Rating Action Commentary
ֳ Rates Clarksville TN's Water, Sewer and Gas Rev Bonds 'AA'; Outlook Stable
Mon 20 Nov, 2023 - 9:47 AM ET
ֳ - New York - 20 Nov 2023: ֳ has assigned a 'AA' rating to the following city of Clarksville, TN (the city) obligations:
--Approximately $35.3 million water, sewer, and gas revenue bonds, series 2023.
The bonds are expected to sell via competitive sale the week of Dec. 4. The proceeds will be used to fund improvements to the system and pay for costs of issuance.
In addition, ֳ has affirmed the following outstanding obligations at 'AA':
--Approximately $307.2 million water, sewer, and gas revenue and refunding bonds series 2016, 2017, 2021A and 2021B.
ֳ has also assessed the Standalone Credit Profile (SCP) of the water, sewer and gas system (the system) at 'aa'. The SCP represents the credit profile of the system on a stand-alone basis irrespective of its relationship with, and the credit quality of, the city (Issuer Default Rating [IDR] AA+/Stable).
The Rating Outlook is Stable.
The 'AA' water, sewer, and gas revenue bond rating, along with the 'aa' SCP, reflect the system's very strong financial profile within the framework of very strong revenue defensibility and very strong operating risk profile, both assessed at 'aa'. The system's leverage, measured as net adjusted debt to adjusted funds available for debt service (FADS), was 5.6x in fiscal 2023 (FYE June 30), and is expected to increase to a peak of 6.7x in fiscal 2028 in ֳ's Analytical Stress Test (FAST) stress case.
The revenue defensibility is supported by the system's role as a monopoly provider of water, sewer, and gas services, and the city has independent rate-setting authority. The operating risk profile reflects a very low operating cost burden (exclusive of gas expenses, as gas consumption is not measured) and very low life cycle ratio, which is supported by robust capital spending.
SECURITY
Bonds are payable from a first lien on net revenues of the city's water, sewer and gas systems.
KEY RATING DRIVERS
Revenue Defensibility - 'aa'
Affordable Rates for the Vast Majority of the Population.
The city retains the legal authority to adjust rates as needed without external oversight. ֳ considers the monthly residential water and sewer bill affordable for about 85% of the service area population as of fiscal 2021, based on standard monthly usage of 7,500 gallons for water and 6,000 gallons for sewer. Customer growth registered a five-year CAGR of 3.1% as of fiscal 2023. Income levels are average, with median household income (MHI) equal to nearly 85% of the national level as of fiscal 2021. The unemployment rate has decreased to 4% since fiscal 2020, and measured around 108% of the national level in fiscal 2022.
Operating Risk - 'aa'
Very Low Operating Cost Burden; Moderate Capital Needs.
In fiscal 2023, the system had a low operating cost burden of $10,058 per million gallons (mg) of water and sewer flows, which is inclusive of gas expenses. Without the gas fund (as gas consumption is not captured), this amount drops to $6,479 per mg in fiscal 2023. The life cycle ratio was very low at 32% in fiscal 2023. Annual capital spending relative to depreciation is adequate, measuring 144% from fiscal 2019 - fiscal 2023. Planned capital spending for the next five years should generally outpace historical depreciation, supporting a continued very low life cycle ratio.
The system's fiscal 2024 - 2028 capital improvement plan (CIP) totals around $370 million, and is around 18% lower than prior fiscal 2023 - 2027 planned spending. The decline is primarily was due to certain projects being pushed further into the outyears. The current CIP is primarily centered around the construction of the new North Clarksville Water Treatment Plant (NCWTP), which is anticipated to be completed by fiscal 2026. Other large projects include funding for consent orders related to wastewater discharges, the installation of thermal dryers at its wastewater treatment facilities, among other projects. Overall, water projects represent the majority of the CIP, around 53%, while wastewater and gas projects represent around 39% and 8%, respectively.
