Fitch Rates Plano, TX's Waterworks and Sewer Revs 'AAA'; Outlook Stable
OREANDA-NEWS. Fitch Ratings has assigned a 'AAA' rating to the following Plano, TX (the city) revenue bonds:
--Approximately $25.3 million waterworks and sewer system revenue bonds, series 2016.
The bonds are expected to sell via negotiation the week of April 18. Proceeds will be used to extend and improve the city's water and sanitary sewer system (the system), including acquisition of right-away therefor, and pay issuance costs.
The Rating Outlook is Stable.
The bonds are payable from a senior lien on net revenues of the system.
No debt service reserve fund is being funded in connection with the series 2016 bonds, but a springing reserve is in effect if debt service coverage (DSC) falls below 1.5x annual debt service.
KEY RATING DRIVERS
SOLID DEBT COVERAGE EXPECTED: System financial performance, particularly in terms of DSC, is projected to be very strong at well over 12.0x through fiscal 2019.
VERY FAVORABLE DIRECT DEBT PROFILE: Direct debt ratios are projected to remain very low as the system currently has no direct debt outstanding and there are no plans to issue debt beyond the current financing.
WHOLESALER COST AND RATE PRESSURES: The city's dependence on its wholesale water and wastewater treatment provider North Texas Municipal Water District (NTMWD, or the district) creates cost pressure outside of the utility's direct control.
DIVERSE, AFFLUENT RESOURCE BASE: The city benefits from a diverse corporate base and prominence in the broad and resilient Dallas-Fort Worth (DFW) economy. Residents are affluent and well-educated.
CHANGES TO FINANCIAL OPERATIONS: Failure to pass on wholesaler rate increases to preserve strong financial margins and generate ongoing resources for capital could pressure the rating, but such a situation is viewed as highly unlikely.
The city of Plano (general obligations rated 'AAA'/Stable) is a wealthy and mature suburb located 20 miles north of Dallas with a population of approximately 274,000. The city's system serves primarily 80,000 water and 76,000 sewer customers on a retail basis within the city's corporate boundaries. System customer growth has been under 1% over the past five years due to the mature nature of the city. Customer concentration is not a concern as the top 10 water and sewer customers combined comprised just 6% of total operating revenues and no one customer accounted for more than 2% of total water or sewer system revenues in fiscal 2015.
STRONG FINANCIAL PERFORMANCE EXPECTED
The city paid off the only revenue bonds it had outstanding in fiscal 2012, so the system currently has no outstanding debt. The current series 2016 bonds debt service payments will be level, with estimated maximum annual debt service (MADS) occurring in fiscal 2032 at $1.9 million. MADS coverage at this level as of fiscal 2015 is exceptional at 14.6x. Given no other debt issuances are planned for the foreseeable future and continued annual rate increases are projected to keep pace with rising wholesaler costs, DSC is expected to remain very strong.
System cash levels have been healthy, with fiscal 2015 available unrestricted reserves at $54 million equal to 188 days cash on hand (DCOH). DCOH has ranged between 180 to just over 200 over the past five years and is expected to remain within historical norms going forward.
WHOLESALER CONTRACTS; RISING PROVIDER RATES
All of the city's water supply and wastewater treatment is purchased from the NTMWD. The city is under three wholesale contracts with the district: a purchase water contract, regional wastewater contract, and interceptor system contract. The city also entered into a contract by itself with NTMWD for the construction of a water transmission system to serve certain areas within the city, but most of the debt under this contract has been nearly repaid. All system contracts extend until the bonds are paid in full, and payments constitute an operating expense of the city's waterworks and sewer system.
Under the water supply contract the city pays an annual minimum take-or-pay amount based upon the maximum amount taken during any previous year, with that consumption setting the new minimum amount for all subsequent years until that amount is exceeded. The city's current annual minimum take-or-pay usage is approximately 26.7 billion gallons set in fiscal year 2001. Once established, the take-or-pay gallonage is never reduced.
Under the regional wastewater system contract, the city pays its annual requirement based on contributing flow to NTMWD's system. The city's proportionate share of the annual requirement is the percentage obtained by dividing the city's estimated contributing flow by the total estimated contributing flow to the NTMWD system by all member cities during such fiscal year.
Purchased water and sewer treatment costs accounted for 64% of total system operating costs (net of depreciation) as of fiscal 2015. Based on city forecasts, purchased wholesaler costs are projected to account for 85% of total operating costs by fiscal 2019 as NTMWD rates are projected to continue to increase annually. Rates have generally been passed onto city customers and will need to continue to be passed on in order to cover system expenditures and preserve the system's solid financial profile.
LOW DIRECT DEBT BURDEN
Direct debt following this transaction will be a modest $159 per customer and $90 per capita, compared to the 'AAA' median of $1,093 and $297, respectively. The current issuance will be used primarily to address certain sewer-related projects associated with an administrative order. However, most of the remainder of the system's $102 million fiscal 2016-2020 capital plan is associated with ongoing system rehabilitation and will be funded with reserves and ongoing surplus revenues. Given the lack of future borrowing plans, system direct debt levels are expected to remain minimal. Furthermore, unrestricted cash reserves of $54 million in fiscal 2015, although expected to be drawn down somewhat for capital expenses over the next few years, exceed the current borrowing amount.
VERY AFFORDABLE RATES
The city has diligently passed on district rate increases to its customers to cover system expenses. The average combined monthly residential bill at close to $100 is very affordable at 1.4% of median household assuming actual usage of 16,470 gallons per month. Despite the projected annual rate increases averaging 10% for water and 5% for sewer over the fiscal 2017 to 2019 period, the system should retain ample rate flexibility, particularly given area wealth levels are above-average.
STRONG LOCAL ECONOMY
Plano's suburban location within the extensive DFW economy and well-educated workforce support continued private sector investment and strong employment trends. The city's economy is diverse and serves as corporate and/or regional headquarters for a number of companies, including HP Enterprise Services, JCPenney, PepsiCo's Frito-Lay North American division, Alcatel-Lucent, Capital One Auto Finance, and Dr. Pepper Snapple Group. The percentage of residents with an advanced degree is nearly twice the national average. Wealth levels are also very high, with per capita personal income at 147% of the national average.
The city and region continue to outpace the nation in job growth. Plano's January 2016 unemployment rate improved to 3.5% from 4% a year prior as employment gains outpaced labor-force gains, which compares favorably to the state (4.4%) and national averages (5.2%), respectively.