Fitch Rates Trinity River Authority, TX Regional Wastewater System Refunding Bonds 'AA+'
--Approximately $87.5 million regional wastewater system revenue refunding bonds, series 2016.
The bonds will be sold as early as Aug. 31. Proceeds will be used to refund outstanding series 2007 bonds.
In addition, Fitch affirms the ratings on the district's outstanding rated bonds as follows:
--$21.6 million regional wastewater system revenue refunding bonds, series 2011 at 'AA+';
--$21.1 million regional wastewater system revenue improvement and refunding bonds, series 2013 at 'AA+';
--$83.6 million central regional wastewater system revenue refunding bonds, series 2014 at 'AA+';
--Up to $350 million in authorized central regional wastewater system series A, tax-exempt extendable commercial paper (ECP) bonds and series A taxable ECP bonds at 'F1+'.
The Rating Outlook is Stable.
The bonds are payable from a first lien on and pledge of net revenues of the system. The ECP bonds have a subordinate lien on pledged revenues and are further secured from proceeds of ECP bonds issued to refinance maturing ECP bonds as well as from proceeds of any senior lien bonds issued to refund the ECP bonds.
KEY RATING DRIVERS
STRONG CONTRACT PROVISIONS: The joint and several contract provisions among 21 members for the repayment of obligations to TRA are viewed by Fitch as an unlimited step-up. The implied unlimited step-up limits bondholder exposure to individual members.
UNCONDITIONAL PAYMENT OBLIGATION: Bondholders are secured by an unconditional payment obligation of members, paid as an operating expense, for their estimated proportional flows to TRA's wastewater system, with an actual true-up each year.
STRONG MEMBER CREDIT PROFILES: Eight of the largest members, constituting about 80% of payments, exhibit strong credit characteristics. The payment history of the members is exemplary.
SLIM FINANCIAL MARGINS: While member payments are designed to recover TRA's system costs by just 1.0x, TRA collects the following year debt service one year ahead of time.
RESERVES PROVIDE FINANCIAL FLEXIBILITY: TRA maintains adequate cash reserves and has a cash-funded debt service reserve equal to average annual debt service. Cash reserves provide financial cushion in the event of member default to bridge the timing gap to reallocate costs to the non-defaulting members.
ABOVE-AVERAGE DEBT AND CAPITAL NEEDS: Debt levels are expected to remain moderately high given future borrowing plans. Amortization of existing debt is above average.
SHORT-TERM RATING: The 'F1+' rating on the ECP bonds is based on TRA's long-term credit quality, recognizing the bonds' subordinate lien on pledged revenue and extendable nature of the repayment obligation.
MEMBER CREDIT PROFILES: Deterioration of the credit quality of one or more of the largest members could have negative credit implications for credit quality.
Created in 1955 by the Texas Legislature as a conservation and reclamation district, the authority has broad powers to construct, own, and operate water and wastewater treatment, collection, and transportation systems. TRA's wastewater system provides collection, treatment, and disposal of wastewater flows on a wholesale basis to a large and diverse service area that includes about 1.4 million people located within the central portion of the Dallas-Fort Worth (DFW) MSA. Unemployment levels at 4% as of June 2016 were better than the state's 4.8% and the national unemployment rate of 5.1%. Wealth indicators for the MSA as measured by median household income are also favorable to the state and national levels.
Wastewater flows are conveyed to TRA for treatment by 19 cities, one town, and the Dallas-Fort Worth International Airport Board through long-term all-service contracts that extend beyond the life of the bonds. Ample treatment capacity remains with recent expansion.
SOUND CONTRACT PROVISIONS
Members pay a proportionate share of the system's annual requirement (AR), which consists of system O&M expenses, debt service, and any amount required under the contracts and bond resolutions, including replenishment of any draws on the debt service reserve fund. The amount that each member pays to the authority annually is based on its proportionate share of estimated flows for the upcoming year. The obligation of each member to make its annual payments (APs) to the authority is an O&M expense, superior in priority to the member's own debt obligations.
