water supplies from multiple surface water sources as part of its long-range water supply planning over multiple decades.
HIGH AND INCREASING DEBT BURDEN: The city's water supply investments have resulted in a high debt burden. The projected use of 100% debt financing to fund capital will further increase leverage. Regulatory requirements expected for the wastewater system will likely result in additional debt but uncertainty exists regarding the exact requirements.
ECONOMY EXPANDING: Much of the current commercial/industrial development underway or planned revolves around the large petrochemical industries, refineries, associated oil/gas support industries, and shipping/port activity that have traditionally anchored the Corpus Christi economy.
SIGNIFICANT REGULATORY CAPITAL: Regulatory mandates to address sanitary sewer overflows (SSOs) are still being negotiated between Corpus Christi and the U.S. Department of Justice but could be significant. Depending on the magnitude of additional capital needs and timing of the costs, downward rating action could occur.
WEAKER FINANCIAL RESULTS: The weakening of all-in DSC or material changes to liquidity levels below the city's minimum target could result in negative rating pressure.
The system is a combined water, sewer and gas system. The water, wastewater and gas systems accounted for 54%, 29% and 17% of operating revenues in fiscal 2014. The gas system's revenues fluctuate annually based on changes in natural gas commodity prices but the similarly variable commodity costs are recovered in a monthly pass-through in rates.
The city's water system serves not only the city of Corpus Christi, but also provides water to several municipalities, water districts, and industries within a 70-mile radius of the city. Wholesale activity accounted for 30% of water revenues in fiscal 2014. Much of the wholesale activity (16% of revenues) consists of raw water sales to the San Patricio Municipal Water District (water revenue bonds rated 'A+'/Stable Outlook by Fitch).
The retail customer base exhibits concentration with the top 10 water customers accounting for 12% of combined utility operating revenues in fiscal 2014. The top 10 customers are primarily industrial customers in the oil and gas sector.
STRONG WATER SUPPLY INVESTMENT
The city has made long-term water supply planning and acquisition a priority for decades. As a result, the city continues to expand its available water supply with pipeline construction expected to be completed in 2015 that will deliver water originally identified and later purchased by city planning efforts initiated in 1990. As a result of the aforementioned purchases and expected completion of the Mary Rhodes II pipeline in September 2015, the city will have a firm supply of 240,000 acre-feet (af), as compared to average system demand of 115,000 af for treated and untreated water. The city's treated water supply is processed at one water treatment plant with 161 MGD capacity and average flow in 2014 of 74.6 MGD.
HIGH DEBT BURDEN AND POTENTIALLY LARGE FUTURE CAPITAL COSTS
The utility's debt load and future planned debt financing of close to 100% of the capital plan continue to be a credit risk. The utility will have a total debt load of approximately $850 million in revenue bonds after issuance of the series 2015C bonds. In addition, $89 million of the debt component of the unconditional Lavaca-Navidad River Authority (LNRA) contract is paid as a contractual operations and maintenance (O&M) expense of the system. Another $75 million of Nueces River Authority (NRA) and LNRA bonds are paid by the city and $55 million of U.S. Bureau of Reclamation debt is inferior lien debt payable after priority and junior lien obligations. Debt ratios are above average, with debt per customer at over $3,800 and are expected to increase over the next five years to over $5,000. Fitch's median for 'A' category water and sewer utilities is $2,218.
The utility's three-year CIP totals around $400 million. The utility plans to debt finance all of its capital projects but will offset the borrowing with excess cash flow. The city continues to be engaged in negotiations with the Department of Justice regarding violations of the Clean Water Act at its wastewater treatment plants. Management expects a resolution in 2015 that will provide clarity regarding the scope and timeline of required improvements. While the current capital plan includes some projects that will likely be required, the capital plan will likely expand once the full extent of the regulatory requirements are settled.
ADEQUATE FINANCIAL MARGINS; LOW LIQUIDITY
Fitch calculated all-in DSC declined to 1.3x in fiscal 2013 from 1.9x the previous year, as expected with increased debt service. All-in DSC in fiscal 2014 was slightly higher at 1.5x but reflected a 14-month audit period (the city changed its year-end to Sept. 30 from July 31), which included two months additional net revenues but the same annual debt service, given the maturity date of the city's bonds. Comparison of certain year-to-year metrics is difficult given the 14-month audit period.
Fitch's all-in DSC calculation includes the LNR contract payment as an operating expense and the LNRA and NRA bonds as well as the Bureau of Reclamation contract payment as debt service. Priority lien DSC has strengthened as a result of the city's creation of a subordinate lien and the movement of debt to this lien. Priority lien coverage was strong at 2.5x and should continue to increase over time with the closure of the lien. These coverage calculations are prior to transfers to the city's general fund that are modest at 3%.
In future years, all-in DSC is projected to remain adequate at around 1.2x, as junior lien debt service is expected to increase significantly to $47 million in fiscal 2016 from $15 million in fiscal 2013. While DSC levels are forecast to decline, actual results have historically exceeded projections; thus the rating reflects Fitch's expectation that coverage margins will likely outperform the forecast. Consistent performance at materially lower coverage levels would likely put pressure on the ratings.
Liquidity levels have fluctuated between 73 and 296 days cash over the past five years, which is low for the ratings, as compared to Fitch's water and sewer median for the 'A' category of 366 days cash on hand. Unrestricted cash was accumulated in fiscals 2012 and 2013 reaching a high of $89.5 million in fiscal 2013, or 296 days cash on hand. In fiscal 2014, cash balances were spent down on construction of the Mary Rhodes II pipeline although reimbursement of those funds occurred with the 2015A & B bond issuance. Future liquidity levels in fiscal 2015 and beyond are expected to be in range of the city's minimum policy of 90 days of operations with excess cash amounts transferred to the city's capital fund to help reduce 100% debt funding of the capital plan.
LIMITED RATE FLEXIBILITY A CONCERN; ADDITIONAL INCREASES NEEDED
The city's retail water sales declined in the past two years with successful conservation efforts. However, as with other water and sewer utilities, most costs are fixed. To recover lower revenues and to fund planned capital investments in furtherance of the city's long-range water supply plan, a series of rate increases have been enacted.
Water and sewer rates are currently at 2.1% of median household income, with additional increases planned to support expected future debt as well. The 2015 rate increase for water was reduced by City Council to around 8% from the initial 16% proposal after concerns were raised in the community. The assumed additional rate increases in management's financial forecast could encounter pressure from the customer base.
Additional information is available at 'www.fitchratings.com'
In addition to the sources of information identified in the Revenue-Supported Rating Criteria, this action was informed by information from CreditScope and IHS Global Insights.
Revenue-Supported Rating Criteria (pub. 16 Jun 2014)
U.S. Water and Sewer Revenue Bond Rating Criteria (pub. 31 Jul 2013)
Dodd-Frank Rating Information Disclosure Form