AUSTIN, Texas--(BUSINESS WIRE)--Fitch Ratings assigns an 'A+' rating to the following bonds issued by the San Patricio Municipal Water District, TX (the district):
--Approximately $20.5 million water revenue refunding bonds, series 2015.
Proceeds will be used to refund the outstanding series 2006 water revenue bonds and to pay for the cost of issuance. The bonds are scheduled to sell via negotiation on March 26.
In addition, Fitch affirms the 'A+' rating on the following district bonds:
--Approximately $23.1 million (pre-refunding) in outstanding water revenue bonds, series 2006.
The Rating Outlook is revised to Stable from Negative.
The series 2006 and 2009 bonds (the prior bonds) are payable from and secured by a first lien on and pledge of net revenues of the district's wholesale water system (the system) and are secured also by a pledge of the money in all funds created by the bond resolution. The series 2015 bonds are secured by a junior lien on the net revenues of the system until the priority bonds are no longer outstanding, at which time the series 2015 bonds will achieve first-lien priority. The prior first lien is being closed with the series 2015 bond issue. Fitch does not rate the series 2009 bonds.
KEY RATING DRIVERS
FINANCIALS DRIVE OUTLOOK REVISION: Fitch's revision of the Outlook to Stable is based on unaudited fiscal 2014 financial results demonstrating all-in debt service coverage (DSC) improving to 1.3x excluding one-time revenues. Additionally, present-value savings from this series 2015 bond issue should lead to stronger DSC going forward.
FLEXIBLE SUPPLY CONTRACT: The district's take-and-pay contract with the city of Corpus Christi (senior-lien water revenue bonds rated 'AA-', Stable Outlook by Fitch) allows it to offset periodic reduced water demand from customers by purchasing less water and thereby reducing operational expenses.
SOLID CUSTOMER PROFILE: Nearly one-half of the district's customers are stable municipal wholesale customers with larger user bases. Although the industrial retail customer base is concentrated, the largest of these corporate customers maintain sizeable operations that feature large capital investments made over a long period.
FINANCIAL PERFORMANCE AND DEBT: The rating is sensitive to shifts in various credit fundamentals including changes in financial performance and the debt burden.
POSSIBLE SENIOR LIEN UPLIFT: Present-value savings resulting in improved senior-lien debt coverage coupled with improved legal covenants included in the current issue and the successful realization of the district's overall financial strategy could trigger potential upward rating movement on the senior series 2006 bonds. However, as the 2006 bonds are expected to be refunded with this issue, such scenario is not expected.
Located in the Corpus Christi metropolitan statistical area, the district is a wholesale supplier providing water to various industrial and municipal customers located along the South Texas Gulf Coast. The district obtains its water from the City of Corpus Christi through long-term, take-and-pay contracts.
IMPROVED FINANCIAL PERFORMANCE
Rate increases implemented over the past few years have led to improved all-in DSC. DSC had been volatile in recent years, with both fiscal 2012 and 2013 finishing with coverage slightly below 1.0x. Moving forward, the rate increases combined with present value savings associated with this issue should keep all-in DSC at levels more consistent with the current rating. Unrestricted cash and reserves have remained mostly stable in recent years with fiscal 2013 finishing at the cash equivalent of 226 days of operational costs (days cash). Days cash has averaged 248 days over the past five years and unaudited results for 2014 indicate cash balances in line with this average. Sound liquidity balances have mitigated some of the risk associated with the low DSC in recent years.
SUFFICIENT SUPPLY VIA TAKE-AND-PAY CONTRACT WITH CORPUS CHRISTI
The district's system includes treatment plants with a combined capacity of 30 million gallons per day, various storage and transmission facilities, and an effluent re-use system. Purchased water supply is derived from Lake Corpus Christi and Choke Canyon reservoirs in the Nueces River Basin and a 101-mile pipeline from Lake Texana, all of which contribute to a firm water supply yield that is expected to meet requirements through 2050. Additional supply is expected to be available in August 2015 upon completion of the Mary Rhodes Pipeline project which will divert water from the Colorado River at Bay City. Allocable costs associated with this project have been passed through from Corpus Christi to the district's customers.
SOLID YET CONCENTRATED CUSTOMER PROFILES
There is some concentration among the district's industrial users with Occidental Chemical Corporation, a wholly-owned subsidiary of Occidental Petroleum Corporation (Issuer Default Rating of 'A' by Fitch), and Sherwin Alumina Company accounting for approximately 17% and 15% of the district's 2013 sales revenues, respectively. However, due to the nature of the take-and-pay contracts, any loss of revenues driven by a large user leaving the system can be largely offset by purchasing less water from Corpus Christi. Any additional impact of the reduced revenue would be resolved by re-allocating the district's costs among its remaining customers via a rate increase.
DEBT RATIOS ELEVATED BUT IMPROVING; CAPITAL NEEDS MINIMAL
Leverage ratios are high with debt-to-net plant at 74% versus Fitch's 'A' median of 54%. However, as the district has no additional debt issuance plans over the intermediate horizon, debt metrics should improve over time. Upcoming capital projects related to the district's industrial retail users are expected to be funded by such users.
LOCAL ECONOMY STABLE DESPITE OIL AND GAS VOLATILITY
Local economic drivers include tourism, petrochemicals, oil and gas refining and shipping, manufacturing and agribusiness. County wealth levels are mostly aligned with state and national averages. The estimated county unemployment rate of 6.3% as of Dec. 2014 was improved year-over-year but is slightly higher than state (4.1%) and national (5.4%) levels. The local economy recently benefited from oil exploration activity in the nearby Eagle Ford Shale region, with refining and shipping activity reportedly up sharply and large scale industrial expansion projects in the works. Management reports that to date falling oil prices have not affected its large industrial customers.
STRENGTHENED RATE COVENANT
Legal provisions are strengthened with the current issue. The series 2015 bond resolution includes an increase in the rate covenant to 1.1x for the 2015 and parity bonds (including the 2006 bonds, which are also rated by Fitch). Previously, a permissive rate covenant allowed coverage near sum sufficient, which was considered weak by Fitch. The additional bonds test remains the same at 1.25x average annual debt service.
Additional information is available at 'www.fitchratings.com'.
Applicable Criteria and Related Research:
--'Revenue-Supported Rating Criteria' (June 2014);
--'U.S. Water and Sewer Revenue Bond Rating Criteria' (July 2013);
--'2015 Water and Sewer Medians' (December 2014);
--'2015 Outlook: Water and Sewer Sector' (December 2014).
Applicable Criteria and Related Research:
Revenue-Supported Rating Criteria
U.S. Water and Sewer Revenue Bond Rating Criteria
2015 Water and Sewer Medians
2015 Outlook: Water and Sewer Sector