Fitch Affirms Carrollton, TX Water & Sewer Bonds at 'AAA'; Outlook Stable

AUSTIN, Texas--()--Fitch Ratings has affirmed the following City of Carrollton, Texas (the city) bonds at 'AAA':

--$5.9 million waterworks and sewer system revenue bonds series 2005 and 2007;

--$8.2 million waterworks and sewer system revenue refunding bonds series 2012.

The Rating Outlook is Stable.

SECURITY

The bonds represent senior lien obligations of the city's combined water and sewer system (the system), payable from net system revenues.

KEY RATING DRIVERS

STRONG FINANCIAL PERFORMANCE AND PLANNING: Financial performance is very good, characterized by annual debt service (ADS) coverage in excess of 4.0x. Cash balances have declined modestly due to cash funding of capital projects but remain healthy. Also, management consistently demonstrates extensive financial and capital planning.

LOW DEBT, MODEST CAPITAL PLAN: Debt levels are low at less than $200 per customer and capital needs are manageable, with limited growth pressures and no additional borrowing plans over at least the next several years.

AFFORDABLE USER RATES: User rates are very affordable, registering at 1% of median household income (MHI), comfortably below Fitch's affordability threshold of 2% of MHI.

WHOLESALER COST PRESSURES: The city is susceptible to operating cost pressure from its wholesale water and wastewater providers. Wholesale provider costs are budgeted to increase by more than 10% in fiscal 2016.

STABLE, MATURE ECONOMY: The city is relatively mature, with a favorable economic profile that is characterized by high wealth levels and relatively low unemployment.

RATING SENSITIVITIES

MAINTENANCE OF FINANCIAL PERFORMANCE: Significant leveraging or swift financial decline could pressure the rating, but given the city of Carrollton's strong financial planning and currently very low debt burden such a situation is viewed as highly unlikely.

CREDIT PROFILE

The system provides retail water and sewer service to more than 38,000 residential and commercial customers within the city. The city does not own any treatment facilities. Instead the city purchases treated water supplies on a wholesale basis from Dallas Water Utilities (DWU) and has a contract for wastewater treatment service with Trinity River Authority (TRA, rated 'AA+' with a Stable Outlook by Fitch).

STRONG FINANCIAL METRICS

Financial operations over the past five fiscal years have been characterized by positive margins. ADS coverage historically has been solid, averaging 4x over the last five years. Liquidity is healthy at 265 days cash on hand but has declined in the last two fiscal years due to above average cash funded capital outlays. Financial management is very strong as evidenced stringent fiscal policies and conservative budgeting. Based upon budget forecasts provided by management, which appear reasonable and conservative, ADS coverage remains above 1.8x through fiscal 2018.

GROWING WHOLESALE COSTS

The city is seeing pressure from its wholesale providers. In fiscal 2016 the city anticipates a 16% increase in total charges from TRA. However, the city saw some reprieve in fiscal 2015 when total charges decline by 8% due to reduced wastewater flows. TRA is in the midst of a largely debt-funded, major plant upgrade and capacity expansion, partly as a result of regulatory requirements. The city's forecasts include an 11% increase in TRA costs in fiscal 2017 followed by annual increase ranging from 6% to 8% through 2021. Due to the rising costs associated with wastewater treatment provided by TRA management anticipates that future city rate increases will be weighed towards sewer system user charges.

Until fiscal 2016, the city had seen only modest increases in the cost of water purchased from DWU. However, the city has budgeted DWU cost increases at 12.4% for fiscal 2016. This is a result of a significant increase in DWU's purchased water costs from Sabine River Authority (SRA). SRA and DWU are currently in a legal dispute over SRA's proposed rate increase following DWU's contract renewal request regarding its share of water from Lake Fork. During the pendency of the proceedings, a judge has ordered DWU to pay the proposed rates, with those funds being deposited into an escrow account until a resolution has been reached.

RATE FLEXIBILITY/BENEFICIAL RATE STRUCTURE

Despite the rising wholesale costs, user rates are very affordable. The city council has historically approved rate hikes to ensure financial health and proper system maintenance. The average monthly residential bill totals a relatively modest $56 (based on 9,500 gallons water consumption) and registers at a low 1% of MHI. Management's forecast points to measured rate increases of about 5% to 6% in fiscal years 2017 and 2018, respectively, with additional annual increases averaging 3.4% through fiscal 2021. The rate increases should offset growing wholesaler costs and ensure continued maintenance of system operations. Fitch views the city's rate structure as a credit positive due sizable base charges which account for 42% of water charges and 58% of sewer charges, providing a good deal of stability in operating revenue.

FAVORABLE DEBT PROFILE WITH MANAGEABLE CAPITAL PLAN

The fiscal 2016-2019 capital improvement plan (CIP) is manageable and totals just under $13.5 million. The CIP will be funded entirely from surplus revenues. The CIP focuses exclusively on renewal of the system, continuing the city's ongoing commitment to maintaining asset performance. Given the lack of additional borrowing plans and the rapid amortization of existing debt (over 94% of principal amortizes within 10 years), debt levels, which are currently very low at $192 per customer, will decline further.

FAVORABLE ECONOMIC CLIMATE

Carrollton (general obligation bonds rated 'AAA'/Stable Outlook by Fitch) is a relatively mature city located northwest of Dallas along Interstate 35 East, in parts of Dallas, Denton, and Collin counties in the Dallas-Fort Worth metroplex. The 2010 census population totaled approximately 119,000, a 9% increase from 2000 census levels. The city is home to a number of manufacturing, distribution, and service businesses, and serves as national or regional headquarters for several companies. The unemployment rate for the city historically has been lower than state and national levels. City wealth indicators are favorable, with median household income 32% higher than the state and 30% higher than the nation.

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 Municipal Advisory Council of Texas.

Applicable Criteria

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=999365

Solicitation Status

https://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=999365

Endorsement Policy

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

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Contacts

Fitch Ratings
Primary Analyst
Teri Wenck, CPA
Director
+1-512-215-3742
Fitch Ratings, Inc.
111 Congress, Suite 2010
Austin, TX 78701
or
Secondary Analyst
Gabriela Gutierrez, CPA
Director
+1-512-215-3731
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
Teri Wenck, CPA
Director
+1-512-215-3742
Fitch Ratings, Inc.
111 Congress, Suite 2010
Austin, TX 78701
or
Secondary Analyst
Gabriela Gutierrez, CPA
Director
+1-512-215-3731
or
Committee Chairperson
Doug Scott
Managing Director
+1-512-215-3725
or
Media Relations:
Elizabeth Fogerty, +1 212-908-0526
elizabeth.fogerty@fitchratings.com