Ratings based on strength of debt service and stable economic outlook
The McAllen Public Utility (MPU) recently went before Fitch Ratings for review on its bond series, affirming the system’s rating of ‘AA+,’ viewing “the outlook for this rating as stable.” The bonds, set for $22.3 million, are for outstanding waterworks and sewer system revenue bonds series 2015 and 2016. In addition, Fitch has assessed the Stand-alone Credit Profile (SCP) of the city at ‘aa+.’ MPU first received the ‘AA+’ rating in 2021.
“This rating reflects the strength and diversity of our economy here in McAllen, which the analysis highlighted, ” said Charles Amos, Chairman, MPU Board of Trustees. “The report stated that the ‘commercial trade with Mexico, healthcare, government and retail provides a well-diversified economic base that complements the traditional government, tourism and agricultural sectors rounding out the local economy.’”
According to the rationale provided by the financial rating agency, the ‘AA+’ rating and stable outlook Fitch assigned MPU reflects the system’s very strong financial profile with its very strong revenue defensibility and very low operating risk profile, both assessed at 'aa.' The rating agency noted that the system’s leverage, measured as net adjusted debt to adjusted funds available for debt service was 6.1x in fiscal year 2022, and is projected to peak at 7.0x by fiscal year 2027. In 2022, MPU had a very low operating cost of $2,800 per million gallons, supporting the risk assessment.
The revenue defensibility is supported by the system’s role as the sole water and sewer service provider and the city’s independent rater-setting authority. The assessment also reflects strong service area demand characteristics including customer growth.
While the system’s anticipated capital spending for 2023, at approximately $152 million is higher than in previous years, some of the increase is related to rising costs for the expansion of the Northwest Water Treatment Plant, which is anticipated to double the capacity of the plant to 22.5 million gallons per day, along with the construction of the plant’s desalination facility, which will be able to draw on deep brackish groundwater. This will help to diversify the city’s raw water sources, reducing its dependence on the Rio Grande. Other large capital projects include water line replacements, the installation of electric generators, lift station rehabilitation, and sewer interceptor repair, among others.
The utility’s credit profile is made up of its primarily residential accounts, including 50,000 water and 45,000 sewer customer accounts, serving a population of over 140,000. Fitch considers the system a related entity of the City of McAllen, TX (IDR AA+) given the relationship of the water and sewer system as an enterprise fund of the city.
MPU General Manager Mark Vega, was extremely pleased with the bond ratings, stating that the rating was also indicative of the fiscally responsible and conservative approach that the McAllen
Public Utility has maintained in managing the utility’s finances and resources, incurring debt slowly to be able to continue provide enough clean water and have capacity at its sewer treatment plants to meet the current and future demands of the rapidly growing city of McAllen.
“The future plans we have for the McAllen Public Utility system will also us to grow the infrastructure and service, as we prepare for the expected future population growth of McAllen,” said Vega. “This rating will allow us to not impact our customers while we incur debt to better serve our community.”
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