Fitch Ratings has assigned its 'AAA' rating to the following Lewisville, TX's (the city) water and sewer system (the system) revenue bonds:
--$7.9 million water and sewer system revenue and refunding bonds, series 2013
The bonds will be sold via negotiation the week of May 20, 2013. Proceeds of the bonds will be used for capital improvements and to refund certain outstanding obligations for debt service savings and to pay related issuance costs.
In addition, Fitch takes the following rating action:
--Approximately $40 million in outstanding water and sewer system revenue bonds (pre-refunding) upgraded to 'AAA' from 'AA+'.
The Rating Outlook is Stable.
The bonds represent senior lien obligations of the system, payable from net system revenues.
KEY RATING DRIVERS
UPGRADE REFLECTS SUPPLY ALTERNATIVES: The upgrade reflects the city's water supply planning efforts that provide alternate water supply sources in the event the primary supply contract with the city of Dallas does not renew at its 2016 expiration. The upgrade further reflects Fitch's opinion that renewal risk is minimal given Dallas's water planning, investment, and commitment to renew its existing contracts. Additionally, Dallas and Lewisville have entered into a memorandum of agreement on rate methodology that extends through 2039.
STRONG FINANCIAL PERFORMANCE: Financial performance is very good, characterized by solid debt service coverage and robust liquidity consistently exceeding well over a year of operating cash on hand over the past five fiscal years.
LOW DEBT, MODEST CAPITAL PLAN: Debt levels are moderate and capital needs are manageable, with limited growth pressures and borrowing plans. System debt amortizes rapidly at 80% in 10 years.
AFFORDABLE USER RATES: User rates are very affordable despite modest annual increases for pass-through costs of service. Combined service rates are 1.1% of median household income (MHI); below Fitch's 2% affordability threshold.
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.
MAINTENANCE OF STRONG FINANCIAL POSITION: The rating is sensitive to shifts in fundamental credit factors. Preservation of the system's solid financial profile consistent with the high credit rating is a key consideration.
The system provides water and wastewater services to approximately 96,000 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 111,000 upon build-out, currently projected by 2030.
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 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 wherewith Lewisville already is 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, and the upgrade reflects Fitch's belief that the contract renewal risk is minimal.
CONSISTENTLY SOLID FINANCIAL PERFORMANCE
The system's financial profile is a key credit strength. Debt service coverage (DSC) has ranged from 1.8x to 2.1x on an all-in basis over the last five fiscal years. While this coverage falls 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 over the last two fiscal years have exceeded previous normal volume due to drought conditions. All-in DSC for fiscal 2012 was a solid 2.0x, better than the previously forecast 1.5x.
The system's five-year forecast reflects all-in DSC ranging from 1.5x to just under 1.6x between fiscal years 2013 and 2017. This forecast is slightly lower than the previous forecast which reflected coverage at or near 1.7x, but management typically outperforms projections. Liquidity remained very high with 689 days cash on hand available for operations at Sept. 30, 2012.
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 median household income. 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 even with the implementation of its moderately sized CIP. The system's fiscal 2013 to 2017 CIP totals a manageable $31.4 million of which approximately 80% is expected to be debt financed and the balance will be funded with available reserves. Over the five-year forecast period, outstanding debt per capita will decline slightly due to the rapid pace of amortization (80% within 10 years).
Fitch views favorably the city's policy to amortize debt repayment over a maximum of 16 years. The new money proceeds from this offering will be used for a water pump station and water reuse projects. The city anticipates returning to the market in fiscal 2014 with about $3.7 million of parity system revenue bonds. Including this offering, the system's debt is comprised of $46 million in parity revenue bonds and a $4 million loan payable to the city's general fund.
STABLE SERVICE AREA
The city's economy benefits from its location within the broad and diverse Dallas Fort-Worth metroplex. Lewisville's median household income and per capita income compare favorably to the MSA, state, and national levels. The unemployment rate of 5.1% in February 2013 is also better than the unemployment rates reported for the MSA, state, and nation.
Additional information is available at 'www.fitchratings.com'.
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', dated June 12, 2012;
--'Water and Sewer Revenue Bond Rating Guidelines', dated Aug. 3, 2012;
--'2013 Water and Sewer Medians', dated Dec. 5, 2012;
--'2013 Outlook: Water and Sewer Sector', dated Dec. 5, 2012.
Applicable Criteria and Related Research
2013 Outlook: Water and Sewer Sector
2013 Water and Sewer Medians
U.S. Water and Sewer Revenue Bond Rating Criteria
Revenue-Supported Rating Criteria
Gabriela Gutierrez, +1-512-215-3731
Fitch Ratings, Inc.
111 Congress, Suite 2010
Austin, TX 78701
Rebecca Meyer, +1-512-215-3733
Jessalynn Moro, +1-212-908-0608
Elizabeth Fogerty, +1-212-908-0526 (New York)