AUSTIN, Texas--(BUSINESS WIRE)--Fitch Ratings affirms at 'AA+' the following Coastal Water Authority, Texas' (the authority) contract revenue bonds:
--$33.5 million outstanding contract revenue refunding bonds, series 2010 (City of Houston Projects);
--$37.6 million outstanding contract revenue refunding bonds, series 2014 (City of Houston Projects).
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
HOUSTON CREDIT QUALITY DRIVES RATING: The pledge securing the authority's contract revenue bonds is an O&M expense of Houston's water and wastewater system. 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+'/Stable Outlook.
UNCONDITIONAL PAYMENT OBLIGATION: Bondholders are secured by an unconditional payment obligation of the city to pay debt service requirements from gross system revenues. Debt service 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 component of the city's system operations.
HEALTHY FINANCIAL MARGINS: The authority maintains a healthy financial position in the TRWCS enterprise with solid liquidity and generally better than sum-sufficient debt service coverage (DSC) due to cash funding of capital outlays.
RATING SENSITIVITIES
CHANGES TO OBLIGOR RATING: Either positive or negative changes to the credit quality of the Houston, TX water and wastewater system 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 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.
UNCONDITIONAL PAYMENT OBLIGATION AND STRONG FLOW OF FUNDS
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 with the paying agent 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 designed to be sum sufficient although actual DSC has been in excess of 1.25x the past three years. As of Dec. 31, 2015, the authority's liquidity position in the TRWCS enterprise fund was solid at 572 days cash on hand and 553 days of working capital, including a $5.5 million 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.
All-in DSC ranged between 1.5x to 1.6x from fiscal 2011 to fiscal 2014 as the rate increases took effect. Fiscal 2015 results slipped to 1.36x all-in DSC due to extremely wet weather. Although these coverage levels are weaker than that of similarly rated credits, an offset to this lower coverage is the substantial liquidity that the city has built-up. At the close of fiscal 2015, the system maintained over 600 days' cash on hand and nearly 10 months in working capital.
Moreover, the flow of funds ends with the accumulation of monies after all obligations are satisfied in the general purpose fund (GPF). The use of the GPF is restricted for system improvements and a limited portion for city drainage purposes. At the close of fiscal 2015, the GPF had an available balance for debt service of $487 million, more than double the $222 million available in the GPF in fiscal 2011.
The system's updated projections, through fiscal 2020, reflect that all-in annual DSC will hover between 1.3x and 1.4x, which is unchanged from prior forecasts. 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.
For additional information on the Houston system attributes, please refer to press release titled 'Fitch Rates Houston, TX Combined Utility System First Lien Bonds 'AA'; Outlook Stable' dated Feb. 1, 2016, available at www.fitchratings.com.
Additional information is available at 'www.fitchratings.com'.
Applicable Criteria
Revenue-Supported Rating Criteria (pub. 16 Jun 2014)
https://www.fitchratings.com/site/re/750012
U.S. Water and Sewer Revenue Bond Rating Criteria (pub. 03 Sep 2015)
https://www.fitchratings.com/site/re/869223
Additional Disclosures
Dodd-Frank Rating Information Disclosure Form
https://www.fitchratings.com/creditdesk/press_releases/content/ridf_frame.cfm?pr_id=1012600
Solicitation Status
https://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=1012600
Endorsement Policy
https://www.fitchratings.com/jsp/creditdesk/PolicyRegulation.faces?context=2&detail=31
ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: HTTPS://WWW.FITCHRATINGS.COM/UNDERSTANDINGCREDITRATINGS. IN ADDITION, RATING DEFINITIONS AND THE TERMS OF USE OF SUCH RATINGS ARE AVAILABLE ON THE AGENCY'S PUBLIC WEB SITE AT WWW.FITCHRATINGS.COM. PUBLISHED RATINGS, CRITERIA, AND METHODOLOGIES ARE AVAILABLE FROM THIS SITE AT ALL TIMES. FITCH'S CODE OF CONDUCT, CONFIDENTIALITY, CONFLICTS OF INTEREST, AFFILIATE FIREWALL, COMPLIANCE, AND OTHER RELEVANT POLICIES AND PROCEDURES ARE ALSO AVAILABLE FROM THE CODE OF CONDUCT SECTION OF THIS SITE. FITCH MAY HAVE PROVIDED ANOTHER PERMISSIBLE SERVICE TO THE RATED ENTITY OR ITS RELATED THIRD PARTIES. DETAILS OF THIS SERVICE FOR RATINGS FOR WHICH THE LEAD ANALYST IS BASED IN AN EU-REGISTERED ENTITY CAN BE FOUND ON THE ENTITY SUMMARY PAGE FOR THIS ISSUER ON THE FITCH WEBSITE.