Member payments are designed to recover TRA's system costs by just 1.0x. While Fitch calculated debt service coverage is below 1.0x in some fiscal years, at the end of each fiscal year, TRA is required to recalculate each member's proportionate share of the AR based upon actual flows and costs from the prior fiscal year. Any difference is either applied as a credit or a charge to the member's next monthly payment thereby ensuring a true-up to recover any shortage.
While the contracts between the authority and its members do not contain explicit step-up provisions in the event of a default by a member in paying its AP, the contract provisions create an implied step-up. Fitch believes the authority would discontinue service to the defaulting member, which in turn would result in a recalculation of the proportionate contributing flows by non-defaulting members and lead to recovery of the system's full AR should this be through an increase in the non-defaulting members' APs. However, no member has ever failed to make timely payments to the authority as required under their respective contracts.
SOLID MEMBER CREDIT PROFILES
The top member accounting for 26% of total revenues in fiscal 2015 was Arlington. Of the 21 members served by the system, Fitch rates the water and wastewater revenue bonds of the cities of Arlington, Carrollton, Colleyville, and Grand Prairie (all rated 'AAA'/Stable Outlook), Dallas ('AA+'/Stable Outlook), as well as, Fort Worth and Mansfield (both 'AA'/Stable Outlook). Combined these members accounted for 61% of the system's total member payments in fiscal 2015.
To determine the rating on the authority's bonds, Fitch also considered the strong credit characteristics of the utility system for Irving, which is the second largest member, accounting for 19% of the system's total member payments in fiscal 2015. Fitch estimates that the combined Fitch-rated entities along with Irving could reasonably cover a one-time increase in their APs in the event of a default by all remaining members. Furthermore, Fitch estimates that these members could absorb any permanent increase to their APs without materially elevating their existing rate structure in the unlikely event that all other members default indefinitely.
In addition to the ability by major members to absorb any potential payment defaults by others, the system maintains some internal financial flexibility, which serves to offset member payment risk. The system had 124 days' worth of operating expenses in unrestricted cash at fiscal year-end 2015, as well as a cash-funded debt service reserve fund and approximately $21 million accumulated in the interest and sinking fund from pre-collections. These additional funds provide the authority some cushion in the event that member delinquencies occur and APs must be recalculated for performing members.
MODERATELY HIGH DEBT BURDEN
Somewhat offsetting the overall strong financial profiles of the system's major members are the system's moderately high debt metrics and the expectation of additional borrowings by the authority over the next several years. As part of the authority's most recently updated capital improvement plan (CIP), approximately $722.5 million in capital projects are expected to be constructed through the fiscal 2017 to 2021 horizon.
Given the authority's practice of debt financing essentially all of its capital expenditures, this is expected to result in an increased debt profile and rising rates by the end of the CIP period. Budgeted rates for fiscal 2017 are $2.51 per 1,000 gallons treated and are projected to rise roughly 41%, to $3.55 per 1,000 gallons in 2021, inclusive of the additional debt projected in the system's CIP.
EXTENDABLE COMMERCIAL PAPER PROGRAM
TRA utilizes a subordinate lien extendable CP bond program (the series A bonds) for capital improvement projects. The ECP bonds originally have maturities of between one and 90 days. However, the authority has the right to extend the maturity to up to 270 days from the original issuance date. If the bonds are extended, the interest rate is reset to the greater of SIFMA plus a fixed number of basis points or a fixed interest rate, both of which are determined based on the ECP bonds' credit ratings at the time. However, the re-set rate shall not exceed a maximum of 9% per annum.
TRA plans to continue utilizing this program for its CIP and refund the ECP periodically with long term bonds. Currently about $30 million ECP bonds are outstanding and TRA currently plans to refund approximately $200 million in 2017.