Fitch Ratings has assigned an 'AA+' rating to the following Trinity River Authority, Texas bonds:
--$70.6 million revenue regional wastewater system revenue refunding bonds, series 2011.
The bonds are scheduled to sell via negotiation the week of May 23. Proceeds of the bonds will be used to refund a portion of the authority's outstanding bonds for interest savings and pay costs of issuance.
The Rating Outlook is Stable.
RATING RATIONALE:
--Customer contract provisions are sound and effectively constitute a joint and several obligation amongst the customers for the payment of the bonds.
--Fitch-rated and other major non-Fitch-rated customers exhibit strong credit fundamentals.
--While customer payments are designed to recover authority regional wastewater system (the system) costs by just 1.0 times (x), the system maintains certain reserves and cash balances that provide some credit enhancement.
--No customer has failed to make required payments to the authority in a timely fashion and customer payments constitute an operations and maintenance (O&M) expense of each customer's respective water and sewer utility.
--The system serves an essential purpose within a broad and diverse service territory.
--Amortization of existing debt is above average, although debt levels are moderate and future borrowing plans are expected to push debt levels to above average amounts over the next several years.
KEY RATING DRIVERS:
--Deterioration of the credit quality of the major customers could have negative credit implications for the bonds.
--Failure by a customer to pay its contracted amounts in a timely fashion would be viewed negatively.
--Enhanced treatment requirements likely would necessitate additional borrowing beyond amounts currently contemplated, further impacting the system's debt burden to end users.
SECURITY:
The bonds are payable from a first lien on and pledge of net revenues of the system.
CREDIT SUMMARY:
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 around 1.8 million people located within the central portion of the Dallas-Fort Worth metropolitan statistical area (the MSA). Wastewater flows are conveyed to the system for treatment by 19 cities, one town, and the Dallas-Fort Worth International Airport Board (the customers) through long-term all-service contracts that extend beyond the life of the bonds.
Customers pay a proportionate share of the system's annual requirement (the AR), which consists of system O&M expenses, debt service on the bonds and all parity bonds, as well as 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 given the failure by a customer to pay its AP would result in a default under the contract. 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 through an increase in the non-defaulting customers' AP. However, to date no customer has ever failed to make timely payments to the authority as required under their respective contracts.
Of the customers served by the system, Fitch rates the water and wastewater utilities of the cities of Arlington, Carrollton, and Colleyville (each rated 'AAA'), and also rates the utilities for the cities of Fort Worth ('AA+'), Grand Prairie ('AA+'), and Mansfield ('AA'). Combined these customers accounted for around 58% of the system's total customer payments in fiscal 2010. While the credit characteristics of these entities are strong, Fitch believes a default by all remaining customers would have a significant impact to the credit profile of these entities.
Consequently, to determine the rating on the authority's bonds, Fitch also considered credit characteristics of the utility systems for the cities of Irving and Dallas (not rated by Fitch), who combined accounted for around 22% of the system's total customer payments in fiscal 2010 and who maintained strong credit fundamentals. Assuming Dallas and Irving, as well as the retailers above rated by Fitch continued to perform in making their required APs under the contract, Fitch estimates that these entities 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 should all other customers default indefinitely.
In addition to the ability by major customers to absorb any potential payment defaults by other members, the system also maintains some internal financial flexibility on its own, which serves to enhance the rating on the bonds. In total, the system had over 150 days cash in fiscal 2010, not including the debt service reserve fund. This reserve level provides the authority some cushion in the event that customer delinquencies occur and the APs must be recalculated for performing customers.
Somewhat offsetting the overall strong financial profile of the system and its major customers is 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 (the CIP), around $672 million in capital projects are expected to be constructed through the fiscal 2013-2015 horizon, depending on timing of projects. Given the authority's practice of debt financing essentially all of its capital expenditures, this is expected to result in an elevated debt profile by the end of the CIP period. In addition, it is possible that enhanced nutrient removal requirements will be included in the system's discharge permit at some point in the future, which may necessitate additional capital expenditures beyond those already identified. However, most wastewater utilities across the nation are expected to face similar nutrient removal requirements in the coming years.
Additional information is available at 'www.fitchratings.com'.
Applicable Criteria and Related Research:
--'Revenue-Supported Rating Criteria', Oct. 8, 2010;
--'Water and Sewer Revenue Bond Rating Guidelines', Aug. 6, 2008;
--'2011 Water and Wastewater Medians', Jan. 18, 2011;
--'2011 Outlook: Water and Wastewater Sector', Jan. 18, 2011.
For information on Build America Bonds, visit 'www.fitchratings.com/BABs'.
Applicable Criteria and Related Research: Trinity River Authority, Texas (Regional Wastewater System)
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=633249
Revenue-Supported Rating Criteria
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=564565
Water and Sewer Revenue Bond Rating Guidelines
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=395918
2011 Water and Wastewater Medians
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=593285
2011 Outlook: Water and Wastewater Sector
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=593286
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