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Fitch Assigns Initial 'AA+' Rating to Sugar Land, TX's Water and Sewer Revs; Outlook Stable
Posted February 12, 2012
We Recommend...
AUSTIN, Texas--(BUSINESS WIRE)--Fitch Ratings assigns an initial 'AA+' rating to the following city of Sugar Land, TX (the city) revenue bonds:
--Approximately $22.4 million waterworks and sewer system revenue bonds, series 2012.
The bonds are expected to sell competitively the week of Feb. 21, 2012. Proceeds will be used to fund extensions and improvements to the city's system and pay costs of issuance.
In addition, Fitch assigns an initial 'AA+' rating to $66.2 million of outstanding waterworks and sewer system revenue bonds.
The Rating Outlook is Stable.
SECURITY
The bonds are secured and payable from a first lien on and pledge of the net revenues of the waterworks and sewer system (the system).
KEY RATING DRIVERS
CONSISTENTLY STRONG OPERATIONS: Financial performance has been strong, characterized by high debt service coverage consistently over 2.0 times (x) over the past five years and good and improving liquidity balances. Financial metrics are anticipated to remain solid over the next five years.
Good Planning Efforts: The system is highlighted by comprehensive long-range financial and capital planning.
High Debt But Affordable Rates: While debt levels on a per capita basis are above the category 'AA' rating medians and are expected to increase over the long term, rates are relatively low as a percentage of median household income (MHI), limiting the direct pressure on the rate base.
Solid Service Area: The service area, which is located outside of Houston, exhibits good growth patterns, very strong income metrics, and unemployment consistently lower than the state and U.S.
CREDIT PROFILE
ABOVE-AVERAGE FINANCIAL PROFILE
The system's historical financial performance has been strong, with net system revenues producing senior lien coverage of 3.4 times (x) or better from fiscal 2006-2009. Due to increasing debt service costs, senior lien coverage was a lower, although still solid 2.4x in fiscal 2010. Regular rate adjustments have maintained the system's above-average operating margins, helping to boost cash levels to a solid 319 days in fiscal 2010 from 239 days in fiscal 2006.
Fiscal 2011 estimates and pro forma projections presented by the city appear sound based on reasonable assumptions and indicate senior lien coverage levels will remain strong, ranging from 2.4x to 2.9x over the fiscal 2011 to 2016 forecast period.
With only 20% of the system capital improvement plan (CIP) anticipated to be funded from pay-as-you-go, liquidity levels are expected to remain at similar levels, if not improve, over the forecast period.
DESPITE INCREASES, RATES REMAIN VERY AFFORDABLE
Water and sewer rates are approved by the City Council as part of the budget process. Effective Jan. 1, 2012, the council approved a 12% increase to the combined monthly bill. At $68 per month (assuming average water and sewer usage of 11,000 and 7,000 gallons, respectively), combined charges are very affordable at 0.8% of MHI.
Because of the debt service cost increases anticipated from the current and proposed debt issuances, rate adjustments are planned for each of the next five years. In spite of planned annual increases to the combined monthly bill of 9% in fiscal 2013 and 3% in fiscal years 2014-2016, charges are expected to remain well below Fitch's affordability threshold of 2% of MHI.
WEAKENING DEBT PROFILE
The system's five-year CIP totals an estimated $40.6 million. Approximately, 80% of system needs are anticipated to be debt-funded. Needs focus primarily on rehabilitation and repair, offering some flexibility in terms of project prioritization.
System debt ratios on a per capita basis are high with outstanding debt per customer at approximately $840 and are forecast to increase above the category 'AA' rating medians in five years. Furthermore, debt amortization is slightly below-average with principal payout at 35% and 74% in 10 and 20 years, respectively.
SYSTEM AND SERVICE AREA
The system provides service to an estimated population of approximately 85,000 through 27,000 water and 25,000 wastewater connections. The majority of customers are residential and there are no customer concentration concerns.
Sugar Land is located approximately 20 miles southwest of downtown Houston in Fort Bend County. The expansion of US Highway 59, which is the direct route from Sugar Land to downtown Houston, along with other roadway improvements in and around the city, has spurred healthy commercial and residential development activity in recent years. The benefit is evidenced in building permit trends which point to steady residential building permit activity despite the national economic slowdown.
City wealth levels are 2.0x state and national averages, and the city's unemployment rate at 5.7% as of November 2011 is below the county (7%), state (7.5%) and national (8.2%) estimates for the month.
Water supplies are currently derived from the city's 17 wells. The city currently has a production capacity of 43 million gallons per day (MGD). The projected ultimate water demand for the city is approximately 24 MGD on average; thus, water supplies are more than sufficient to meet the city's projected build-out demand.
To meet Fort Bend Subsidence District regulations, the city approved a Groundwater Reduction Plan that outlines the city's strategies for meeting mandated conversion to non-groundwater sources. The city has commenced a surface water conversion project that involves the construction of transmission lines, groundwater plant improvements and construction of a 9 MGD surface water treatment plant (with capability for future expansion to 22 MGD) adjacent to Oyster Creek and Gannoway Lake.
The design of the surface water treatment plant was completed in January 2010. The total cost of the conversion project is an estimated $109.5 million, all of which has been entirely funded. Design costs have come in within budget and all construction contracts have been awarded. The estimated completion date for the conversion project is early 2013.
Wastewater treatment is provided by the Sugar Land Regional Sewerage System Plant and the South Wastewater Treatment Plant. Both plants are operated by the Brazos River Authority (BRA). The current contract with BRA began in October 2010 and is for three years with two one-year extensions. With a combined wastewater treatment capacity of 16 MGD and sewer flows averaging 8.1 MGD annually over the past five years, there is more than sufficient wastewater treatment capacity remaining to handle city growth.
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 Fitch's Revenue-Supported Rating Criteria, this action was informed by information from CreditScope and the Municipal Advisory Council of Texas.
Applicable Criteria and Related Research:
--'Revenue-Supported Rating Criteria' (June 20, 2011);
--'U.S. Water and Sewer Revenue Bond Rating Criteria' (Aug. 10, 2011);
--'2012 Water and Wastewater Medians' (Dec. 8, 2011);
--'2012 Outlook: Water and Sewer Sector' (Dec. 8, 2011).
Applicable Criteria and Related Research:
Revenue-Supported Rating Criteria
http://www.fitchratings.com/creditdesk/report...
U.S. Water and Sewer Revenue Bond Rating Criteria
http://www.fitchratings.com/creditdesk/report...
2012 Water and Sewer Medians
http://www.fitchratings.com/creditdesk/report...
2012 Outlook: Water and Sewer Sector
http://www.fitchratings.com/creditdesk/report...
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