Fitch Rates Victoria, TX Utility System Revs 'AA-'; Outlook Stable

AUSTIN, Texas--()--Fitch Ratings assigns an 'AA-' rating to the following city of Victoria, Texas (the city) bonds:

--Approximately $21.5 million utility system revenue bonds, series 2014.

The bonds are scheduled to sell via negotiation the week of May 5. Proceeds will be used to improve and enlarge the city's combined water and sewer utility system (the system) and to pay costs of issuance.

At this time, Fitch also affirms its 'AA-' rating on the following bonds:

--$47.7 million utility system revenue refunding bonds, series 2005, 2007 and 2009;

--$12.6 million utility system revenue bonds, series 2008 and 2010.

The Rating Outlook is Stable.

SECURITY

The bonds are secured by a senior lien on net revenues of the system.

KEY RATING DRIVERS

SOUND FINANCIAL PROFILE: System actual annual debt service coverage remains adequate for the rating level and liquidity improved to over one year of operating cash on hand.

MIXED DEBT PROFILE: System debt levels on a per customer basis compares favorably to the 'AA' rating category median, while debt on a per capita basis is high. The debt profile benefits from rapid amortization with a significant portion of

system debt paid off in 10 years.

EXPANDING CAPACITY: The city is expanding its wastewater treatment capacity with the construction of a new plant funded by the current offering. Treatment capacity will increase almost 20% when the plant comes online in 2016.

AMPLE WATER SUPPLY: The system has an ample water supply, and Victoria has aggressively pursued additional supplies in recent years to provide diversity.

STABLE SERVICE AREA ECONOMY: Victoria is a regional retail, commercial and industrial hub, and historically has exhibited a steady economic profile.

RATING SENSITIVITIES

MAINTENANCE OF FINANCIAL PROFILE: Deterioration of the system's financial profile in light of rising debt service costs could apply downward pressure to the rating. The Stable Outlook reflects Fitch's opinion that such changes are unlikely.

CREDIT PROFILE

The system provides retail service to more than 22,000 water and 21,000 sewer customer accounts within the city, with most customers residential in nature. The city's water is drawn from the Guadalupe River and system water supplies are estimated to be sufficient to meet city demand for 50 years. Water is treated at the city's 25.2 million gallons per day (mgd) water treatment plant. Wastewater flows are treated at one of two city-owned and operated wastewater treatment plants (WWTPs).

EXPANDING WASTEWATER TREATMENT CAPACITY

The current offering will finance the construction of a new 4.4 mgd WWTP. The new WWTP will increase total system capacity by 2 mgd when it comes on line in 2016 and replace the system's smaller WWTP that was built in the 1950s. The new WWTP will also be capable of handling up to 35 mgd of peak flows. The current combined system capacity of 12 mgd is more than sufficient to treat the 5.9 mgd of flows the system has averaged since 2010. With the additional capacity, the system should be capable of handling customer flows through 2030. The utility system is in compliance with all state and federal regulations and has received a superior rating from the state's regulatory agency.

AMPLE WATER RIGHTS

The city is permitted to draw up to 20,000 acre feet (af) of water from the Guadalupe River, or about twice its annual pumpage. The water rights are junior in nature so the city has acquired an additional 7,000 af of senior Guadalupe River water rights in recent years to boost available supplies. The city also has about a four month 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.

STABLE FINANCIAL METRICS

Financial operations are sound, characterized by healthy DSC levels and solid liquidity. Senior lien annual DSC registered at 1.8x and 1.7x for fiscal years 2012 and 2013, respectively. While these numbers are a decline from previous coverage levels that were consistently over 2.0x, they are still considered adequate for the rating category. The declines are largely the result of increasing debt service costs.

Management-provided calculations of DSC point to 1.6x coverage in fiscal 2014 and then 1.4x coverage in 2015 when the full effect of this new issue rolls on. The declining DSC is a concern, but the reduced DSC should be relatively temporary as debt costs remain elevated for a period of six years and then decline rapidly thereafter. Concerns could arise if DSC continues to drop beyond these expectations.

Fiscal year 2013 liquidity has improved with operating cash of $11 million or 371 days cash on hand, growing from 214 days cash in fiscal 2009. The system benefits from sizable contributions from the city's sales tax development corporation, which finances more than 30% of the utility's capital needs.

RATE RAISING FLEXIBILITY REMAINS

Both water and sewer rates have increased consistently since 2007. Water rate increases have ranged from 1.3% to 7.3% from fiscals 2008 to 2011. Sewer rates experienced a large increase of 18% in fiscal 2007, followed by more modest increases ranging from 1.5% to 6.6% through fiscal 2012. There have been no additional rate increases since, but modest increases are anticipated again in fiscal 2015.

System rates include a substantial fixed base rate (over 50% to the combined bill) and volumetric rates, which are tiered to encourage conservation. Fitch views favorably the use of a large fixed base rate as it adds stability to the revenue stream. While the city has imposed regular rate increases to offset increasing operating costs and to fund capital projects, rates remain comparable to similarly sized cities in the state. Rates are deemed affordable, registering at 1.6% of median household income and under Fitch's affordability threshold of 2%.

DEBT PROFILE TO IMPROVE

Debt per customer of $1,628 is currently in line with the 'AA' rating category median of $1,812, while debt per capita is twice the $514 median. Debt levels have remained relatively constant over the last five fiscal years from periodic borrowings. However, the system currently does not have additional debt plans in the next five years. Consequently, debt levels should improve rapidly as 70% of principal amortizes over the next 10 years.

INLAND PORT CITY WITH DIVERSE ECONOMY

Victoria (general obligation bonds rated 'AA' by Fitch) has an estimated population of about 64,000 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 Intracoastal 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. Additionally, the labor force of the city has shown continued growth over the past five years, and the local unemployment rate has consistently been below both state and national averages over the past several years.

Additional information is available at 'www.fitchratings.com'

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 2013);

--'U.S. Water and Sewer Revenue Bond Rating Criteria' (July 2013);

--'2014 Water and Sewer Medians' (December 2013);

--'2014 Sector Outlook: Water and Sewer' (December 2013).

Applicable Criteria and Related Research:

Revenue-Supported Rating Criteria

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=709499

U.S. Water and Sewer Revenue Bond Rating Criteria

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=715275

2014 Water and Sewer Medians

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=724358

2014 Outlook: Water and Sewer Sector

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=724357

Additional Disclosure

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Contacts

Fitch Ratings
Primary Analyst
Teri Wenck, CPA
Associate Director
+1-512-215-3742
Fitch Ratings, Inc.
111 Congress, Suite 2010
Austin, TX 78701
or
Secondary Analyst
Jose Acosta
Senior Director
+1-512-215-3726
or
Committee Chairperson
Doug Scott
Managing Director
+1-512-215-3725
or
Media Relations:
Elizabeth Fogerty, +1-212-908-0526 (New York)
elizabeth.fogerty@fitchratings.com

Sharing

Contacts

Fitch Ratings
Primary Analyst
Teri Wenck, CPA
Associate Director
+1-512-215-3742
Fitch Ratings, Inc.
111 Congress, Suite 2010
Austin, TX 78701
or
Secondary Analyst
Jose Acosta
Senior Director
+1-512-215-3726
or
Committee Chairperson
Doug Scott
Managing Director
+1-512-215-3725
or
Media Relations:
Elizabeth Fogerty, +1-212-908-0526 (New York)
elizabeth.fogerty@fitchratings.com