Financial Profile - 'aa'
Leverage to Increase Moderately; Neutral Liquidity
The system had leverage of 5.6x in fiscal 2023, which is up from fiscal 2019 when it measured 3.5x. The increase is driven by additional debt incurred in fiscal 2022. The liquidity profile is neutral to the overall assessment, with coverage of full obligations (COFO) of 1.6x and 567 current days cash as of fiscal 2023. ֳ-calculated total debt service was 1.8x.
The FAST considers the potential trend of key ratios in a base case and stress case over a five-year period. The stress case is designed to impose capital costs 10% above expected base case levels and evaluate potential variability in projected key ratios. The FAST reflects ֳ's view of a reasonable scenario, which is generally informed by publicly available and/or management provided information with respect to capital expenditures, user charges and rate of revenue and expenditure growth.
In the base case scenario, the leverage ratio is expected to increase to 5.9x in fiscal 2028. In the stress case, the leverage ratio is projected to increase to 6.7x in fiscal 2028. Liquidity is expected to remain neutral to the assessment over the five-year horizon.
Asymmetric Additional Risk Considerations
No asymmetric additive risk considerations affected this rating determination.
RATING SENSITIVITIES
Factors that Could, Individually or Collectively, Lead to Negative Rating Action/Downgrade
--Further meaningful increases in the anticipated cost of the WTP and CIP;
--Sustained leverage above 9.0x through ֳ's base and stress scenarios in the context of current revenue defensibility and operating risk assessments.
Factors that Could, Individually or Collectively, Lead to Positive Rating Action/Upgrade
--Successful completion of the current WTP and CIP without further meaningful increase in costs;
--Sustained leverage at or below 6.0x through ֳ's base and stress scenarios in the context of current revenue defensibility and operating risk assessments.
PROFILE
Clarksville is located 50 miles northwest of Nashville on the Kentucky border. It is the county seat of Montgomery County and the fifth largest city in the state. The city provides water, wastewater and gas service to nearly 200,000 people within and outside of the city limits.
Water is supplied from the Cumberland River without permitted limitation. Production is via the Clarksville Water Treatment Plant (WTP), with capacity of 28 million gallons per day (mgd), and is in the process of constructing a new water treatment plant (the NCWTP), with initial capacity of 12 mgd, expected to be completed by fiscal 2026. The system provides retail service to approximately 78,400 mostly residential water and 69,700 wastewater accounts as of fiscal 2022. Wastewater is treated at the system's main wastewater treatment plant (WWTP), with a treatment capacity of 25 mgd. The water and sewer utilities have ample treatment capacity to absorb continued strong growth in the customer base, while gas availability is driven by demand and ably supplied through the city's contract.
ֳ considers the system to be a related entity to the city for rating purposes given the city's oversight of the system, including the authority to establish rates and direct operations. The credit quality of the city does not currently constrain the bond rating. However, as a result of being a related entity, the issue ratings could become constrained by a material decline in the general credit quality of the city.
Sources of Information
In addition to the sources of information identified in ֳ's applicable criteria specified below, this action was informed by information from Lumesis.
REFERENCES FOR SUBSTANTIALLY MATERIAL SOURCE CITED AS KEY DRIVER OF RATING
The principal sources of information used in the analysis are described in the Applicable Criteria.
ESG Considerations
The highest level of ESG credit relevance is a score of '3', unless otherwise disclosed in this section. A score of '3' means ESG issues are credit-neutral or have only a minimal credit impact on the entity, either due to their nature or the way in which they are being managed by the entity. ֳ's ESG Relevance Scores are not inputs in the rating process; they are an observation on the relevance and materiality of ESG factors in the rating decision. For more information on ֳ's ESG Relevance Scores, visit /topics/esg/products#esg-relevance-scores.
Additional information is available on
PARTICIPATION STATUS
The rated entity (and/or its agents) or, in the case of structured finance, one or more of the transaction parties participated in the rating process except that the following issuer(s), if any, did not participate in the rating process, or provide additional information, beyond the issuer’s available public disclosure.
APPLICABLE CRITERIA
ADDITIONAL DISCLOSURES
ENDORSEMENT STATUS
| Clarksville (TN) | EU Endorsed, UK Endorsed |