Copyright© 2016 by Fitch Ratings, Inc., Fitch Ratings Ltd. and its subsidiaries. 33 Whitehall Street, NY, NY 10004. Telephone: 1-800-753-4824, (212) 908-0500. Fax: (212) 480-4435. Reproduction or retransmission in whole or in part is prohibited except by permission. All rights reserved. In issuing and maintaining its ratings and in making other reports (including forecast information), Fitch relies on factual information it receives from issuers and underwriters and from other sources Fitch believes to be credible. Fitch conducts a reasonable investigation of the factual information relied upon by it in accordance with its ratings methodology, and obtains reasonable verification of that information from independent sources, to the extent such sources are available for a given security or in a given jurisdiction. The manner of Fitch's factual investigation and the scope of the third-party verification it obtains will vary depending on the nature of the rated security and its issuer, the requirements and practices in the jurisdiction in which the rated security is offered and sold and/or the issuer is located, the availability and nature of relevant public information, access to the management of the issuer and its advisers, the availability of pre-existing third-party verifications such as audit reports, agreed-upon procedures letters, appraisals, actuarial reports, engineering reports, legal opinions and other reports provided by third parties, the availability of independent and competent third- party verification sources with respect to the particular security or in the particular jurisdiction of the issuer, and a variety of other factors. Users of Fitch's ratings and reports should understand that neither an enhanced factual investigation nor any third-party verification can ensure that all of the information Fitch relies on in connection with a rating or a report will be accurate and complete. Ultimately, the issuer and its advisers are responsible for the accuracy of the information they provide to Fitch and to the market in offering documents and other reports. In issuing its ratings and its reports, Fitch must rely on the work of experts, including independent auditors with respect to financial statements and attorneys with respect to legal and tax matters. Further, ratings and forecasts of financial and other information are inherently forward-looking and embody assumptions and predictions about future events that by their nature cannot be verified as facts. As a result, despite any verification of current facts, ratings and forecasts can be affected by future events or conditions that were not anticipated at the time a rating or forecast was issued or affirmed.
The information in this report is provided "as is" without any representation or warranty of any kind, and Fitch does not represent or warrant that the report or any of its contents will meet any of the requirements of a recipient of the report. A Fitch rating is an opinion as to the creditworthiness of a security. This opinion and reports made by Fitch are based on established criteria and methodologies that Fitch is continuously evaluating and updating. Therefore, ratings and reports are the collective work product of Fitch and no individual, or group of individuals, is solely responsible for a rating or a report. The rating does not address the risk of loss due to risks other than credit risk, unless such risk is specifically mentioned. Fitch is not engaged in the offer or sale of any security. All Fitch reports have shared authorship. Individuals identified in a Fitch report were involved in, but are not solely responsible for, the opinions stated therein. The individuals are named for contact purposes only. A report providing a Fitch rating is neither a prospectus nor a substitute for the information assembled, verified and presented to investors by the issuer and its agents in connection with the sale of the securities. Ratings may be changed or withdrawn at any time for any reason in the sole discretion of Fitch. Fitch does not provide investment advice of any sort. Ratings are not a recommendation to buy, sell, or hold any security. Ratings do not comment on the adequacy of market price, the suitability of any security for a particular investor, or the tax-exempt nature or taxability of payments made in respect to any security. Fitch receives fees from issuers, insurers, guarantors, other obligors, and underwriters for rating securities. Such fees generally vary from US$1,000 to US$750,000 (or the applicable currency equivalent) per issue. In certain cases, Fitch will rate all or a number of issues issued by a particular issuer, or insured or guaranteed by a particular insurer or guarantor, for a single annual fee. Such fees are expected to vary from US$10,000 to US$1,500,000 (or the applicable currency equivalent). The assignment, publication, or dissemination of a rating by Fitch shall not constitute a consent by Fitch to use its name as an expert in connection with any registration statement filed under the United States securities laws, the Financial Services and Markets Act of 2000 of the United Kingdom, or the securities laws of any particular jurisdiction. Due to the relative efficiency of electronic publishing and distribution, Fitch research may be available to electronic subscribers up to three days earlier than to print subscribers.
For Australia, New Zealand, Taiwan and South Korea only: Fitch Australia Pty Ltd holds an Australian financial services license (AFS license no. 337123) which authorizes it to provide credit ratings to wholesale clients only. Credit ratings information published by Fitch is not intended to be used by persons who are retail clients within the meaning of the Corporations Act 2001