Fitch Rates Victoria, TX's $8MM Utility System Revs 'AA-'; Outlook Stable

AUSTIN, Texas--(BUSINESS WIRE)--Fitch Ratings assigns an 'AA-' rating to the following Victoria, Texas (the city) utility system revenue bonds:

--$7.8 million series 2010.

The bonds are expected to sell via negotiation on Aug. 17.

In addition, Fitch affirms the following rating:

--$84.9 million in outstanding parity utility system revenue bonds at 'AA-'.

The Rating Outlook is Stable.

RATING RATIONALE:

--The utility system maintains a sound financial profile, characterized by good debt service coverage and adequate liquidity.

--The system has an ample water supply, and Victoria has aggressively pursued additional supplies in recent years.

--System leverage is projected to remain above average; however, rapid amortization somewhat offsets this. Moreover, the utility benefits from capital support from its economic development corporation.

--Victoria is a regional retail, commercial and industrial hub, and historically has exhibited a steady economic profile.

KEY RATING DRIVERS:

--Maintenance of a manageable capital improvement plan (CIP) to help moderate the system's above average leverage ratios over time;

--Maintenance of strong operating performance and financial flexibility.

SECURITY:

The bonds are secured by a senior lien on net revenues of the city's water and wastewater system.

CREDIT SUMMARY:

Financial operations are sound. Senior lien debt service coverage in fiscal 2009 was 2.4 times (x) and 1.6x on combined senior and subordinate lien debt service. (Fitch does not rate the subordinate lien obligations.) Unaudited projections for fiscal 2010 show senior lien coverage remaining at over 2.0x. Days of cash on hand in fiscal 2009 totaled a solid 214 days, while the operating margin was a good 46%. Given that only 2% of pay-go is anticipated to fund the city's fiscal 2010 capital projects, liquidity should remain at similar levels. While the city has imposed regular rate increases to offset increasing operating costs and to fund capital projects, rates remain affordable when compared to similarly sized cities in the state.

Scheduled to mature in December 2010, contract revenue bonds issued by the GBRA for the city's wastewater treatment plants are paid as an operating expense of the system. Future capital needs total $93 million over the next four fiscal years. The largest components of the CIP are line replacements in the downtown area and a wastewater treatment plant expansion. The utility benefits from sizable contributions from the city's sales tax development corporation, which is estimated to contribute roughly 25% of capital needs. The remainder will be funded primarily through revenue bonds. Legal covenants are adequate, although the city is required to maintain a debt service reserve fund only if senior lien debt service coverage is less than 1.35x the average annual debt service.

The city's primary water supply comes from the Guadalupe River; the city permits allow it to withdraw up to 20,000 acre feet annually, or about twice its annual pumpage. Additionally, the city has about a one-year supply of surface water and shallow alluvial ground water stored in off-channel reservoirs. For emergency purposes, the city maintains 10 wells that supply ground water from the Gulf Coast Aquifer. Officials estimate that these combined supplies will provide an adequate water supply through approximately 2085 or even beyond, depending on the rate of growth in the service area and conservation efforts. The wastewater system is made up of two city-owned treatment facilities, one of which is currently operated by the Guadalupe-Blanco River Authority (GBRA) under a regional disposal contract that is set to expire at the end of 2010. The city plans to operate its own wastewater system upon termination of the contract and is planning to expand the system to accommodate ongoing growth. The utility system is in compliance with all state and federal regulations and has received a superior rating from the state's regulatory agency.

Victoria (general obligation bonds rated 'AA' by Fitch) has an estimated population of about 63,000, and is located between Houston and Corpus Christi, 30 miles inland from the Gulf of Mexico. A barge canal connects the city to the gulf intra-coastal waterway, allowing access to ports on the Gulf and Atlantic coasts, as well as destinations on the Mississippi River. The city has emerged as a regional service and supply center for heavy industry, including petrochemical and plastics manufacturing. The development of the service and retail sectors has complemented the industrial base and added a measure of diversity and stability to the local economy. As a regional center for trade, per capita retail sales in the city are substantially higher than state and national levels.

Additionally, the labor force of the city has shown some modest growth over the past five years, and the local unemployment rate has consistently been below both state and national figures over the past several years.

Applicable criteria available on Fitch's web site at www.fitchratings.com:

--'Revenue-Supported Rating Criteria' (Dec. 29, 2009);

--'Water and Sewer Revenue Bond Rating Guidelines' (Aug. 6, 2008).

Additional information is available at www.fitchratings.com.

Related Research:

Revenue-Supported Rating Criteria

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=493154

Water and Sewer Revenue Bond Rating Guidelines

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=395918

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