Fitch Rates Canadian River Muni Water Auth, TX Sub Lien Contract Revs Ser 2014 'AA'; Outlook Stable

Fitch Ratings has assigned an 'AA' rating to the following obligations issued by the Canadian River Municipal Water Authority, Texas (CRMWA or the authority):

--Approximately $42.5 million subordinate-lien contract revenue refunding bonds, series 2014 (conjunctive use groundwater supply project).

Bond proceeds will be used to refund portions of the authority's outstanding bonds and to pay for the costs of issuance. The bonds are expected to price via negotiation the week of Nov. 3.

In addition, Fitch affirms the following at 'AA':

--$74.5 million senior lien contract revenue bonds (conjunctive use groundwater supply project);

--$114.5 million subordinate lien contract revenue bonds (conjunctive use groundwater supply project);

--$5.5 million (senior-lien) contract revenue bonds (U.S. Bureau of Reclamation prepayment project).

The Rating Outlook is Stable.

SECURITY

The bonds are secured by an irrevocable lien on and pledge of the project payments that is junior and subordinate to the first lien pledged to the senior lien bonds. Project payments are derived from the member cities pursuant to individual agreements relating to participation by members in each authority project financing. Project payments by member cities are an operating expense of their respective utility, payable prior to debt service on the member cities' own bonds.

KEY RATING DRIVERS

MEMBERS EXHIBIT HEALTHY FINANCIAL PROFILES: The financial profiles of the authority's largest contributing members, the cities of Amarillo and Lubbock, remain healthy. Of note, Amarillo generates enough free cash to pay all of the authority's obligations.

AUTHORITY'S FINANCIAL POSITION SOLID: The authority's own robust financial position provides flexibility. Unrestricted cash finished fiscal 2013 at more than $15 million, or enough to cover approximately 460 days of operational costs (days cash on hand).

STRONG LEGAL COVENANTS: Legal protections include a step-up provision in the event of non-payment by one or more members. No member has ever defaulted on any of its payments to the authority in its extended operating history.

AMPLE WATER SUPPLY: Existing and additional groundwater rights are estimated to ensure members' water needs are met for the next 100 years.

WATER SCARCITY: Fitch believes the 11 member cities have a strong incentive to continue to participate in CRMWA due to water scarcity in the area and the authority's rate affordability.

RATING SENSITIVITIES

WEAKENED FINANCIAL PROFILES: Deterioration in the credit quality of Amarillo or Lubbock and/or deterioration in the authority's own financial position likely would have a negative impact on the rating.

CREDIT PROFILE

As a regional wholesale provider, the authority delivers untreated water to 11 member cities in the panhandle and south plains regions of Texas. The members include Amarillo, Borger, Brownfield, Lamesa, Levelland, Lubbock, O'Donnell, Pampa, Plainview, Slaton, and Tahoka.

Fitch's analysis focuses on the systems of Amarillo and Lubbock, as these two cities are responsible for most of the authority's debt and operating charges. As of fiscal 2013, Amarillo contributed approximately 41% of the authority's combined charges while Lubbock accounted for 34% (75% combined). These levels have been relatively stable over time.

AMARILLO REMAINS AUTHORITY'S STRONGEST, LARGEST MEMBER

Debt service coverage (DSC) generated by Amarillo's water and sewer system has been consistently strong over at least the past five years. Inclusive of Amarillo's debt service related to the authority, fiscal 2013 shows all-in DSC at 2.2x, which is above Fitch's 'AA' median of 2.0x. Liquidity is also very strong; unrestricted cash and investments totaled nearly $67 million in fiscal 2013 or the equivalent of 692 days of cash on hand. This is in excess of Fitch's 'AAA' median of 671 days.

The city has prudently raised rates over the past few years to pay for increasing debt service carrying costs. As a result, operating revenues have climbed in each of the last five years even with some year-over-year reductions in water usage. At approximately 1.2% of median household income (MHI), combined system rates are considered affordable by Fitch based on its standard assumption of 7,500 gallons per month of consumption.

At $1,644, the system's current debt-per-customer is slightly better than the 'AA' rating category median, as is debt-to-net plant. Debt amortization is rapid at 61% in 10 years and 100% in 20 years. Capital projects in the city's capital improvement plan total $95 million from 2015 to 2018. Projects include repair and rehabilitation of existing facilities and the construction of a new water transmission line.

