OREANDA-NEWS. Fitch Ratings upgrades to 'AAA' from 'AA+' the ratings on the following Grand Prairie, Texas (the city) revenue bonds:

--\$19.5 million water and wastewater system revenue bonds, new series 2006A, 2007 and 2008;
--\$8.6 million water and wastewater system revenue refunding and improvement bonds, new series 2011A;
--\$18.5 million water and wastewater system revenue refunding bonds, new series 2011, and 2013.

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

UPGRADE ON FINANCIAL STABILITY, DECLINING DEBT: The upgrade to 'AAA' from 'AA+' reflects a slight shift in the system's rate structure in recent years that has produced greater stability in revenues as well as an increase in pay-go capital that results in flat to declining debt levels going forward.

SOLID FINANCIAL PROFILE AND MANAGEMENT: The city's prudent management team has implemented various fiscal policies, including the maintenance of financial reserves for capital outlays and rate stabilization, which have historically contributed to positive financial performances 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 well 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, with planned bond financings sized and timed to minimize user charge impact. Given modest debt issuance plans and rapid amortization, already low system debt levels should decline over time.

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

RATING STABILITY EXPECTED: The rating is sensitive to shifts in various credit characteristics, including financial performance, operations, and capital and debt management. The Stable Outlook reflects Fitch's opinion that such changes are unlikely.

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 181,000 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 related to treatment facilities and source water supply. Additionally, management has continued to pass moderate annual rate increases to keep pace with rising wholesale costs and also 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.

Demonstrating the effect of the rate structure change, total DSC dropped from 2.3x in fiscal 2009 to 1.8x in fiscal 2010 on a 10% decline in water consumption from wet weather. Subsequently, the residential rate structure was adjusted to capture around 40% of charges from base rates from 30% assuming 7,500 gallons of water usage. With this change the city has been able to maintain total DSC in the 2.6x-2.8x range despite a 14% decline in consumption in fiscal 2012 relating largely to drought conservation measures.

Total DSC is expected to remain strong through the fiscal 2019 forecast and exceed 2.7x with moderate annual rate increases. Utility rates are typically mid-range when compared to those of other area cities and measure just 1.4% of MHI for fiscal 2015. The city plans to continue with moderate 4.5% annual rate increases over the next five years to keep pace with wholesale supply and treatment costs.

Liquidity has been robust and is expected to remain strong despite planned use of cash reserves for capital outlays. At the close of fiscal 2013, the system maintained 419 days cash on hand and 432 days in working capital.

MANAGEABLE CAPITAL PLAN AND LOW DEBT BURDEN

The city's fiscal 2015-2019 capital improvement program (CIP) is manageable at \$73 million. The majority of projects (72%) are water related. Only about 20% of the CIP is expected to be debt funded, with the remaining 80% funded from available resources. In prior years debt funding of capital was slightly higher at around 40% of all financing sources. With the increase in pay-go sources existing debt levels, which are very low, should decline somewhat, with planned issuances roughly equating to principal being amortized. Existing customer debt levels are just \$479 in fiscal 2013 and are expected to be just \$420 by fiscal 2019.

SYSTEM AND SERVICE AREA

The water system serves more than 64,000 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, 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, 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.

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 improving the unemployment rate to 4.7% in November 2014 from 5.8% the prior year. The unemployment rate is comparable to the state (4.6%) and below the national average (5.5%). City wealth indices are mixed. Median household income approximates the state and nation but per capita income is only 80% of the national norm. Poverty rates though are on par with the nation and below the state average.