Fitch Affirms Trinity River Auth, TX Regional Wastewater Syst Revs at 'AA+' & Extendable CP at 'F1+'

AUSTIN, Texas--()--Fitch Ratings affirms the following ratings to Trinity River Authority, Texas' (TRA) bonds:

--$28.2 million regional wastewater treatment system revenue refunding bonds, series 2011 at 'AA+';

--$31.3 million regional wastewater treatment system revenue improvement and refunding bonds, series 2013 at 'AA+';

--$91.2 million central regional wastewater system (the system) revenue refunding bonds, series 2014 at 'AA+';

--Up to $350 million in authorized central regional wastewater system series A, tax-exempt extendable commercial paper (ECP) bonds and series A taxable ECP bonds at 'F1+'.

The ECP bonds program authorization was recently extended to $350 million from $175 million to allow for better management of CIP related contracts. Proceeds from the ECP bonds will be used to fund system improvements and will be periodically refunded with long term bonds.

The Rating Outlook is Stable.

SECURITY

The bonds are payable from a first lien on and pledge of net revenues of the system. The ECP bonds have a subordinate lien on net water system revenues of the authority.

KEY RATING DRIVERS

STRONG CONTRACT PROVISIONS: The joint and several contract provisions among the participants for the repayment of obligations to TRA are treated as an unlimited step-up.

STRONG PARTICIPANT PROFILES: Large customers, constituting about 80% of payments, exhibit strong credit fundamentals. The payment history of the contractors is exemplary.

OPERATING FLEXIBILITY: While customer payments are designed to recover TRA's system costs by just 1.0x, the system's reserves and cash balances provide some financial flexibility.

LARGE, DIVERSE SERVICE AREA: The system serves an essential purpose within a broad and diverse service territory.

ABOVE-AVERAGE DEBT AND CAPITAL NEEDS: Debt levels are expected to remain moderately high given future borrowing plans. Favorably, amortization of existing debt is above average.

SHORT-TERM RATING: The 'F1+' rating on the ECP bonds is based on TRA's long-term credit quality, recognizing the bonds' subordinate lien on pledged revenue.

RATING SENSITIVITIES

MEMBER CREDIT PROFILES: Deterioration of the credit quality of one or more of the major customers could have negative credit implications for credit quality.

ADDITIONAL REGULATORY REQUIREMENTS: Enhanced treatment requirements likely would necessitate additional borrowing beyond amounts currently contemplated, with a further impact on the system's debt burden of end users.

CREDIT PROFILE

Created in 1955 by the Texas Legislature as a conservation and reclamation district, the authority has broad powers to construct, own, and operate water and wastewater treatment, collection, and transportation systems. The system provides collection, treatment, and disposal of wastewater flows on a wholesale basis to a large and diverse service area that includes about 1.3 million people located within the central portion of the Dallas-Fort Worth (DFW) MSA. Unemployment levels at 4% as of November 2015 were better than the state's 4.5% and the national unemployment rate of 4.8%. Wealth indicators for the MSA as measured by median household income are also favorable to the state and national levels.

Wastewater flows are conveyed to the system for treatment by 19 cities, one town, and the Dallas-Fort Worth International Airport Board through long-term all-service contracts that extend beyond the life of the bonds. Ample treatment capacity remains with recent expansion.

SOUND CONTRACT PROVISIONS

Customers pay a proportionate share of the system's annual requirement (AR), which consists of system O&M expenses, debt service, and any amount required under the contracts and bond resolutions, including replenishment of any draws on the debt service reserve fund. The amount that each customer pays to the authority annually is based on its proportionate share of estimated flows for the upcoming year. The obligation of each customer to make its annual payments (APs) to the authority is an O&M expense, superior in priority to the customer's own debt obligations.

While the contracts between the authority and its customers do not contain explicit step-up provisions in the event of a default by a customer in paying its AP, the contracts create an implied step-up. Fitch believes the authority would be able to discontinue service to the defaulting customer, which in turn would result in a recalculation of the proportionate contributing flows by non-defaulting customers and lead to recovery of the system's full AR should this be through an increase in the non-defaulting customers' APs. However, no customer has ever failed to make timely payments to the authority as required under their respective contracts.

