AUSTIN, Texas--(BUSINESS WIRE)-- Fitch Ratings affirms its 'AA-' rating on the following Andrews County, TX limited tax general obligation (LTGO) bonds:
--$72.3 million permanent improvement bonds, taxable series 2010.
The Rating Outlook is Stable.
The bonds are secured by an annual property tax levy limited to $0.80 per $100 assessed valuation (AV) on all taxable property within the county.
KEY RATING DRIVERS
TAX BASE CONCENTRATION: The county's tax base is sizeable although heavily concentrated in mineral values. Overall tax base growth has been healthy but demonstrates vulnerability to market-driven changes in mineral valuations and related activity.
AMPLE TAXING MARGIN: The tax rate is below average and the county maintains significant financial flexibility in its various tax levies.
LIMITED ECONOMY: Primarily rural in nature, the local area is geographically remote and its economy is narrow. Nonetheless, current economic indicators and local wealth levels are better than average.
LARGE FINANCIAL RESERVES: The county has strong reserve levels and conservative financial management practices.
POSITIVE DEBT PROFILE: The county's debt profile is positive overall with debt levels moderate relative to surging taxable values and limited future debt plans. However, voter approval of the county's 2010 authorization was by a slim margin, and debt levels per capita are high and amortization is low. Debt service is being paid through lease payments from a private sector operator, which the county expects to continue through maturity. Fitch considers the debt associated with these types of projects to be self-supporting after debt service has been paid by the lessee for a period of time (i.e. three years).
DEBT SERVICE RESERVE: Additional security to bondholders comes from an amount equivalent to one year of debt service that is held in escrow and maintained by the county in the event of non-payment by the lessee.
WHAT COULD TRIGGER A RATING CHANGE
SUSTAINED MINERAL VALUE LOSSES: A multi-year trend of sizeable declines in mineral values would signify fundamental deterioration in the county's tax and economic base and could lead to negative rating action. Current financial flexibility derived from the county's strong reserve levels and taxing margin must be maintained in order to preserve credit quality.
With an estimated population of 15,445 residents, Andrews County is located in far-west Texas in the Permian Basin, one of the largest mineral reserves in the U.S., about 50 miles northwest of the cities of Midland and Odessa. The local economy is narrow, focused on oil/gas production, associated industries, and agribusiness. Nonetheless, current economic indicators and local wealth levels are better than average.
While rising sharply in 2009 from historical lows, the county's unemployment rate has declined notably from 5.5% to 4.5% as of July 2012 on a year-to-date basis, well below the respective unemployment rates of 7.5% and 8.6% for the state and nation. Rapid employment gains have been fueled by surging oil and gas exploration and production.
TAX BASE CONCENTRATION
The county's tax base is sizeable and heavily concentrated in mineral values. In fiscal 2013, AV increased to over $5 billion and the top 10 taxpayers who represent some of the largest oil/gas corporate concerns account for almost 50% of the tax base, led by Exxon Mobil Corporation at 13%.
While the county has generally experienced double-digit annual gains in taxable values since fiscal 2006, the tax base remains vulnerable to market-driven changes in mineral valuations and related drilling activity, evidenced by the 20% drop in AV in fiscal 2010, which was largely regained the following year. Management estimates additional tax base gains will be realized over the near term with active drilling projects reportedly underway.
RADIOACTIVE WASTE DISPOSAL PROJECT
In 2010, the county issued the full $75 million authorization that was narrowly passed by voters in May 2009. Bond proceeds were used to acquire real property that is being leased by the county to Waste Control Specialists, LLC (WCS) for the expansion of their existing hazardous waste facility in the county to include the ability to receive low-level radioactive/nuclear waste.
The Andrews County WCS facility is the only licensed site in the U.S. currently permitted to handle all three classes of low-level radioactive/nuclear waste. As this site functions as the state's nuclear waste compact site, the state of Texas continues to maintain involvement in this project and, according to licensing standards, WCS posted approximately $136 million in financial assurance with the state prior to accepting nuclear waste; these funds would pay post-closure costs and accident-related costs, among other things.
In practice, the county is funding debt service entirely with annual lease payments from WCS which will continue through the maturity of the bonds. However, the county remains responsible for debt service in the event of non-payment by WCS. The county maintains an amount equivalent to one year of debt service in escrow to cover debt repayment until a tax levy could be applied.
The county has no other tax-supported debt, owing to a practice of pay-as-you-go financing and low debt needs; overall debt levels are modest relative to the tax base but very high on a per capita basis, reflective of the county's heavily industrial economy. Amortization of principal is very slow with roughly 30% of principal amortized in 10 years. Retirement benefits are provided through the Texas County and District Retirement System and are adequately funded.
LARGE FINANCIAL RESERVES
The county's financial position is sound as characterized by its strong reserve levels. Property taxes provide nearly all of the county's operating revenues, although the county still maintains significant financial flexibility under its various tax levies allowed by state statute. Management budgets conservatively and actual results typically outperform budgeted numbers.
Since fiscal 2007, the county's unreserved general fund balance has typically exceeded 60% of spending. Fiscal 2011 results were generally comparable with an $11.4 million unrestricted general fund balance (sum of committed, assigned, and unassigned per GASB 54) that equaled about 67% of spending.
Liquidity also totaled a strong $14.2 million or 10 months of spending in cash on hand in fiscal 2011. For fiscal 2012, management expects to close the year with a modest addition to general fund reserves. The fiscal 2013 general fund budget was adopted with a modest $984,000 use of reserves for operations. The county has started to benefit from revenue sharing associated with the WCS expansion facility. The county has designated such funds for capital projects only, which Fitch considers prudent.
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 Tax-Supported Rating Criteria, this action was informed by information from CreditScope, University Financial Associates, S&P/Case Shiller Home Price Index, HIS Global Insight, Zillow.com, and National Association of Realtors.
Applicable Criteria and Related Research:
'Tax-Supported Rating Criteria', Aug. 14, 2012;
'U.S. Local Government Tax-Supported Rating Criteria', Aug. 14, 2012.
Applicable Criteria and Related Research:
Tax-Supported Rating Criteria
U.S. Local Government Tax-Supported Rating Criteria
Jose Acosta, +1 512-215-3726
111 Congress Avenue, Suite 2010
Austin, TX 78701
Rebecca Meyer, +1 512-215-3733
Doug Scott, +1 512-215-3725
Elizabeth Fogerty, +1 212-908-0526
Source: Fitch Ratings