Fitch Affirms Carrollton, TX Water & Sewer Bonds at 'AAA'; Outlook Stable
AUSTIN, Texas--(BUSINESS WIRE)--Fitch affirms the following City of Carrollton, Texas (the city) bonds at 'AAA':
-- $7.4 million waterworks and sewer system revenue bonds, series 2005 and 2007;
-- $9.7 million waterworks and sewer system revenue refunding bonds, series 2012.
The Rating Outlook is Stable.
The bonds represent senior lien obligations of the combined water and sewer system (the system), payable from net system revenues.
KEY RATING DRIVERS
STRONG FINANCIAL PERFORMANCE, PLANNING: Financial performance is very good, characterized by annual debt service (ADS) coverage in excess of 3.0x and liquidity equal to over a 400 days of operating cash on hand. Also, management consistently demonstrates extensive financial and capital planning.
LOW DEBT, MODEST CAPITAL PLAN: Debt levels are low at less than $200 per capita and capital needs are manageable, with limited growth pressures and no additional borrowing plans over at least the next several years.
WHOLESALER COST PRESSURES: The city is susceptible to operating cost pressure from its wholesale water and wastewater providers.
AFFORDABLE USER RATES: User rates are very affordable, registering at 0.9% of median household income (MHI) and comfortably below Fitch's affordability threshold of 2% of MHI.
STABLE, MATURE ECONOMY: The city is relatively mature, with a favorable economic profile characterized by high wealth levels and relatively low unemployment.
RATING STABILITY EXPECTED: The rating is sensitive to shifts in various credit characteristics, including financial performance, operations, and capital and debt management. The Stable Rating Outlook reflects Fitch's opinion that such changes are unlikely.
The system provides retail water and sewer service to more than 35,000 residential and commercial customers within the city. The city does not own any treatment facilities. Instead the city purchase 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 3.7x over the last five years. Liquidity is also robust, with cash averaging over 400 days over the same period. ADS coverage and reserves should remain strong through the fiscal 2016 budget period despite sizeable equity contributions for capital. Financial management is very strong as evidenced by high fund balances, stringent fiscal policies and conservative budgeting. Based upon budget forecasts provided by management, which appear reasonable, ADS coverage remains above 2.2x through fiscal 2016.
GROWING WHOLESALE COSTS
The city is seeing pressure from its wastewater provider, with payments to TRA growing by 22% and 8% in fiscal 2012 and 2013, respectively. 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 a 15% increase in TRA costs in fiscal 2015 followed by 5%-6% annual increases through fiscal 2019. 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.
The city has seen only modest increases in the cost of water purchased from DWU. DWU costs have increased an average of 3% annually for the last decade. The city anticipates continued 3% annual increases for the foreseeable future. Total costs for purchased water and sewer service equaled 38% and 24%, respectively, of operating expenses in fiscal 2013 and are paid prior to debt service on the bonds.
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 $54 (based on 9,500 gallons water consumption) and registers at a low 0.9% of MHI. Management forecast's point to measured rate increases of 4% to 5% in fiscal years 2015 and 2016, respectively, with additional increases ranging for 6% to 2% through fiscal 2019. The rate increases will offset growing wholesaler costs and ensure continued maintenance of system operations. Fitch views the city's rate structure as credit positive due a sizable base charge which accounts for 42% of water charges and 54% of sewer charges, providing a good deal of stability in operating revenue.
FAVORABLE DEBT PROFILE WITH MANAGEABLE CAPITAL PLAN
The fiscal 2014-2019 capital improvement plan (CIP) totals just over $19.5 million and will be funded entirely from surplus revenues and cash reserves. 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 85% of principal amortizes within 10 years), debt levels, which are currently very low at $248 per customer, will decline further.
FAVORABLE ECONOMIC CLIMATE
Carrollton 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. Fitch rates the city's general obligations 'AAA' with a Stable Outlook. 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 36% higher than the state and 32% higher than the nation.
Additional information is available at 'www.fitchratings.com'
In addition to the sources of information identified in the U.S. Municipal Revenue-Supported Rating Criteria, this action was additionally informed by information from Creditscope and the Municipal Advisory Council of Texas.
Applicable Criteria and Related Research:
--'Revenue-Supported Rating Criteria' (June 2013);
--'U.S. Water and Sewer Revenue Bond Rating Criteria' (July 2013);
--'2014 Water and Sewer Medians' (December 2013);
--'2014 Sector Outlook: Water and Sewer' (December 2013).
Applicable Criteria and Related Research:
Revenue-Supported Rating Criteria
U.S. Water and Sewer Revenue Bond Rating Criteria
2014 Water and Sewer Medians
2014 Outlook: Water and Sewer Sector