Fitch Rates Arlington, TX, Water and Sewer Revs 'AAA'; Outlook Stable

AUSTIN, Texas--()--Fitch Ratings has assigned an 'AAA' rating to the following revenue bonds of the City of Arlington, Texas (the city):

--Approximately $13.14 million water and wastewater revenue bonds, series 2014A;

--Approximately $7.96 million water and wastewater revenue refunding bonds, series 2014B.

The bonds will be sold via competitive bid during the week of June 10. Series 2014A bond proceeds will be used to improve and extend the system. Series 2014B bond proceeds will be used to refund certain outstanding obligations of the system for debt service savings.

Fitch also affirms the following parity system revenues bonds at 'AAA':

--$33.7 million outstanding water and wastewater system revenue refunding bonds, series 2009, 2010 and 2013B;

--$92.5 million outstanding water and wastewater system revenue bonds, series 2004, 2005, 2007, 2008, 2012 and 2013A (pre-refunding).

The Rating Outlook is Stable.

SECURITY

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

KEY RATING DRIVERS

CONSISTENTLY STRONG DEBT SERVICE COVERAGE: The financial performance of the city of Arlington's water and wastewater system is strong, characterized by solid debt service coverage in excess of 2.8 times (x) over the past five fiscal years.

LOW DIRECT DEBT: Direct system debt levels compare favorably to other 'AAA' rated credits. The system's capital improvement program (CIP) is manageable and debt levels are projected to remain favorable due to the system's rapid principal amortization, combined with limited debt issuance plans.

WHOLESALE COST PRESSURE: The system is susceptible to operating cost pressure from its wholesale water and wastewater providers. Also, the system's overall debt burden grows significantly when the off-balance-sheet debt of Tarrant Regional Water District (TRWD; revenue bonds rated 'AA' with a Stable Outlook by Fitch) and Trinity River Authority (TRA; revenue bonds rated 'AA+' with a Stable Outlook by Fitch) is taken into consideration.

AFFORDABLE USER RATES: User charges are competitive with those of other regional providers and despite annual pass-through rate hikes, remain very affordable in relation to area wealth levels.

STABLE ECONOMY: The mature service area benefits from its location in the center of the broad and diverse Dallas-Fort Worth Metropolitan Area.

RATING SENSITIVITY

MAINTENANCE OF STRONG FINANCIAL POSITION: The rating is sensitive to shifts in fundamental credit factors. Preservation of the system's solid financial profile consistent with the high credit rating is a key consideration.

CREDIT PROFILE

The system provides retail water service to over 100,000 residential and commercial customers within the city. The city has its own water treatment facilities and purchases raw water supplies on a wholesale basis from TRWD. The sewer system serves approximately 98,000 connections with wastewater treatment service provided through a contract with the TRA. Total costs for purchased water and sewer treatment from TRWD and TRA equaled 26% and 35% of operating expenses, respectively, in fiscal 2013 and are paid prior to debt service on the bonds.

HISTORY OF STRONG DEBT SERVICE COVERAGE

Financial performance and operating flexibility are solid. To improve operating consistency, the city transitioned to a new rate structure beginning in fiscal 2004 with full implementation by fiscal 2008. With the new rate structure base rates were increased while volumetric charges decreased. This change led to increased reliability in fixed revenues relative to fixed expenditures even during periods of low water sales. The stability in revenues allows the city to more accurately forecast revenues available not only for debt service, but also capital outlays, which is a key factor in limiting the city's need for additional leveraging.

Debt service coverage (DSC) based on a three year historical average is 3.2x. Fiscal 2011 was a very dry year, resulting in high sales volume and high DSC 3.8x. DSC for fiscal 2013 remains strong at 2.8x. Based on budget appropriations, management forecasts that DSC should remain healthy through 2019, not falling below 2.0x.

Liquidity is considered somewhat weak for the rating level at just 133 days of operating expenses for fiscal 2013. This takes into account $11 million in the system's capital construction fund. The fund includes deposits of annual unbudgeted surpluses generated by the system, according to policy. The system's consistent operating revenues, the lack of growth pressure, and the city's practice for budgeting annual depreciation (over $13 million), all contribute to a very stable operating environment, thereby mitigating the need for higher fund balances.

