TEXT-Fitch affirms Pasadena, Texas
Sept 14 - Fitch Ratings affirms the 'AA-' rating on the following Pasadena, TX water and sewer revenue bonds: --$71 million waterworks and sewer system revenue bonds, series 2010 and 2008. SECURITY The bonds are secured by a first lien on and pledge of the net revenues of the city's combined waterworks and sewer system (the system). KEY RATING DRIVERS STRONG FINANCIAL METRICS MAINTAINED: The system has continued to demonstrate financial stability with solid debt service coverage and sound liquidity. Concern regarding a projected decline in liquidity over the near term to fund capital projects is offset by the system's ample reserves and the prudent practice of funding capital needs from current resources. AMPLE RATE FLEXIBILITY: System rates remain competitive with those of nearby utilities and are well within Fitch's affordability threshold. MODEST CAPITAL NEEDS: The city's lack of a formal capital improvement plan (CIP) is a concern, but Fitch notes that the system's existing infrastructure provides ample water and wastewater treatment capacity to provide service to its mature service area. No additional debt plans are currently planned. DIVERSE AND STABLE SERVICE AREA: The system provides an essential service to a diverse customer mix in a broad and stable service area. FAVORABLE DEBT PROFILE: The system's debt levels are moderately low and should continue to decline going forward given the absence of any additional borrowing plans. CREDIT PROFILE The system serves a mature and relatively stable service area located in southeast Texas along the Houston Ship Channel. With a population of approximately 152,000, Pasadena is the largest suburb in the Houston metropolitan statistical area. The service area, while stable, is sensitive to economic cycles due to nondurable manufacturing concentration. The system provides service to nearly 35,000 water and more than 33,000 sewer connections. Pasadena entered into a cost sharing agreement with the city of Houston for water supply, acquiring rights to 15 million gallons per day (MGD) from the southeast water plant, and subsequently entered into another agreement for an expansion project to provide another 25 MGD of surface water rights to meet long-term needs. Combined, the system's existing water supply is reportedly sufficient to serve its customers over the long term. STRONG FINANCIAL METRICS MAINTAINED System-supported debt totals roughly $94 million and includes about $23 million of outstanding general obligation bonds issued to restructure a portion of the system revenue debt. In fiscal 2005, the city restructured its revenue bond portfolio and implemented a large rate increase that became effective for fiscal 2006 in response to deteriorating system financial metrics. Subsequent to the restructuring and rate hike, annual debt service coverage and system liquidity showed marked improvement. Since then, management has remained more vigilant regarding rising costs and maintaining rates and fees to recover cost of service. In fiscal 2008, the city began imposing a fixed monthly fee on customers with larger than standard residential lines to recover the additional costs related to higher volume connections. This fixed fee adds some stability to the system's revenue stream. The city reported ample senior lien debt service coverage of 3.3 times (x) and all-in coverage of 2.2x in fiscal 2011. After falling to a low point of 27 days cash on hand in fiscal 2005, liquidity improved to 332 days by the end of fiscal 2011. Management reports that operating results for fiscal 2012 should yield similar debt service coverage levels with no material change in unrestricted cash. For fiscal 2013, liquidity is projected to decline to a still satisfactory level in support of the system's ongoing capital needs. MANAGEABLE CAPITAL NEEDS The system's major infrastructure needs, primarily related to water and wastewater treatment capacity and water supply, have reportedly been satisfied. For fiscal 2013, the city plans to spend down about $13.2 million from reserves for capital projects that will improve system water pressure and address system rehabilitation. The city does not have a formal CIP beyond fiscal 2013 but plans to continue maintaining the system with recurring revenues. The absence of a formal capital improvement plan to cover repair and rehabilitation needs is viewed with some concern by Fitch, but this is somewhat mitigated by the maturity of the service area and system's ample treatment capacity and water supply. At $1,390 total outstanding long-term debt per customer, the system's debt levels are in line with the rating category. Annual debt service as a percent of gross revenues is a manageable 20%. Debt levels should moderate further given the system's above-average amortization rate and lack of additional borrowing plans.