Fitch Rates Grand Prairie, Texas' Water and Wastewater Rev Bonds 'AAA'; Outlook Stable

AUSTIN, Texas--()--Fitch Ratings has assigned a 'AAA' rating to the following Grand Prairie, Texas (the city) revenue bonds:

--$16.98 million water and wastewater system revenue refunding and improvement bonds, new series 2016.

The bonds will be sold via negotiation on Nov. 1. Approximately $6.8 million will be used to fund capital projects, and the remaining proceeds will be used to refund all or a portion of outstanding new series 2007 and 2008 bonds for savings.

In addition, Fitch has affirmed the 'AAA' rating on the following outstanding obligations (pre-refunding):

--$13.9 million water and wastewater system revenue bonds, new series 2007 and 2008;

--$8.1 million water and wastewater system revenue refunding and improvement bonds, new series 2011A;

--$20.8 million water and wastewater system revenue refunding bonds, new series 2011, 2013, and 2015.

The Rating Outlook is Stable.

SECURITY

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

KEY RATING DRIVERS

SOLID FINANCIAL PROFILE AND MANAGEMENT: The city's management team has implemented various prudent fiscal policies, including the maintenance of financial reserves for capital outlays and rate stabilization, which contribute to positive financial performance and robust liquidity levels.

AFFORDABLE RATES: Rates have increased annually and will continue to rise over the near term to keep pace with cost increases but are expected to remain competitive with those of surrounding communities and below Fitch's 2% of median household income (MHI) affordability threshold.

MANAGEABLE CAPITAL COSTS, LOW DEBT: Capital costs appear affordable and are predominately cash funded. Debt levels are low and are expected to remain low despite a recent increase in the five-year capital improvement plan (CIP).

WHOLESALER COST PRESSURES: The city is susceptible to operating cost pressure from its wholesale water and wastewater providers.

STRONG SERVICE AREA: The system provides an essential service to a strong and stable service area, benefiting from its central location in the Dallas-Fort Worth (DFW) region.

RATING SENSITIVITIES

SUSTAINED STRONG FINANCIAL METRICS: Grand Prairie's maintenance of solid all-in debt service coverage (DSC), low debt levels, and manageable CIP are key credit considerations.

CREDIT PROFILE

Grand Prairie encompasses a narrow, 80 square mile stretch of land in the center of the DFW metroplex, directly between Dallas and Fort Worth and just south of DFW International Airport. The system provides retail water and sewer service to an estimated 188,000 city residents.

INCREASED REVENUE STABILITY; SOLID FINANCIAL PERFORMANCE EXPECTED

Financial performance has been very good with debt service coverage (DSC) levels consistently above average, reflecting the city's lack of direct debt. Additionally, management has continued to pass moderate annual rate increases to keep pace with rising wholesale costs and implemented a slight shift in the rate structure in recent years to capture more revenues from fixed charges. The revision to the rate structure has enhanced the stability of the revenue stream overall and helped preserve financial results.

Total DSC remained strong through fiscal 2015 at 3.0x. Unaudited fiscal 2016 results point to DSC at 3.2x and the city's projections show coverage at a minimum 2.6x (excluding connection fees) through fiscal 2020. Utility rates are typically mid-range when compared to those of other area cities and measure just 1.2% of MHI for fiscal 2015. The city adopted a 4.4% rate increase for fiscal 2017 and plans to continue with moderate 4.5% annual rate increases through 2020 to keep pace with wholesale supply and treatment costs.

Liquidity is expected to remain strong despite planned use of cash reserves for capital outlays. At the close of fiscal 2015, the system maintained 372 days cash on hand, or 380 days measuring working capital. Even with the expected use of reserves for CIP projects, management expects liquidity to remain above 100 days cash on hand through the forecast period.

MANAGEABLE CAPITAL PLAN AND LOW DEBT BURDEN

The city's fiscal 2017-2021 CIP totals a manageable $89.4 million. The majority of projects (70%) are water related. Only about 40% of the CIP is expected to be debt funded, with the remainder funded from available resources. Despite a recent uptick in the CIP due primarily to growth and the acceleration of some projects, Fitch expects low debt levels will remain very manageable. Existing customer debt levels are just $436 in fiscal 2015 and are projected to remain under $500 by fiscal 2021 with implementation of the CIP.

SYSTEM AND SERVICE AREA

The water system serves more than 65,000 customers, and nearly 90% of all treated water is supplied by the Dallas Water Utilities under a contract extending through 2039. Additional water supply (roughly 10%) is provided through a contract with Fort Worth that expires in 2031, and a small portion via the recently activated Midlothian water supply contract, while system wells provide less than 1% of the city's water. The city also has additional water supply contracts with the cities of Mansfield and Arlington, although water pursuant to these contracts has not yet been purchased. The wastewater system serves about 64,000 customers, with treatment provided by the Trinity River Authority.

The city's economy benefits from its location within the broad and diverse DFW metroplex. The city's employment picture is positive, with both employment and labor force growth in the last 12 months. The unemployment rate at 4.1% in August 2016 remains stable as compared to the prior year and is favorable compared to the state (5%) and national average (4.8%).

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

Applicable Criteria

Revenue-Supported Rating Criteria (pub. 16 Jun 2014)

https://www.fitchratings.com/site/re/750012

U.S. Water and Sewer Revenue Bond Rating Criteria (pub. 03 Sep 2015)

https://www.fitchratings.com/site/re/869223

Additional Disclosures

Dodd-Frank Rating Information Disclosure Form

https://www.fitchratings.com/creditdesk/press_releases/content/ridf_frame.cfm?pr_id=1013345

Solicitation Status

https://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=1013345

Endorsement Policy

https://www.fitchratings.com/regulatory

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Contacts

Fitch Ratings, Inc.
Primary Analyst
Gabriela Gutierrez, CPA
Director
+1-512-215-3731
Fitch Ratings, Inc.
111 Congress Avenue, Suite 2010
Austin, TX 78701
or
Secondary Analyst
Rebecca Moses
Director
+1-512-215-3739
or
Committee Chairperson
Kathy Masterson
Senior Director
+1-512-215-3730
or
Media Relations
Elizabeth Fogerty, +1-212-908-0526
elizabeth.fogerty@fitchratings.com

Contacts

Fitch Ratings, Inc.
Primary Analyst
Gabriela Gutierrez, CPA
Director
+1-512-215-3731
Fitch Ratings, Inc.
111 Congress Avenue, Suite 2010
Austin, TX 78701
or
Secondary Analyst
Rebecca Moses
Director
+1-512-215-3739
or
Committee Chairperson
Kathy Masterson
Senior Director
+1-512-215-3730
or
Media Relations
Elizabeth Fogerty, +1-212-908-0526
elizabeth.fogerty@fitchratings.com