Fitch Affirms Pasadena, TX Water and Sewer Revenue Bonds 'AA-'
--$465,000 waterworks and sewer system revenue bonds, series 2008;
--$6,815,000 waterworks and sewer system revenue refunding bonds, series 2010.
The Rating Outlook is Stable.
The bonds are secured by a first lien on and pledge of the net revenues of the city's combined waterworks and sewer system (the system).
KEY RATING DRIVERS
STRONG FINANCIAL METRICS: The system has continued to demonstrate financial stability with strong debt service coverage (DSC) and liquidity.
AMPLE RATE FLEXIBILITY: System rates remain well within Fitch's affordability threshold despite recent rate increases. An automatic annual rate adjustment based on regional consumer price index will be implemented beginning in October 2016.
LOW DEBT/MANAGEABLE NEEDS: The city lacks a formal capital improvement plan (CIP), but the system has ample water and wastewater treatment capacity to provide service to its mature service area. While the system's aging infrastructure will require additional investment, management plans to fund on a pay-go basis.
MATURE AND STABLE SERVICE AREA: The system provides an essential service to a mature customer base in a stable service area.
MAINTENANCE OF STRONG FINANCIAL POSITION: Preservation of the system's strong financial profile is a key credit consideration. The Stable Outlook reflects Fitch's expectation that the system's financial metrics will remain adequate.
Pasadena, with an estimated population of 154,000, is the largest suburb in the Houston metropolitan statistical area. Located in southeast Texas along the Houston Ship Channel, the system serves a mature and relatively stable service area that is nonetheless sensitive to economic cycles due to nondurable manufacturing concentration. The system provides service to 35,657 water and 33,876 sewer connections.
STRONG FINANCIAL METRICS MAINTAINED
System-supported debt totals roughly $67 million, down from $85 million in 2014. This includes a total of $60 million of outstanding general obligation bonds.
The city's most recent rate increase was implemented in March of this year. Water and sewer rates rose 4% and 9%, respectively. Prior to this the last increase was a large 24% for water service only in fiscal 2012. Notably, the total water and sewer bill remains very low at 1.1% of MHI, leaving additional flexibility for future rate hikes. Given that rate increases have historically been few and far between, Fitch views positively a new city ordinance for automatic annual rate adjustments based on regional consumer price index published by the BLS.
The city reported ample senior lien DSC of 3.5x and all-in coverage of 2.4x in fiscal 2015. Liquidity also remained strong at 338 days despite spend down of $17 million for capital improvements over the last two years.
Although the system does not regularly prepare a five-year financial forecast, Fitch expects financial metrics will remain adequate for the rating. DSC for fiscal 2016 is expected to remain strong at 1.9x on an all-in basis. The fiscal 2017 proposed budget projects similar operating performance.
AMPLE WATER SUPPLIES
Pasadena entered into a cost sharing agreement with the city of Houston for water supply, acquiring rights to 15 million gallons per day (MGD) from the southeast water plant, and subsequently entered into another agreement for an expansion project to provide another 25 MGD of surface water rights to meet long-term needs. The city also has a water supply contract with Clear Lake Water Authority and nine wells. Combined, the system's existing water supply is considered sufficient to serve its customers over the long term.
MANAGEABLE CAPITAL NEEDS EXPECTED
The city does not have a formal CIP beyond what is budgeted each fiscal year. Fitch views the absence of a formal CIP to cover repair and rehabilitation needs with some concern, but this is somewhat mitigated by the maturity of the service area and the system's ample treatment capacity and water supply. Management reports that ongoing repair and rehabilitation of the system will be funded on a pay-as-you-go basis.
Total outstanding long-term debt per customer has declined to a favorable $1,068 given the absence of new money debt issuance since 2010. Annual debt service as a percent of gross revenues is a very manageable 19%. System debt amortizes at an above average pace.