AUSTIN, Texas--(BUSINESS WIRE)--
Fitch Ratings upgrades the following North Texas Municipal Water District's (the district) regional solid waste disposal system revenue bonds (the system) bonds:
--$6.1 million solid waste disposal system revenue bonds, series 2006 to 'AA-' from 'A+';
--$19.3 million solid waste disposal system revenue bonds, series 2009 to 'AA-' from 'A+'.
The Rating Outlook is Stable.
KEY RATING DRIVERS
HEALTHY OPERATIONS: The rating upgrade reflects the district's continued conservative budgeting practices as evidenced by management's timely rate adjustments that enabled the system to consistently achieve sound debt service coverage amidst a volatile operating environment.
STRONG CONTRACT PROVISIONS: Member contract provisions are strong, extending through the life of the bonds, with a fixed, unconditional debt service component not subject to setoff or counterclaim regardless of whether the district actually provides or members receive services.
GROWING SERVICE AREA: The North Texas Municipal Water District's waste disposal system provides an essential service to five member cities with strong credit fundamentals, serving a growing population in a service area with very healthy economic underpinnings.
HIGH WEALTH/RATE FLEXIBILITY: Rate flexibility is evidenced by individual member cities' combined bills of water/sewer and garbage fees well below 2% of their respective median household incomes.
WEAK RATE COVENANT: While member payments are designed to recover system costs by just 1.0 times (x), the system maintains certain reserves and cash balances that provide some credit enhancement.
FAVORABLE DEBT PROFILE: Amortization of existing debt is rapid, aided by deferral of system capital projects. Future borrowing plans appear manageable.
TIMELY RATE ADJUSTMENTS: The district's ability to continue to manage volatility in waste flow through prudent budget practices and rate adjustments as needed to maintain adequate debt service coverage is essential to the rating.
MEMBERS FINANCIAL FLEXIBILITY MAINTAINED: Material deterioration of the individual member's strong credit fundamentals could apply pressure to the rating.
The bonds are secured by a first lien on gross revenues largely derived from distinct operating and debt service charges paid by the five members to the system. The debt service charge is paid on an unconditional basis.
The district was created in 1951 by the Texas Legislature as a conservation and reclamation district. The district has broad powers with the specific authority to construct, own, and operate, water supply, sewage treatment, and waste disposal facilities such as the regional solid waste disposal system (the system). The system serves the cities of Plano (GOs rated 'AAA' by Fitch), Richardson, McKinney, Allen, and Frisco in northern Texas.
CONTRACT FEATURES UNCONDITIONAL DEBT SERVICE OBLIGATION
All five member cities have contracts with the district to deliver all waste generated within each city to district facilities. The contract terms match the life of the district's assets and exceed the life of the bonds. Total tonnage declined 11.5% over the last five years due to the recession and likely also due to recycling efforts, nonetheless the system revenues have increased by a corresponding amount due to the cost reimbursement nature of the contract. The largest member city is Plano, supplying 30% of district revenues and 25% of district tonnage in fiscal 2012, followed by McKinney with 19% and 16%, respectively. Each city provides for its own waste collection and by contract delivers waste to district facilities consisting of a landfill and three transfer stations.
The bonds are secured by a first lien on gross revenues of the system, primarily derived from the annual required payments from the member cities. The annual requirement has two components, operating costs and debt service. The debt service component is not subject to non-payment by the member cities. This component is established at the greater of the minimum utilization established upon execution of the contract or the highest utilization year on record. According to the contract, each member city is obligated unconditionally, and without offset or counterclaim, to make payments designated as the 'Bond Service Component' of the annual requirement regardless of whether or not the district provides such services and facilities, or whether or not any member city actually receives or uses such services and regardless of the validity or performance of any other part of the contract. The operating component is based on utilization on a proportionate basis.
AFFORDABLE SERVICE FEES PROVIDE AMPLE FLEXIBILITY
The member cities charge garbage fees on a combined utility bill. To aid in enforcing the collection of garbage fees, the cities suspend service from the waterworks system for customer non-payment. Rate flexibility is a credit strength, as the average combined utility bill across the five member cities is below 2% of MHI.
SUM-SUFFICIENT RATE COVENANT CONSIDERED A WEAKNESS
Payments to the district are made monthly based on waste flow estimates with an annual true-up. The rate covenant and additional bonds test are weak, requiring sum-sufficient coverage although, the system maintains certain reserves for capital outlays, maintenance expense, and equipment replacement, providing additional credit enhancement. Revenues derived from contracted waste provide less than 100% of operations and debt service, but a competitive location and rate structure continue to attract non-member (spot) waste. Revenue derived from non-member waste disposal totaled 15% of fiscal 2012 revenues. This source of revenue has been stable mitigating concerns over the lower coverage generated from annual requirements billed to member cities.
SOUND FINANCIAL OPERATIONS
Financial operations of the district are strong. Gross revenues covered debt service a high 4.5x in fiscal 2012, with net revenues providing a more modest but still adequate 1.3x coverage. Annual debt service coverage on a net basis regularly exceeds 1.2x due to strong spot waste and other revenues. Coverage on a gross basis averaged a strong 4.4x over the past three years. Key rating drivers are the district's ability to maintain efficiency in operations with competitive fees for both member participants and nonmember spot waste, as well as stability in the competitive environment, as projected. Rate-raising flexibility is due to the current low combined utility bill of each member city, mitigating against future potential reductions in spot waste revenue.
HIGH DEBT WITH MANAGEABLE CAPITAL NEEDS
The system is highly leveraged with debt to net plant at 64%, but this has declined (from 78% in 2010) with the deferral of capital projects over the last two years. Future capital needs include a transfer station expansion, a transition of an existing transfer station, and construction of a new transfer station. The district plans to issue approximately $8.8 million in bonds in 2015, and another $15.6 million in 2017 for these projects.
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 IHS Global Insights, Creditscope and the Municipal Advisory Council of Texas.
Applicable Criteria and Related Research:
--'Revenue-Supported Rating Criteria', dated June 3, 2013;
--'Rating Guidelines for Solid Waste Revenue Bonds', dated June 19, 2013.
Applicable Criteria and Related Research:
Rating Guidelines for Solid Waste Revenue Bonds Effective June 22, 2012 to June 19, 2013
Revenue-Supported Rating Criteria
- Banking & Budgeting
- Fitch Ratings
Gabriela Gutierrez, CPA, +1-512-215-3731
Fitch Ratings, Inc.
111 Congress Avenue
Austin, TX 78701
Julie Seebach, +1-512-215-3742
Karen Krop, +1-212-908-0661
Elizabeth Fogerty, +1-212-908-0526