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Fitch Affirms ‘AA+’ Bond Rating for McAllen Public Utility

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Ratings based on strength of debt service and stable economic outlook

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The McAllen Public Utility 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 $27.1 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+.’  

“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 low debt to funds available for debt service, with its very strong revenue defensibility and very low operating risk profile, both assessed at ‘aa.’ The rating agency noted that the system’s financial operations are very strong, with leverage registered at a 6.6x in fiscal year 2019, even with an increase from 5.2 in fiscal year 2018 . 

While debt is expected to increase somewhat over the next five years as MPU plans to undertake a relatively sizable capital improvement plan of $97.8 million, focusing primarily on maintenance and growth-related projects, the resulting ratios should remain supportive of the assessment. Currently, there are no expectations of future water and sewer rate increases through fiscal year 2024 and the system plans to fund its capital spending from existing and projected cash reserves and low-interest loans. Additionally, the system has a history of healthy financial performance.

The utility’s credit profile is made up of its primarily residential accounts, including 48,000 water and 43,000 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. 

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A new factor that the rating agency had to also analyze is the coronavirus outbreak, which has created an uncertain global environment for the water and sewer sector. While the water and sewer system’s performance did not show any infrastructure failure, MPU experienced a shift in demand from commercial to residential usage as stay-at-home orders were implemented. Fitch’s ratings remain forward-looking in nature, and Fitch will continue to monitor developments related to the severity and duration of the virus outbreak, as well as revise expectations for future performance as appropriate.

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.”

The McAllen Public Utility 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 $27.1 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+.’  

“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 low debt to funds available for debt service, with its very strong revenue defensibility and very low operating risk profile, both assessed at ‘aa.’ The rating agency noted that the system’s financial operations are very strong, with leverage registered at a 6.6x in fiscal year 2019, even with an increase from 5.2 in fiscal year 2018 . 

While debt is expected to increase somewhat over the next five years as MPU plans to undertake a relatively sizable capital improvement plan of $97.8 million, focusing primarily on maintenance and growth-related projects, the resulting ratios should remain supportive of the assessment. Currently, there are no expectations of future water and sewer rate increases through fiscal year 2024 and the system plans to fund its capital spending from existing and projected cash reserves and low-interest loans. Additionally, the system has a history of healthy financial performance.

The utility’s credit profile is made up of its primarily residential accounts, including 48,000 water and 43,000 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. 

A new factor that the rating agency had to also analyze is the coronavirus outbreak, which has created an uncertain global environment for the water and sewer sector. While the water and sewer system’s performance did not show any infrastructure failure, MPU experienced a shift in demand from commercial to residential usage as stay-at-home orders were implemented. Fitch’s ratings remain forward-looking in nature, and Fitch will continue to monitor developments related to the severity and duration of the virus outbreak, as well as revise expectations for future performance as appropriate.

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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