Fitch Affirms Canadian River Muni Water Auth, TX's Revenue Bonds at 'AA'; Outlook Stable

AUSTIN, Texas--()--Fitch Ratings has affirmed the following obligations issued by the Canadian River Municipal Water Authority, Texas (CRMWA) at 'AA':

--Approximately $26.3 million senior lien contract revenue bonds (conjunctive use groundwater supply project);

--Approximately $163.3 million subordinate lien contract revenue bonds (conjunctive use groundwater supply project);

--Approximately $10.5 million (senior lien) contract revenue bonds (U.S. Bureau of Reclamation prepayment project).

The Rating Outlook is Stable.

SECURITY

The bonds are secured by an irrevocable lien on and pledge of project payments. Project payments are pursuant to individual agreements relating to each member's participation in the authority's financing projects. Project payments by member cities are an operating expense of their respective utility, payable prior to direct debt service on the member cities' own bonds.

KEY RATING DRIVERS

MEMBERS EXHIBIT SOUND CREDIT QUALITY: The overall credit quality of the CRMWA's members, particularly its two largest participants, remains the primary rating factor. Financial profiles of the authority's largest contributing members, the cities of Amarillo and Lubbock, have remained healthy with solid cash flow metrics and robust levels of liquidity.

STRONG LEGAL COVENANTS: Member agreements include an implied unlimited step-up provision requiring members to absorb any non-payment by one or more of its members. No member has ever defaulted on any of its payments to the authority in its extended operating history.

AUTHORITY'S FINANCIAL POSITION SOLID: The authority's own robust financial position provides flexibility. Unrestricted cash totaled slightly more than $16.5 million at fiscal year-end 2015, equal to approximately 440 days of cash on hand.

AMPLE WATER SUPPLY: Existing and additional groundwater rights are estimated to ensure members' water needs are met for the next 100 years.

WATER SCARCITY: Fitch believes the 11 member cities have a strong incentive to continue participating in CRMWA due to water scarcity in the area and the authority's affordable rates.

RATING SENSITIVITIES

CHANGE IN CREDIT QUALITY: Meaningful change in the credit quality of Canadian River Municipal Water Authority's largest members (Amarillo and Lubbock) and/or deterioration in the authority's own financial position would likely have a negative impact on the rating.

CREDIT PROFILE

As a regional wholesale provider, the authority delivers untreated water to 11 member cities in the panhandle and south plains regions of Texas. The members include the cities of Amarillo, Borger, Brownfield, Lamesa, Levelland, Lubbock, O'Donnell, Pampa, Plainview, Slaton, and Tahoka.

MEMBER-CITY PAYMENT ARRANGEMENTS

Member cities remit payments to the authority for their proportionate share of debt-financed projects as well as their share of operations and maintenance costs for pumping and transporting water. Payments by members to the authority, whether for debt service or operations of the authority, are a contractual operating expense of the cities' utility systems. In addition, the members are obligated to make up for nonpayment by defaulting members on a pro rata basis. In the event of nonpayment by a member city, the defaulting city's water rights will be transferred to those cities making up the payments. The agreements have been validated in the Texas courts.

Fitch's analysis focuses primarily on the systems of Amarillo and Lubbock, as these two cities are responsible for most of the authority's debt and operating charges. As of fiscal 2015, Amarillo contributed approximately 42% of the authority's combined charges while Lubbock accounted for 33% (75% combined). These levels have been relatively stable over time.

AMARILLO, TX

The city of Amarillo's water and sewer system continues to produce strong financial results. Although near-record rainfall led to a decrease in annual consumption (and a decrease in water sales) in fiscal 2015, the system ended the fiscal year with all-in debt service coverage (DSC) of 2.6x, which was in excess of Fitch's 'AA' median ratio of 2.0x. Preliminary financial results for fiscal 2016 are tracking near or better than historic norms. Going forward, additional costs servicing anticipated new debt are expected to produce somewhat lower DSC margins although they are expected to remain at or above Fitch's medians.

The system continued its trend of solid unrestricted cash balances in fiscal 2015, finishing the year with the equivalent of 685 days cash on hand versus the 'AA' median of 485 days.

