AUSTIN, Texas--(BUSINESS WIRE)-- Fitch Ratings has affirmed its ratings on the following Coastal Water Authority, Texas' (the authority) contract revenue bonds:
--$38.9 million contract revenue refunding bonds, series 2010 (City of Houston Projects) at 'AA';
--$38.9 million contract revenue bonds, series 2004 (City of Houston Projects) at 'AA'.
The Rating Outlook is Stable.
The bonds constitute a special obligation of the authority payable from contract revenues pursuant to a projects contract between the authority and the City of Houston (the city). Pursuant to the contract, the pledged revenues include the debt service payments, bond reserve fund payments and any interest income earned on monies or investment securities held in the bond fund or bond reserve fund.
The city is obligated to make payments under the projects contract as an operations and maintenance (O&M) expense from the gross revenues of the city's water and wastewater system (the system), and payment by the city of its obligations under the projects contract is on parity with payment of all other O&M expenses of the system.
KEY RATING DRIVERS
OBLIGOR DRIVES RATING: The pledge securing the authority's contract revenue bonds is an O&M expense of the city's system and is superior to the pledged security on any of the system's revenue bonds. Consequently, the rating on the authority's bonds is directly tied to that of the system. The credit profile of the system is strong. Fitch last affirmed the system's junior lien revenue bonds rating at 'AA' with Stable Outlook on Aug. 6, 2012.
STRONG LEGAL PROTECTIONS: Legal protections are strong, with an unconditional obligation of the city to pay debt service requirements from gross system revenues without demand, notice, or counterclaim.
ESSENTIALITY OF SERVICE: The authority operates and maintains the Trinity River Water Conveyance System (TRWCS), which is an essential function to the operation of the system.
EXPERIENCED MANAGEMENT: Both the authority and the system have a long and successful operating history.
WHAT COULD TRIGGER A RATING ACTION
CHANGES TO OBLIGOR RATING: Either positive or negative changes to the credit quality of the system likely would translate into a corresponding change to the authority's ratings.
ESSENTIALITY OF PROJECT
The authority's primary project with the city is the TRWCS which collectively includes a number of essential projects that have been constructed by the authority to effectively transport the city's water allocations from the Trinity River and Lake Livingston to the Lynchburg Reservoir. Presently, the project has sufficient capacity to transport all of the water rights belonging to the city, thus any additional capital projects related to the TRWCS are anticipated to be minimal.
The city and authority entered into two contracts, one for the projects and one for operations. Under the projects contract, the city is obligated to repay debt service related to the authority's contract revenue bonds issued in conjunction with the TRWCS projects. The operations contract stipulates the authority's responsibility to operate and maintain the TRWCS. The city's payment obligation under this contract is on parity with its obligation to pay for debt service under the project's contract.
STRONG LEGAL COVENANTS
Pursuant to the projects contract, the city has an unconditional obligation to pay debt service requirements from gross system revenues without demand, notice, or counterclaim. The pledged revenues are directly deposited as follows: (1) into the bond fund at the securities depository and disbursed for payment of debt service; (2) into the reserve fund (if necessary); and (3) any unused revenue remains deposited in the bond fund. The authority is required to maintain a bond reserve fund with a minimum balance of average annual aggregate debt service. Additional parity obligations may be issued subject to amendment to the projects contract to provide an adjustment to pledged revenue.
ADEQUATE FINANCIAL MARGINS ALTHOUGH CITY SYSTEM IS PRESSURED BY LARGE CAPITAL NEEDS
The authority maintains a healthy financial position. As of Dec. 31, 2011, the authority's liquidity position was solid at 589 days cash on hand and 950 days of working capital. All required reserves are fully funded.
System financial margins have deteriorated somewhat over the last few years in large part due to the ongoing implementation of its massive capital improvement program (CIP) and growing operating costs, combined with only marginal rate increases until recently. Despite thinner coverage ratios, the system's financial margins remain adequate. For fiscal 2011 (year-end June 30), all-in debt service coverage improved to 1.6x from 1.3x the prior year. Updated system projections through fiscal 2016 (1.3x to 1.4x) are better than previous forecasts reflecting implemented rate hikes and maintaining a conservative growth in sales volume projection. It will be important for the system to meet or exceed these projections given the expected operating and capital pressures related to the system's sizeable CIP.
LUCE BAYOU INTER-BASIN TRANSFER PROJECT (LBITP); ADDITIONAL CAPITAL PRESSURE ON SYSTEM
Another partnered effort between the city, other stakeholders, and the authority is the LBITP which is a project to convey existing water supply from the Trinity River Basin to Lake Houston. This project is a key regional water supply strategy in the Texas Water Plan. This additional surface water is needed to meet the projected population growth in north and west Harris County.
Although the funding sources are still being identified, the total cost of this project is estimated at roughly $350 million. The authority is seeking state support in the form of deferred interest loans or other subsidies for the project, but the ultimate principal obligor likely will be the system. However, the city does not plan to secure LBITP project debt on parity with the authority's outstanding series 2004 and 2010 contract revenue bonds.
AUTHORITY PURPOSE AND GOVERNANCE
The authority was created by the Texas Legislature in 1967 to serve as a conservation and reclamation district and political subdivision covering a part of southwest Liberty County, southwest Chambers County, and most of Harris County. Under the act, the primary purpose of creating the authority was to provide an agency to finance and construct a water conveyance and distribution system to transport surface water from Lake Livingston and the Trinity River into the above mentioned counties. The authority is also charged with conveying water to a point where it will be available for Galveston County, and its authorizing legislation was amended in 2005 with additional rights and responsibilities to enable the authority to carry out its purposes.
The authority is governed by a seven-member board of directors who serve staggered two-year terms. Three board members (one from each county) are appointed by the governor, with the consent of the state senate, and four are appointed by the mayor of the city, with the consent and approval of the city council.
Additional information is available at www.fitchratings.com. The ratings above were solicited by, or on behalf of, the issuer, and therefore, Fitch has been compensated for the provision of the ratings.
In addition to the sources of information identified in the Revenue-Supported Rating Criteria, this action was additionally informed by information from Creditscope.
Applicable Criteria and Related Research:
--'Revenue-Supported Rating Criteria', dated June 12, 2012;
--'Water and Sewer Revenue Bond Rating Criteria', dated Aug. 3, 2012;
--'2012 Water and Sewer Medians', dated Dec. 8, 2011;
--'2012 Outlook: Water and Sewer Sector', dated Dec. 8, 2011.
For information on Build America Bonds, visit www.fitchratings.com/BABs.
Applicable Criteria and Related Research:
Revenue-Supported Rating Criteria
U.S. Water and Sewer Revenue Bond Rating Criteria
2012 Water and Sewer Medians
2012 Outlook: Water and Sewer Sector
Gabriela Gutierrez, +1-512-215-3731
111 Congress Ave., Suite 2010
Austin, TX 78701
Teri Wenck, +1-512-215-3742
Doug Scott, +1-512-215-3725
Elizabeth Fogerty, +1-212-908-0526
Source: Fitch Ratings