AUSTIN, Texas--()--Fitch Ratings assigns an 'AA+' rating to the following Grand Prairie, Texas (the city) bonds:
--Approximately $14.4 million water and wastewater system revenue refunding bonds, series 2013.
The bonds are scheduled to sell competitively the week of March 18. Bond proceeds will be used to refund certain outstanding bonds of the city for interest savings without extension of maturity.
In addition, Fitch affirms the 'AA+' rating on:
--$61.9 million in outstanding city parity.
The Rating Outlook is Stable.
The bonds are secured by a first lien on net system revenues.
KEY RATING DRIVERS
SOLID FINANCIAL PROFILE AND MANAGEMENT: System financial performance is very good, and projections indicate it will remain solid. The city's prudent management team has implemented various fiscal policies, including the maintenance of financial reserves for capital outlays and rate stabilization.
AFFORDABLE RATES: Rates will increase moderately over the near term but should remain competitive with those of surrounding communities and below Fitch's 2% of median household income affordability threshold.
MANAGEABLE CAPITAL COSTS: Capital costs appear affordable, with planned bond financings sized and timed to minimize user charge impact.
LOW DEBT LEVELS: Debt ratios are below the 'AA' rating category median levels and should remain a positive credit factor even with additional debt financings. Debt amortization is rapid.
ESSENTIAL SERVICE: The system provides an essential service to a strong and stable service area, benefiting from its central location in the Dallas-Fort Worth region.
The rating is susceptible to operating cost pressure from its wholesale water and wastewater treatment providers. The Stable Outlook reflects Fitch's expectation that a shift in fundamental credit characteristics due to wholesale cost pressures is unlikely.
SOLID FINANCIAL PERFORMANCE EXPECTED
Financial performance has been very good with coverage levels consistently above average, reflecting the city's lack of direct debt related to treatment facilities and source water supply. Fiscal 2011 results point to improved annual debt service coverage (DSC) of 2.7x, with a 15% boost in sales from the ongoing drought combined with an 8.6% rate increase for the year. Fiscal 2010, DSC was a slightly lower than historical level of 1.8x (as expected), resulting from reduced water sales in an exceptionally wet year. Coverage is forecast to remain strong at between 2.3x and 3.6x over the fiscal 2012 to 2016 period with the help of annual rate increases averaging 6%.
Liquidity declined slightly in fiscal 2011, although remains very good, with audited fiscal 2011 days cash on hand a healthy 385 days and days working capital a sizable 496 days. With significant anticipated cash funding of capital projects, unrestricted reserves are projected to lower slightly but remain very good through fiscal 2016.
MANAGEABLE CAPITAL PLAN AND LOW DEBT BURDEN
The city's 2013-2017 capital improvement program (CIP) is manageable at $71 million. The majority of projects (83%) are water related. Approximately 40% of the CIP is expected to be debt funded, with the remaining 60% funded from available resources as the city plans to continue its practice of providing a substantial amount of pay-as-you-go funding. Current per-customer debt levels, as well as projected debt levels in five years, remain well below those of most utilities nationally. As a result, Fitch has limited concern over system leverage. Utility rates are typically mid-range when compared to those of other area cities. The city plans to continue with moderate 6% annual rate increases over the next five years to keep pace with wholesale supply costs.
SYSTEM AND SERVICE AREA
The water system serves more than 63,000 customers, and nearly 90% of all treated water is supplied by the Dallas Water Utilities under a contract extending through 2039. Roughly 10% of the city's water supply is provided through a contract with Fort Worth that expires in 2031, and city wells provide less than 1% of the city's water. The city also has additional water supply contracts with the cities of Mansfield, Midlothian, and Arlington, although water pursuant to these contracts has not yet been purchased to date. The wastewater system serves nearly 63,000 customers, with treatment provided by the Trinity River Authority under a contract that extends to 2023.
The city's economy is buoyed by its location in the heart of the DFW metroplex and easy access to major air and ground transportation routes. The city's employment picture is positive, with both employment and labor force growth in the last 12-months improving the December 2012 unemployment rate to 6% from 7.1% in December 2011. The most recent figure is on par with the state and below the national average (7.6%). Residents also benefit from access to the broad and diverse employment market of the greater DFW MSA, which has outpaced the nation in job growth since 2009. Wealth indicators are slightly below average.
Additional information is available at 'www.fitchratings.com'. The ratings above were solicited by, or on behalf of, the issuer, and therefore, Fitch has been compensated for the provision of the ratings.
In addition to the sources of information identified in Fitch's U.S. Municipal Revenue-Supported Rating Criteria, this action was additionally informed by information from Creditscope and the Municipal Advisory Council of Texas.
Applicable Criteria and Related Research:
--'Revenue-Supported Rating Criteria', June 12, 2012;
--'U.S. Water and Sewer Revenue Bond Rating Criteria', Aug. 3, 2012;
--'2013 Water and Sewer Medians', dated Dec. 5, 2012;
--'2013 Outlook: Water and Sewer Sector', dated Dec. 5, 2012.
Applicable Criteria and Related Research
Revenue-Supported Rating Criteria
U.S. Water and Sewer Revenue Bond Rating Criteria
2013 Water and Sewer Medians
2013 Outlook: Water and Sewer Sector