The system's five-year CIP includes approximately $187 million in projects. Projects include mostly repair and rehabilitation of existing facilities, a portion of which will be funded by debt. Total debt outstanding, which includes the system's allocable share of CRMWA debt, equals approximately $1,533 on a per-customer basis, slightly lower than the 'AA' rating category median of $2,050. The additional debt associated with the CIP will likely increase the system's debt metrics, although Fitch expects leverage metrics will continue to align with the rating category medians.

The city has prudently raised rates over the past few years to pay for increasing debt service carrying costs. At approximately 1% of median household income (MHI), combined system rates are considered very affordable by Fitch. The low rates provide the city with financial flexibility to pay for any further debt service cost increases associated with debt funding of the CIP.

Amarillo is a growing and diversifying city with an estimated population of over 198,000 in 2015. Measured at just 3.3% in August 2016, the city's unemployment rate is well below the state and national average. However, the city's MHI trails behind state and national levels.

LUBBOCK, TX

The city of Lubbock is the largest of all the members in terms of population and is considered by Fitch as having a stable and diverse service area. Lubbock's water system continues to produce sound all-in DSC, despite being somewhat low relative to Fitch's 'AA' median level. DSC has ranged from 1.5-2.0x over the past five years.

The system's robust liquidity somewhat offsets its below average cash flow metrics. Fiscal 2015 ended with a sizeable unrestricted cash position equal to 446 days of cash on hand, which was a vast improvement of just 76 days registered in fiscal 2009. Cash levels should remain healthy based on the city's plan to debt finance most capital projects over the next 5 years.

The system's debt burden, inclusive of its allocable share of CRMWA's debt, is elevated with debt per customer registering 2.1x higher than Fitch's 'AA' category median. Going forward, the debt burden is expected to remain elevated as the city plans to largely debt finance its system-related CIP. However, rapid principal amortization should provide some capacity to absorb the additional debt and prevent a more rapid escalation in leverage ratios.

AUTHORITY'S FINANCIAL, DEBT PROFILE SOLID AND STABLE

The authority's finances have been solid and stable through at least each of the last five years. All-in DSC has experienced limited volatility and has remained between 1.4x and 1.7x over this timeframe. Sizeable cash balances have remained in excess of 400 days of cash on hand over the same period, providing a solid cushion in the event of a delayed member payment.

The authority's debt per customer is low at $1,027, aligning with Fitch's 'AAA' median of $1,093. Amortization is very rapid at 74% in 10 years and 100% in 20 years. With no new debt issuances planned over the intermediate term, the authority's debt profile should improve with scheduled amortization.

ADEQUATE SUPPLY PROJECTED THROUGH 2140

The authority has been proactive in seeking new supply as the severe drought over the past few years has decreased surface water to below a useable yield. With the December 2011 acquisition of an additional 180,000 acres in water rights from Mesa Water Inc., the authority's water needs are estimated to be met through 2140.

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=1013252

Solicitation Status

https://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=1013252

Endorsement Policy

https://www.fitchratings.com/regulatory

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Contacts

Fitch Ratings, Inc.
Major Parkhurst
Director
+1-512-215-3724
Fitch Ratings, Inc.
111 Congress Avenue, Suite 2010
Austin, TX 78701
or
Secondary Analyst
Teri Wenck
Director
+1-512-215-3742
or
Committee Chairperson
Christopher Hessenthaler
Senior Director
+1-212-908-0773
or
Media Relations
Elizabeth Fogerty, +1-212-908-0526
elizabeth.fogerty@fitchratings.com

Contacts

Fitch Ratings, Inc.
Major Parkhurst
Director
+1-512-215-3724
Fitch Ratings, Inc.
111 Congress Avenue, Suite 2010
Austin, TX 78701
or
Secondary Analyst
Teri Wenck
Director
+1-512-215-3742
or
Committee Chairperson
Christopher Hessenthaler
Senior Director
+1-212-908-0773
or
Media Relations
Elizabeth Fogerty, +1-212-908-0526
elizabeth.fogerty@fitchratings.com