AUSTIN, Texas--(BUSINESS WIRE)--
Fitch Ratings assigns the following rating to Trinity River Authority, Texas' (TRA) bonds:
--$49.7 million regional wastewater system (the system) revenue improvement and refunding bonds, series 2013 at 'AA+'.
The bonds are scheduled to sell via negotiation the week of Sept. 9. Bond proceeds will be used to fund system improvements, refund certain outstanding bonds for interest savings, fund a debt service reserve, and pay costs of issuance.
In addition, Fitch affirms the rating on the authority's outstanding bonds as follows:
--$49.9 million revenue regional wastewater system revenue refunding bonds, series 2011 at 'AA+'.
The Rating Outlook is Stable.
The bonds are payable from a first lien on and pledge of net revenues of the system.
KEY RATING DRIVERS
SOLID CONTRACT PROVISIONS: The authority's customer contract provisions are sound and effectively constitute a joint and several obligation among the customers for the payment of the regional wastewater system (the system) bonds.
STRONG PARTICIPANT PROFILES: Large customers, constituting about 80% of payments, exhibit strong credit fundamentals. The payment history of the contractors is exemplary.
RESERVES PROVIDE OPERATING FLEXIBILITY: While customer payments are designed to recover TRA's system costs by just 1.0x, the system maintains certain reserves and cash balances that provide some credit enhancement.
ESSENTIALITY OF SERVICE: The system serves an essential purpose within a broad and diverse service territory.
ABOVE-AVERAGE DEBT AND CAPITAL NEEDS: Debt levels are moderately high and are expected to remain so given future borrowing plans. Favorably, amortization of existing debt is above average.
MEMBER CREDIT PROFILES: Deterioration of the credit quality of one or more of the major customers could have negative credit implications for credit quality.
TIMELY CONTRACTOR ANNUAL PAYMENTS: Failure by a customer to pay its contracted amounts in a timely fashion would be viewed negatively.
ADDITIONAL REGULATORY REQUIREMENTS: Enhanced treatment requirements likely would necessitate additional borrowing beyond amounts currently contemplated, with a further impact on the system's debt burden of end users.
Created in 1955 by the Texas Legislature as a conservation and reclamation district within the state, the authority has broad powers to construct, own, and operate water and wastewater treatment, collection, and transportation systems, including owning and operating projects such as the system. The system provides collection, treatment, and disposal of wastewater flows on a wholesale basis to a large and diverse service area that includes about 1.8 million people located within the central portion of the Dallas-Fort Worth MSA. Wastewater flows are conveyed to the system for treatment by 19 cities, one town, and the Dallas-Fort Worth International Airport Board through long-term all-service contracts that extend beyond the life of the bonds.
SOUND CONTRACT PROVISIONS
Customers pay a proportionate share of the system's annual requirement (AR), which consists of system O&M expenses, debt service, and any amount required under the contracts and bond resolutions, including replenishment of any draws on the debt service reserve fund. The amount that each customer pays to the authority annually is based on estimated flows contributed to the system over the year by each customer relative to all flows conveyed to the system. The obligation of each customer to make its annual payments (APs) to the authority is an O&M expense of each customer's combined water and sewer system and is superior in priority to the customer's own debt obligations.
While the contracts between the authority and its customers do not contain explicit step-up provisions in the event of a default by a customer in paying its AP, the contracts create an implied step-up. Consequently, the authority likely would be able to discontinue service to the defaulting customer, which in turn would result in a recalculation of the proportionate contributing flows by non-defaulting customers and lead to recovery of the system's full AR should this be through an increase in the non-defaulting customers' APs. However, no customer has ever failed to make timely payments to the authority as required under their respective contracts.
SOLID MEMBER CREDIT PROFILES
Of the customers served by the system, Fitch rates the water and wastewater revenue bonds of the cities of Arlington, Carrollton, Colleyville (all rated 'AAA' with a Stable Outlook), Fort Worth and Mansfield (both 'AA', Stable Outlook), and Grand Prairie ('AA+', Stable Outlook). Combined these customers accounted for around 59% of the system's total customer payments in fiscal 2012. While the credit characteristics of these entities are strong, Fitch believes a default by all remaining customers would have a significant impact on the credit profile of these entities.
Consequently, to determine the rating on the authority's bonds, Fitch also considered the strong credit characteristics of the utility systems for the cities of Irving and Dallas (not rated by Fitch), which combined accounted for around 21% of the system's total customer payments in fiscal 2012. Assuming Dallas and Irving, as well as the aforementioned cities and utilities rated by Fitch, continue to make their required APs under the contract, Fitch estimates that the combined Fitch-rated entities along with Irving and Dallas could reasonably cover a one-time increase in their APs from existing cash resources in the event of a default by all remaining customers. Furthermore, Fitch estimates that these performing customers also could absorb any permanent increase to their APs without materially elevating their existing rate structure in the unlikely event that all other customers default indefinitely.
In addition to the ability by major customers to absorb any potential payment defaults by other members, the system maintains some internal financial flexibility, which serves to offset customer payment risk. In total, the system had 145 days cash at fiscal year-end 2012, not including the $42 million set-aside in a debt service reserve fund and $25 million of resources accumulated in the interest and sinking fund from pre-collections. These additional reserve amounts provide the authority some cushion in the event that customer delinquencies occur and APs must be recalculated for performing customers.
MODERATELY HIGH DEBT BURDEN
Somewhat offsetting the overall strong financial profiles of the system's major customers are the system's moderately high debt metrics and the expectation of additional borrowings by the authority over the next several years which will add to the burden to end users. As part of the authority's most recently updated capital improvement plan (CIP), approximately $349 million in capital projects is expected to be constructed through the fiscal 2013 to 2017 horizon. Given the authority's practice of debt financing essentially all of its capital expenditures, this is expected to result in maintenance of an elevated debt profile by the end of the CIP period.
Additional information is available at 'www.fitchratings.com'
In addition to the sources of information identified in Fitch's U.S. Municipal Revenue-Supported Rating Criteria, this action was additionally informed by information from Creditscope.
Applicable Criteria and Related Research:
--'Revenue-Supported Rating Criteria' (June 3, 2013);
--'U.S. Water and Sewer Revenue Bond Rating Criteria' (July 31, 2013);
--'2013 Water and Sewer Medians' (Dec. 5, 2012);
--'2013 Outlook: Water and Sewer Sector' (Dec. 5, 2012).
Applicable Criteria and Related Research:
Revenue-Supported Rating Criteria
U.S. Water and Sewer Revenue Bond Rating Criteria
2013 Water and Sewer Medians
2013 Outlook: Water and Sewer Sector
- Banking & Budgeting
- Fitch Ratings
Julie G. Seebach
Fitch Ratings, Inc.
111 Congress, Suite 2010
Austin, TX 78701