Fitch Rates Garland, TX $18.3MM Water and Sewer Revs 'AA'
Source: Business Wire
The 'AA' rating reflects the system's economically diverse and mature service area, adequate financial results, a stable, long-term water supply, implementation of a large capital improvement program (CIP) and corresponding impact on the system's moderately high debt levels. Severe volatility in precipitation in recent years, compounded by the nature of the city's potable water contract, has adversely affected the system's historically stable financial performance. Although Fitch viewed favorably the city's action to restore financial resources with rate increases implemented in each of fiscal years 2005 and 2006, a subsequent change in the system's rate structure in fiscal 2007 that effectively reduced service rates, combined with another year of significant rainfall, eroded the financial flexibility gained in fiscal 2006. Fitch will continue to monitor the system's financial performance and its ability to address volatility in financial operations year to year. Fitch believes continued vulnerability resulting from extreme weather conditions and take-or-pay contract terms, as well as the system's inability to restore liquidity levels more in line with the 'AA' rating category could exert downward pressure on the system's current bond rating.
The water system serves approximately 67,000 city customers and purchases its water on a wholesale basis under a perpetual contract from the North Texas Municipal Water District (NTMWD), of which Garland is a member city. Existing and projected water supplies from NTMWD reportedly are sufficient to meet all customer demands through 2030. The wastewater system serves over 65,000 customers within the city, as well as portions of six other cities, including the city of Dallas.
Wet weather periods significantly pressured operations and reduced liquidity levels in fiscal years 2004 and 2005, as customer sales declined and budgetary flexibility was already limited due to the city's take-or-pay water contract with NTMWD, which is based on maximum-year usage. Conversely, extreme dry weather conditions in fiscal 2006, combined with the implementation of annual rate increases led to a 28% boost in operating revenue, which in turn helped restore liquidity levels. However, implementation of a tiered rate structure in fiscal 2007 needed to promote water conservation effectively reduced the average total water and sewer bill by 4.6%. This rate cut and the return of above-average precipitation levels during fiscal 2007 resulted in a significant decline in operating revenues.
For fiscal 2008, water and sewer rates were increased by 10%, and increases averaging 7% for the water and wastewater systems are projected for the next five years. Currently, Garland's average combined water and sewer bill ranks third highest when compared to other surrounding area providers but remains within the 2% of median household income that Fitch considers to be affordable.
Despite the revenue swings in the last five fiscal years, the system has experienced strong debt service coverage and operating margins, though both are expected to decline as the city contends with the implementation of a sizeable CIP expected to be almost entirely debt funded. Based on audited fiscal 2008 results, senior lien annual debt service (ADS) coverage was a still healthy 2.3 times (x), with all-in ADS coverage, which includes approximately $38.8 million in outstanding tax-backed general obligation debt supported by a subordinate lien on system revenues, at 1.5x. These results are a decline from senior lien ADS coverage levels of 3.1x and 5.3x reported in fiscal years 2005 and 2006, respectively. Through fiscal 2011, financial projections show senior lien coverage ranging from 1.9x to 2.1x based on moderate future rate hikes and normal weather conditions; all-in ADS coverage for the period is expected to stay at or above 1.4x.
The system's CIP for fiscal 2009-13 was lower at $118 million compared with the $186 million prior year five-year plan. Financed almost exclusively from debt proceeds, approximately 60% of the plan will address sewer system improvements that will ensure compliance with new and enhanced regulatory and operational standards with the remaining 40% for water system improvements. Debt levels per customer are moderately high at $1,585 per customer, though Fitch expects the debt per customer level will continue to increase for the next several years as the city issues revenue bonds for the larger projects included in the five-year CIP.
Garland has benefited from its location within the Dallas-Fort Worth metropolitan area. Manufacturing and distribution remain the city's primary economic engines, and the city's industrial market reportedly is the second largest in the Dallas-Fort Worth metroplex. The city's unemployment rate, measured at 5.5% in September 2008, historically has tracked regional, state, and national averages. Local wealth levels in the city, as measured by per capita buying income and median household income, are slightly higher than both state and national averages.
Fitch's rating definitions and the terms of use of such ratings are available on the agency's public site, www.fitchratings.com. Published ratings, criteria and methodologies are available from this site, at all times. Fitch's code of conduct, confidentiality, conflicts of interest, affiliate firewall, compliance and other relevant policies and procedures are also available from the 'Code of Conduct' section of this site.
Contact:
Fitch Ratings
Julie Seebach, 512-215-3740 (Austin)
Gabriela Gutierrez, 512-215-3731 (Austin)
Media Relations
Cindy Stoller, 212-908-0526 (New York)
cindy.stoller@fitchratings.com
