Fitch Rates Grand Prairie, Texas' Water and Wastewater Rev Bonds 'AAA'; Outlook Stable
--$4.2 million water and wastewater system revenue refunding bonds, new series 2015.
In addition, Fitch affirms its 'AAA' rating on the following outstanding obligations (pre-refunding):
--$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.
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 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 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 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 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.
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 182,600 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 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 2014 at 3.0x and is forecast to exceed 2.7x with moderate annual rate increases through fiscal 2020. 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 is expected to remain strong despite planned use of cash reserves for capital outlays. At the close of fiscal 2014, the system maintained 345 days cash on hand, or 361 days measuring working capital.
MANAGEABLE CAPITAL PLAN AND LOW DEBT BURDEN
The city's fiscal 2016-2020 capital improvement program (CIP) is manageable at $70 million. The majority of projects (76%) are water related. Only about 34% of the CIP is expected to be debt funded, with the remaining 66% funded from available resources. In prior years debt funding of capital was slightly higher at around 40% of all financing sources. Existing very low debt levels should decline somewhat, with planned issuances roughly equating to principal being amortized. Existing customer debt levels are just $475 in fiscal 2013 and are expected to be $455 by fiscal 2020.
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 improving the unemployment rate to 3.9% in August 2015 from 5.4% the prior year. The unemployment rate is better than the state (4.4%) and national average (5.2%). City wealth indices are mixed. MHI 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.