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/reports/report_frame.cfm?rpt_id=637130
U.S. Water and Sewer Revenue Bond Rating Criteria
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=647331
2012 Water and Sewer Medians
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=657111
2012 Outlook: Water and Sewer Sector
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=657110
ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND
DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING
THIS LINK: HTTP://FITCHRATINGS.COM/UNDERSTANDINGCREDITRATINGS.
IN ADDITION, RATING DEFINITIONS AND THE TERMS OF USE OF SUCH RATINGS ARE
AVAILABLE ON THE AGENCY'S PUBLIC WEBSITE '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.