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Fitch Affirms Edinburg, Tex. Utility System Revs at 'AA-'; Outlook Stable
Feb 15, 2012 (Close-Up Media via COMTEX) --
Fitch Ratings affirmed the rating on revenue bonds of Edinburg, Texas (the city) as part of its continuous surveillance effort.
In a release, Fitch noted details:
--$18 million utility system revenue bonds, series 2000, 2002 and 2006 at 'AA-';
--$1.7 million utility system revenue refunding bonds, series 2010 at 'AA-'.
The Rating Outlook is Stable.
SECURITY
The bonds are secured by a pledge of a first lien on net revenues of the city's water and sewer system (the system). Bonds are also secured by a debt service reserve fund provided by a surety policy, equal to average annual debt service.
KEY RATING DRIVERS
OPERATIONAL CONSTRAINTS: The rapidly growing customer population has placed operational pressure on the system. Growth has recently slowed to a more moderate pace, which if sustained could ease capacity needs somewhat.
SOLID FINANCIAL PERFORMANCE: Debt service coverage (DSC) levels declined to a still solid 1.8 times (x) in fiscal 2010 due to unusually high rainfall totals which in turn resulted in lower consumption. However, coverage appears to have recovered in fiscal 2011. Liquidity levels remain strong with over 360 days of cash on hand.
LOW DEBT BURDEN: The system's debt burden is low on per customer and per capita basis with rapid amortization. Despite additional debt planned in the next five years debt levels should remain moderate.
MODERATE RATE FLEXIBILITY: The system exhibits moderate rate flexibility, as combined utility rates fall below Fitch's affordability threshold.
MIXED ECONOMIC PROFILE: The area is characterized by favorable unemployment rates but below average wealth levels.
CREDIT PROFILE
Edinburg provides retail service to more than 77,000 people within the city. The system is facing operational pressure due to rapid growth. In 2009 the city was warned by state regulators that wastewater flows (over 7 mgd) exceed permitted capacity (5.9 mgd). This resulted in the city entering into an agreed order with state regulators and required the relocation of the system's wastewater discharge site. A needed expansion of the system's sole wastewater treatment plant is under construction and expected to be online by mid 2013. The expansion will increase wastewater treatment capacity by over 50 percent to 12.3 mgd.
The city purchases raw water on a wholesale basis from two Hidalgo County irrigation districts, which are supplied by reservoirs on the Rio Grande, for the bulk of the city's water needs. Due to the Texas drought of 2011, the city faced water supply pressures. In fiscal 2011 demand for water was higher than the city's permanent supply. The city met the extra demand by leasing additional water rights from surrounding entities. Prospectively, the city will budget annually to lease water rights based on projected need and will continue to plan for the purchase of additional long term water rights.
Financial performance has been sound, with senior lien annual debt service (ADS) coverage levels averaging 2.2x for the past three years. All-In ADS coverage has also been solid, averaging 2.0x over the same period. Financial results for fiscal 2010 were negatively impacted by an unusually wet season in which the city received over 30 inches of rain, thereby cutting consumption of water dramatically. As a result, DSC declined to 1.8x in 2010 from 2.7x in 2009. Unaudited fiscal 2011 results show a notable improvement in DSC to 2.5x. Other financial metrics also have been favorable, including liquidity levels, which registered at 368 days of cash on hand for fiscal 2010.
Capital needs are moderate at $47.7 million through fiscal 2016, of which 30 percent is expected to be provided from debt. Currently, leverage ratios are low, with outstanding debt per customer at just $687 in fiscal 2010, comparing favorably to the 'AA' rating category median of $1,615 per customer. Debt amortization is rapid at 53 percent and 97 percent retiring in 10 and 20 years, respectively. The current capital plan includes $15 million for the expansion of the wastewater treatment plant, which was funded by bonds issued in 2010. Also included in the plan is approximately $11 million in additional debt for expansion of the water treatment capacity scheduled for 2013. With the planned issuance, debt levels should remain moderate for the rating category.
The city's customer base has averaged 3 percent annual growth in the last five years, compared to the more rapid growth of over 6 percent experienced annually from 2005 through 2008. This growth increased the rate payer base and enabled the city to minimize rate increases, although it put a strain on capital resources. The city's monthly residential water and sewer charge of $47 for 10,000 gallons of water is below the state average and is second lowest in the area. The city has a history of frequent moderate rate increases, with the most recent rate adjustment of less than 5 percent occurring in fiscal 2011. Despite some concentration amongst the largest users, the customer base is well diversified, and the top 10 largest customers (16 percent of fiscal 2010 sales) are mostly government institutions.
Located 20 miles from the U.S.-Mexico border, Edinburg (general obligation bonds rated 'AA-' by Fitch Ratings) is the seat of Hidalgo County in southern Texas. Edinburg's population grew over 50 percent during the latest census period. The energy production, healthcare, higher education, and tourism components of the local economy have developed in recent years to complement the distribution, international trade, and agricultural sectors that have historically been present. As a result, the city's unemployment rate is favorable at 7.9 percent for November 2011, well below the county and MSA level of 11 percent. However, resident wealth levels remain substantially lower than those of the state and nation, although the below-average cost of living somewhat offsets these conditions.
More information:
fitchratings.com
((Comments on this story may be sent to newsdesk@closeupmedia.com))
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