Fitch Affirms Fort Worth, Texas Drainage Rev Bonds at 'AA '; Outlook Stable
--\\$112.1 million drainage utility system revenue bonds at 'AA+'.
The Rating Outlook is Stable.
The bonds are secured by a first lien on and pledge of the gross revenues of the drainage utility system (the system).
KEY RATING DRIVERS
STABLE REVENUE SOURCE: The bonds are secured by a very stable and predictable revenue stream with the fixed drainage fee comprising a nominal 8% of the total utility bill. The drainage fee is attached to the water and sewer bill, and nonpayment of any portion of it results in termination of service.
AMPLE OPERATING AND FINANCIAL FLEXIBILITY: The low cost of maintenance of utility assets provides the utility with a high degree of operating and financial flexibility.
STRONG FINANCIAL PROFILE: Debt service coverage (DSC) levels are healthy at over 2x and liquidity has grown to robust levels.
EXTENSIVE CAPITAL PLAN: The system has an extensive \\$1.5 billion capital plan to address flooding concerns with \\$340 million considered critical needs to be addressed over the next 15 to 20 years.
LARGE AND DIVERSE REGIONAL ECONOMY: Fort Worth is a major anchor in the Dallas-Fort Worth regional economy, with a population of roughly 6.5 million.
CONTINUED HEALTHY FINANCIAL METRICS: Maintenance of healthy financial margins is key to retaining the currently high rating level. The Stable Outlook reflects Fitch's expectation that a shift in fundamental credit characteristics is highly unlikely.
The drainage utility fund was established in fiscal 2006 in response to flash flood problems and federally mandated storm water-runoff and treatment requirements. In August 2006 the city began to assess a drainage utility fee that is billed and collected monthly with the water and sewer utility charges. At that time, an annual ascending rate structure was reviewed and the city council supported rate increases to move forward with its capital plan.
SLOWED DEBT ISSUANCE: RATES HELD STEADY
Fiscal 2007 was its first full year of operation and through fiscal 2011 rates increased from \\$2.90 per equivalent residential unit (ERU) to \\$5.40 per ERU. These rates were proposed to further increase to \\$5.80 per ERU in fiscal 2015 and to \\$6.20 per ERU in fiscal 2017 to support a biennial \\$30 million bond program. However, the city has slowed its progress on new projects and new debt issuance. The planned \\$30 million for fiscal 2015 has been postponed until around the fiscal 2017 or fiscal 2018 timeframe. The city has also shifted from an entirely debt-financed capital plan to a 30% debt-financed plan putting a greater focus on pay-go capital spending, and strives to maintain debt carry costs at or below 30% of operating expenses.
Collections are strong, and in effect mirror the water and sewer utility (whose revenue bonds Fitch rates 'AA'), since the city is authorized to disconnect water service for non-payment or partial bill payment. Drainage rates have remained at \\$5.40 per ERU and at this time no additional rate increases are planned over the coming five-year period. When combined with the city's water and sewer average residential bill of \\$57.80 (assuming usage of 10.22 ccf per month for water and 6.12 ccf per month for sewer) the average residential bill grows to a still very affordable \\$63.20 or 1.5% of median household income. This falls comfortably below Fitch's 2% MHI affordability threshold, providing the system sufficient rate flexibility.
GOOD FINANCIAL PERFORMANCE EXPECTED
The drainage fund has reported healthy annual operating surpluses since inception. For fiscal 2014 the system reports robust cash balances in excess of \\$29 million or the equivalent of over 600 days of cash on hand (DCOH), well above the 'AA' category median of 442 DCOH. DSC for fiscal 2014 was also healthy at over 2x. Management provided forecasts for fiscal years 2016 to 2020, which appear reasonable, and point to DSC levels to remain at or near 2x. Coverage levels should remain sound, despite plans to issuance an additional \\$30 million in revenues bonds around fiscal 2017 to finance the capital improvement plan (CIP). The large degree of discretion with regard to operating expenses of the utility given the lower cost of maintenance of utility assets is a credit strength.
EXTENSIVE CAPITAL PLAN
The city has completed a study of its major storm drainage systems and costs for the entire plan are estimated at \\$1.5 billion, to be completed over a 40-year period. The city has identified 198 projects that it considers critical and to date the city has completed, constructed or funded 117 projects. The remaining unfunded 81 critical projects total approximately \\$340 million and are anticipated to be funded over the next 15 to 20 years. The current CIP is designed to address the most critical needs first.
The utility's fiscal 2016 through 2020 CIP totals \\$81 million, a 10% reduction from the \\$89 million 2014-2018 CIP. The current CIP will be approximately 30% funded from existing bond proceeds and 30% from a \\$30 million planned issuance in the coming years, with the remaining funding coming from system revenues. The current debt burden is moderately high with debt service at 26% of gross revenues as of fiscal 2014, higher than the 'AA' median of 16%. Debt-to-net plant is also elevated at 103%. Debt ratios have moderated due to the rapid amortization and the city shifting away from an entirely debt-financed CIP.
SOUND ECONOMIC FUNDAMENTALS
With an estimated 2014 population of about 797,000, Fort Worth's population continues to grow. In addition, the city's extra-territorial jurisdiction is sizable and provides opportunity for future annexation and growth. The metropolitan area employment base is extensive, and while military-related spending still accounts for an estimated one-quarter of the economy, recent gains in other sectors, such as services, construction, and trade have helped diversify the labor force. City job growth remained strong through the recessionary years, increasing 19% from May 2005 to May 2015. For April 2015, the city's unemployment stood at 3.7%, down from 5.2% the year prior and below the state (4.2%) and the nation (5.4%). City wealth levels are on par with the region and state although slightly below the national average.