Legal provisions associated with Amarillo's utility debt are sound, including a rate covenant that requires the city to set rates sufficient to cover maximum annual debt service (MADS) by at least 1.25x. The additional bonds test requires that historical net revenues equal at least 1.25x MADS on outstanding and proposed bonds. In the highly unlikely case of nonpayment of CRMWA debt service by all other members, Amarillo generates enough free cash to pay all of the authority's obligations.

Amarillo (estimated 2013 population over 198,000) is a growing and diversifying city. Measured at 4.0% in August 2014, the city's unemployment is well below the state and national average. However, the city's MHI trails behind state and national levels.

LUBBOCK FINANCIAL METRICS SATISFACTORY

Lubbock's water system's financial profile has been mixed in recent years, with strong liquidity but DSC below Fitch's 'AA' rating category median. At greater than one year, cash on hand is healthy as a result of a series of significant rate increases implemented from 2008 through 2011. All-in DSC peaked in fiscal 2011 driven by the rate increases combined with higher consumption due to the drought. In general, DSC has been below average but adequate at 1.4x to 1.8x since fiscal 2009.

Existing debt levels are high and are expected to increase as a significant amount of additional debt is planned over the next five years to complete the city's major water projects. Additional debt service costs associated with such new debt are forecast to lead to a decline in DSC to 1.3x. However, the city's forecasts are noted for being conservative with actual results outpacing projections in past years. As debt is being issued, Fitch expects the city to continue implementing rate hikes to accommodate the rising fixed costs. Additionally, the strong cash balances somewhat mitigate concerns about the below-average coverage.

Lubbock is the largest of all the members in terms of population and is characterized as having a stable and diverse service area.

MEMBER-CITY PAYMENT ARRANGEMENTS

Member cities remit payments to the authority for their proportionate share of debt-financed projects as well as their share of operations and maintenance costs for pumping and transporting water. Payments by members to the authority, whether for debt service or operations of the authority, are a contractual operating expense of the cities' utility systems. In addition, the members are obligated to make up for nonpayment by defaulting members on a pro-rata basis. In the event of nonpayment by a member city, the defaulting city's water rights will be transferred to those cities making up the payments. The agreements have been validated in the Texas courts.

AUTHORITY'S FINANCIAL, DEBT PROFILE SOLID AND STABLE

The authority's finances have been solid and stable through at least each of the last five years. All-in DSC has experienced limited volatility and has remained between 1.5x and 1.7x over this timeframe while cash has been strong at above 400 days. Tighter DSC margins are generally typical with wholesale providers as such providers' customers are sensitive to overcharging.

The authority's debt per customer is low at $1,162, aligning with the 'AAA' median of $1,165. Amortization is very rapid at 71% in 10 years and 100% in 20 years. With no new debt issuance planned over the intermediate term, the authority's debt profile should improve with amortization.

ADEQUATE SUPPLY PROJECTED THROUGH 2140

The authority has been proactive in seeking new supply as the severe drought over the past few years has decreased surface water to below a useable yield. With the December 2011 acquisition of an additional 180,000 acres in water rights from Mesa Water Inc., the authority's water needs are estimated to be met through 2140.

Additional information is available at 'www.fitchratings.com'.

Applicable Criteria and Related Research:

--'Revenue-Supported Rating Criteria' (June 2014);

--'U.S. Water and Sewer Revenue Bond Rating Criteria' (July 2013);

--'2014 Water and Sewer Medians' (December 2013);

--'2014 Outlook: Water and Sewer' (December 2013).

Applicable Criteria and Related Research:

2014 Outlook: Water and Sewer Sector

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=724357

2014 Water and Sewer Medians

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=724358

U.S. Water and Sewer Revenue Bond Rating Criteria

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=715275

Revenue-Supported Rating Criteria

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=750012

Additional Disclosure

Solicitation Status

http://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=906314

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Contacts:

Fitch Ratings
Primary Analyst
Major Parkhurst
Director
+1-512-215-3724
Fitch Ratings, Inc.
111 Congress Avenue
Austin, TX 78701
or
Secondary Analyst
Teri Wenck
Associate Director
+1-512-215-3742
or
Committee Chairperson
Amy Laskey
Managing Director
+1-212-908-0568
or
Elizabeth Fogerty
Media Relations
+1-212-908-0526
New York
elizabeth.fogerty@fitchratings.com

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