SOLID MEMBER CREDIT PROFILES

The top contributor accounting for 28% of total revenues in fiscal 2014 was Arlington. Of the 21 customers served by the system, Fitch rates the water and wastewater revenue bonds of the cities of Arlington, Carrollton, Colleyville, and Grand Prairie (all rated 'AAA'/Stable Outlook), as well as Fort Worth and Mansfield (both 'AA'/Stable Outlook). Combined these customers accounted for around 57% of the system's total customer payments in fiscal 2014.

To determine the rating on the authority's bonds, Fitch also considered the strong credit characteristics of the utility systems for the cities of Irving and Dallas, which combined accounted for 23% of the system's total customer payments in fiscal 2014. Fitch estimates that the combined Fitch-rated entities along with Irving and Dallas could reasonably cover a one-time increase in their APs from existing cash resources in the event of a default by all remaining customers. Furthermore, Fitch estimates that these customers could absorb any permanent increase to their APs without materially elevating their existing rate structure in the unlikely event that all other customers default indefinitely.

In addition to the ability by major customers to absorb any potential payment defaults by other members, the system maintains some internal financial flexibility, which serves to offset customer payment risk. The system had 164 days' worth of operating expenses in unrestricted cash at fiscal year-end 2014, as well as a cash-funded debt service reserve fund and approximately $31 million accumulated in the interest and sinking fund from pre-collections. These additional funds provide the authority some cushion in the event that customer delinquencies occur and APs must be recalculated for performing customers.

MODERATELY HIGH DEBT BURDEN

Somewhat offsetting the overall strong financial profiles of the system's major customers are the system's moderately high debt metrics and the expectation of additional borrowings by the authority over the next several years. As part of the authority's most recently updated capital improvement plan (CIP), approximately $543 million in capital projects are expected to be constructed through the fiscal 2016 to 2020 horizon.

Given the authority's practice of debt financing essentially all of its capital expenditures, this is expected to result in an increased debt profile and rising rates by the end of the CIP period. Budgeted rates for fiscal 2016 are $2.38 per 1,000 gallons treated and are projected to rise roughly 36%, to $3.25 per 1,000 gallons in 2020, inclusive of the additional debt projected in the system's CIP.

EXTENDABLE COMMERCIAL PAPER PROGRAM

TRA utilizes a subordinate lien extendable CP bond program (the series A bonds) for capital improvement projects. The original authorization was for a maximum $175 million. The Authority amended the authorization to expand the size of the program to a maximum of $350 million. The ECP bonds originally have maturities of between one and 90 days. However, the authority has the right to extend the maturity to up to 270 days from the original issuance date. If the bonds are extended, the interest rate is reset to the greater of SIFMA plus a fixed number of basis points or a fixed interest rate, both of which are determined based on the ECP bonds' credit ratings at the time. However, the re-set rate shall not exceed a maximum of 9% per annum.

TRA plans to continue utilizing this program for its CIP and refund the CIP periodically with long term bonds. TRA currently plans to refund approximately $215.8 million and another $219 million in 2017 and 2018, respectively.

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.

Applicable Criteria

Rating U.S. Public Finance Short-Term Debt (pub. 17 Nov 2015)

https://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=873508

Revenue-Supported Rating Criteria (pub. 16 Jun 2014)

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

U.S. Water and Sewer Revenue Bond Rating Criteria (pub. 03 Sep 2015)

https://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=869223

Additional Disclosures

Dodd-Frank Rating Information Disclosure Form

https://www.fitchratings.com/creditdesk/press_releases/content/ridf_frame.cfm?pr_id=998834

Solicitation Status

https://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=998834

Endorsement Policy

https://www.fitchratings.com/jsp/creditdesk/PolicyRegulation.faces?context=2&detail=31

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Contacts

Fitch Ratings
Primary Analyst
Gabriela Gutierrez, CPA
Director
+1-512-215-3731
Fitch Ratings, Inc.
111 Congress Avenue, Suite 2010
Austin, TX 78701
or
Secondary Analyst
Doug Scott
Managing Director
+1-512-215-3725
or
Committee Chairperson
Kathy Masterson
Senior Director
+1-512-215-3730
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 Avenue, Suite 2010
Austin, TX 78701
or
Secondary Analyst
Doug Scott
Managing Director
+1-512-215-3725
or
Committee Chairperson
Kathy Masterson
Senior Director
+1-512-215-3730
or
Media Relations:
Elizabeth Fogerty, +1 212-908-0526
elizabeth.fogerty@fitchratings.com