DALLAS — The Midland County Freshwater Supply District No. 1 in the Permian Basin of West Texas took a two-notch downgrade from Standard & Poor's to AA-minus due to weaker financial performance from its primary customer, analysts said.
"The downgrade reflects the weaker financial performance of the City of Midland's water and sewer enterprise fund," said Standard & Poor's credit analyst James Breeding.
Midland's monthly payments from waterworks and sewer system gross revenue to the district secure the series 2012 bonds and 2012A notes. Midland will make payments to the district regardless of how much water the system delivers to the city, analysts said.
While rich in oil, West Texas is poor in water, which prompted creation of the district in 2010 and the issuance of $200 million of bonds in 2012 to build a 60-mile pipeline. The pipeline brings groundwater from the T-Bar Ranch in Loving County to the more populous Midland-Odessa area.
The district's strengths include a strong regional service area economy, with good income and low unemployment, Breeding said. The Midland City Council has also shown a willingness to increase rates, and the city has a "strong, though declining" liquidity position, he added.
"The outlook is stable, reflecting Standard & Poor's belief that although the sooner-than-planned introduction of significant additional debt obligations," Breeding's report said. "The city's rate adjustments and strong cash reserves will likely allow Midland to navigate the immediate water supply crisis."
Moody's Investors Service downgraded Midland's water and sewer bonds to Aa3 from Aa2 on Aug. 31, 2012, due, in part to its limited water supply.
While the Midland owns the T Bar Ranch property and the water underneath it, the city needed a financing mechanism to move the water to the city, leading to the creation of the Supply District. Under a 40-year contract, the city has agreed to pay up to $2.78 per thousand gallons of water for any water it uses.
Completed in 12 months as Midland was nearly out of water, the pipeline supplies 20 million gallons per day from a 7,000 acre field, where 44 wells are drilled to depths of 650 feet. The project includes a 2 million gallon storage tank.
With a population of 121,000, Midland-Odessa led all 380 U.S. metropolitan areas in economic expansion from 2010 to 2013, according to the Bureau of Economic Analysis. Despite falling oil prices, unemployment remains low.
However, Moody's has four Midland County credits on its watch list for possible downgrade. The city of Midland shares a place on the list with the Midland Independent School District, rated A1, the Midland County Hospital District, rated Aa2, and Aa2-rated Midland Community College District.