MANAGEABLE CAPITAL NEEDS

The fiscal 2014-2016 CIP totals $135 million, or $679 per customer. Projects in fiscal years 2014 and 2015 are primarily for line renewals and routine rehabilitation. Fiscal 2016 projects total over $60 million and include improvements to two water treatment plants and a new pump station. The city is updating its Treatment Master Plan with related projects to be spread out over a three to five year period.

The series 2014B bonds, along with a $3.9 million loan from the Texas Water Development Board will fund approximately half of the fiscal 2014 projects with cash reserves funding the rest. Currently, management expects to cash fund the entire $38 million in projects outlined in fiscal 2015 and has yet to determine the funding of the $61 million planned in fiscal 2016. The system's direct debt burden is low with debt per customer of $621, which compares very favorably to the 'AAA' median of $1,812.

The low system leverage is partially a result of the city's purchase of wholesale service, but also due to limited growth pressures. In addition, the city has proactive policies of debt amortization and funding annual depreciation from current revenues. As a result, amortization of debt is above average with 72% of all principal maturing in 10 years and 100% in 20 years.

GROWING DEBT OF WHOLESALE PROVIDERS

Both TRA and TRWD are in capital intensive phases and have notified contracting members that rates will be going up by approximately 10% annually for the next five years. Much of the expansion will be debt funded, adding to the system's annual requirement to both agencies. The increased debt will result in Arlington's off-balance sheet debt associated with TRA and TRWD to climb above $3,007 per customer.

System user rates are affordable at approximately $59 a month (based on Arlington's average residential consumption of 10,000 gallons of water usage and 8,000 for sewer usage), registering at 1.4% of median household income (MHI). This compares very well to Fitch's affordability threshold of 2% of MHI and also provides the system ample flexibility for future rate adjustments.

Arlington is well placed with affordable rates and low debt burden to handle the increases in wholesale provider rates. While significant increases in wholesale charges could pressure user charges, Fitch expects financial margins to remain consistent, given the city's policy of passing through provider charges.

MATURE AND STABLE SERVICE AREA

Arlington (GO rated 'AA+' with a Positive Outlook by Fitch) is located in the center of the Dallas-Fort Worth Metroplex and had an estimated 2013 population of just over 375,000. The city's proximity to the Dallas-Fort Worth International Airport and a well-developed highway transportation network make the city a logical center for manufacturing, distribution, and trade. Its central location in the Metroplex has also led to the development of sizeable retail trade activity.

Tourism is another important economic component, with professional sports and amusement parks being a major draw for residents from the area and around the state. The city's unemployment rate of 5% for March 2014, is below the county, MSA and state, which were all equal at 5.3% and the national average of 6.8%.

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

In addition to the sources of information identified in the 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

Solicitation Status

http://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=831359

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Contacts

Fitch Ratings
Primary Analyst
Teri Wenck, CPA
Associate Director
+1 512-215-3742
Fitch Ratings, Inc.
111 Congress Avenue,
Austin, TX 78701
or
Secondary Analyst
Rebecca Meyer, CFA, CPA
Director
+1 512-215-3733
or
Committee Chairperson
Adrienne Booker
Senior Director
+1 312-368-5471
or
Media Relations, New York
Elizabeth Fogerty, +1 212-908-0526
elizabeth.fogerty@fitchratings.com

Sharing

Contacts

Fitch Ratings
Primary Analyst
Teri Wenck, CPA
Associate Director
+1 512-215-3742
Fitch Ratings, Inc.
111 Congress Avenue,
Austin, TX 78701
or
Secondary Analyst
Rebecca Meyer, CFA, CPA
Director
+1 512-215-3733
or
Committee Chairperson
Adrienne Booker
Senior Director
+1 312-368-5471
or
Media Relations, New York
Elizabeth Fogerty, +1 212-908-0526
elizabeth.fogerty@fitchratings.com