Fitch Affirms Lewisville, TX Waterworks and Sewer System Rev Bonds at 'AAA'; Outlook Stable

AUSTIN, Texas--()--Fitch Ratings affirms its 'AAA' rating on the following Lewisville, TX's (the city) waterworks and sewer system revenue bonds:

--$20.9 million outstanding revenue bonds, series 2006, 2008, 2009 and 2013;

--$16.5 million outstanding revenue refunding and improvement bonds series 2005, 2011 and 2012.

The Rating Outlook is Stable.

SECURITY

The bonds represent senior lien obligations of the city's combined water and sewer system (the system).

KEY RATING DRIVERS

STRONG FINANCIAL PERFORMANCE: Financial performance is very good, characterized by robust liquidity and solid debt service coverage (DSC). While DSC is somewhat lower than the 'AAA' median DSC of 2.8x, the system's modest capital needs and rapid amortization of existing debt somewhat offset the DSC difference.

LOW DEBT, MODEST CAPITAL PLAN: Debt levels and capital needs are modest, with limited growth pressures and borrowing plans. System debt amortizes rapidly at nearly 90% in 10 years, compared with the 'AAA' median of 52%.

AFFORDABLE USER RATES: User rates are very affordable despite modest annual pass-through cost of service annual increases. Combined service rates at 1% of median household income (MHI) remains well below Fitch's affordability threshold of 2% of MHI.

AMPLE WATER SUPPLY: The city's water supply planning efforts provide alternate water supply sources in the event that the contract renewal with the city of Dallas does not materialize. Although Fitch recognizes that the city is exposed to contract renewal risk as its wholesale contract with the city of Dallas expires in 2016, the cities' memorandum of agreement regarding rate methodology that extends beyond the term of the contract (through 2039) is evidence of their respective commitment to renew.

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

STRONG FINANCIAL PLANNING: Management has demonstrated extensive financial and capital planning.

RATING SENSITIVITIES

MAINTENANCE OF STRONG FINANCIAL POSITION: The rating is sensitive to shifts in fundamental credit factors, including preservation of the system's solid financial profile consistent with the highest credit rating. The Stable Outlook reflects Fitch's belief that such deterioration in the credit's fundamentals for the foreseeable future is unlikely.

CREDIT PROFILE

The city provides water and wastewater services to approximately 101,000 residents of the city of Lewisville, which is located about 20 miles northwest of Dallas. About 90% developed, Lewisville is currently experiencing in-fill growth and is estimated to reach a population of 128,000 upon build-out, currently projected by around 2030.

CONSISTENTLY SOLID FINANCIAL PERFORMANCE

The system's financial profile is a key credit strength. DSC has ranged from 1.8x to 2.1x on an all-in basis over the last five fiscal years. While this coverage falls somewhat below the 'AAA' median, the system's debt amortizes at a much more rapid pace. Fitch recognizes that its rapid amortization offsets its lower DSC and notes that financial performance has been very stable. Moreover, the system's capital plan is very manageable.

Water sales have been somewhat volatile, typical of the regional weather patterns. The prolonged drought has resulted in stricter conservation efforts and accompanying reduced water sales. For fiscal 2014, water sales declined nearly 14% from the prior year. Despite the decline, a modest 1.5% base rate increase, and declining debt service schedule, the city produced 1.8x all-in DSC for fiscal 2014, better than the previously forecast 1.6x.

The system's five-year forecast reflects all-in DSC ranging from 1.5x to 1.8x between fiscal years 2015 and 2019. Management typically outperforms projections and Fitch expects all-in DSC will remain at historical levels. Liquidity remained very high with 659 days cash on hand available for operations at Sept. 30, 2014.

RATE FLEXIBILITY

Rates are reviewed annually and the city continues to pass through cost increases associated with its purchased water contract. Despite annual rate increases, the city's combined water and sewer service rates remain competitive with the surrounding communities and comfortably below 2% of MHI. Fitch expects liquidity to remain solid despite some planned use of available reserves for capital improvement projects, given the city's strong history of rate reviews and implementation of necessary increases.

FAVORABLE LEVERAGE POSITION WITH LIMITED CAPITAL NEEDS

Fitch expects the system's leverage position to remain favorable. The system's fiscal 2015-2019 capital improvement plan (CIP) is a modest $8.6 million, down from the $31.4 million fiscal 2013-2017 CIP. The city plans to debt finance about 64% of the CIP with the remainder funded on a pay-go basis.

While the CIP declined, a number of demand-based projects remain in the 10-year horizon. These include water and wastewater treatment plant expansions and a lift station project with an estimated construction cost of $31 million for all projects. Since these projects are demand based, the city may continue to delay these projects over time.

Fitch believes that even with the projects in the horizon, the system would be able to absorb them given that more than 50% (or $21 million) of existing debt amortizes over the next five years. Fitch views favorably the city's policy to amortize debt repayment over a maximum of 16 years.

WATER SUPPLY CONTRACT RENEWAL EXPECTED

The city purchases all of its treated and untreated water from the city of Dallas under a contract extending through 2016. While previously Fitch cited concerns regarding the contract expiration, the city of Dallas, as a regional water supply provider, has made significant investment in its water plans in order to continue to serve its 23 customer cities. Lewisville expects to renew its water supply contract with the city of Dallas and the cities have already entered into a new memorandum of agreement with regard to rate methodology that extends through 2039.

Additional water sources may be available to Lewisville from the Upper Trinity Regional Water District in which Lewisville is already a member city. Fitch takes comfort from all the steps the city has taken to ensure long-term water supplies are available to continue to serve its customers and projected growth.

STABLE SERVICE AREA

The city's economy benefits from its location within the broad and diverse Dallas - Fort-Worth metroplex. Lewisville's MHI and per capita income compare favorably to the MSA, state, and national levels. The unemployment rate of 3.6% in January 2015 is also better than the unemployment rates reported for the MSA, state, and nation.

Additional information is available at 'www.fitchratings.com'.

In addition to the sources of information identified in the 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 2014)

--'Water and Sewer Revenue Bond Rating Guidelines' (July 2013)

--'2015 Water and Sewer Medians' (December 2014)

--'2015 Outlook: Water and Sewer Sector' (December 2014)

Applicable Criteria and Related Research:

2015 Outlook: Water and Sewer Sector

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=818410

2015 Water and Sewer Medians

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=818409

U.S. Water and Sewer Revenue Bond Rating Criteria

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=715275

Revenue-Supported Rating Criteria

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=750012

Additional Disclosure

Solicitation Status

http://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=982856

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Contacts

Fitch Ratings
Primary Analyst
Gabriela Gutierrez, CPA
Director
+1-512-215-3731
Fitch Ratings, Inc.
111 Congress, Suite 2010
Austin, TX 78701
or
Secondary Analyst
Rebecca Meyer
Director
+1-512-215-3733
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
Gabriela Gutierrez, CPA
Director
+1-512-215-3731
Fitch Ratings, Inc.
111 Congress, Suite 2010
Austin, TX 78701
or
Secondary Analyst
Rebecca Meyer
Director
+1-512-215-3733
or
Committee Chairperson
Doug Scott
Managing Director
+1-512-215-3725
or
Media Relations:
Elizabeth Fogerty, +1-212-908-0526
elizabeth.fogerty@fitchratings.com