Fitch Ratings assigns its 'AA' rating to Grand Prairie, Texas' (the city) $4.9 million water and wastewater system revenue bonds, new series 2008. In addition, the 'AA' rating is affirmed on the city's $7.7 million of outstanding prior lien bonds and $56.8 million of outstanding parity bonds. The current offering is scheduled to sell on Nov. 4 via negotiation. The Rating Outlook is Stable.
The 'AA' rating reflects the city's sound policies, which have contributed to solid financial performance which is characterized by ample coverage of debt service and healthy liquidity levels. Capital costs are manageable, and coverage levels are expected to remain strong. Rates will increase moderately over the near term but should remain competitive. Service area economics remain positive, with the city benefiting from its central location in the Dallas-Fort Worth region.
The water system serves over 61,000 customers, and nearly 90% of all treated water is supplied by the Dallas Water Utilities under a contract extending through 2012. Roughly 7% of the city's water supply is provided through a contract with Fort Worth that expires in 2010, and the balance is derived from city wells. City officials report that negotiations are underway for water supply contract extensions. Fitch expects that the city will renegotiate long-term wholesale water contracts without interruption. However, significant increases in wholesale charges could pressure operations; given the city's demonstrated willingness to pass through rate increases somewhat mitigates this concern. The wastewater system serves nearly 61,000 customers, with treatment provided by the Trinity River Authority under a contract that extends to 2023.
Coverage levels remain well above average, reflecting the city's lack of direct debt related to treatment facilities and source water supply. For fiscal 2007, annual debt service (ADS) coverage was 2.7 times (x) and is projected at 2.2x for fiscal 2008, consistent with historical results. ADS coverage is projected to range between 1.9x-2.4x through fiscal 2013, although the city employs conservative modeling assumptions and actual performance has tended to be more favorable. Liquidity remains strong and in line with the 'AA' category. Audited fiscal 2007 liquidity was sizable at 387 days of unrestricted cash and investments.
The city's fiscal years 2009-2013 capital improvement program (CIP) totals $73 million, up slightly from the prior year but considerably higher from that of just a few years ago as a result of elevated projected population density in the southern sector of the city and higher material costs. Despite the rising capital costs, the debt burden to customers is, and is expected to remain, relatively low compared to other utilities. Approximately 68% of the CIP is expected to be debt funded with the remaining 32% funded from available resources as the city plans to continue its practice of providing a substantial amount of pay-as-you-go funding. Utility rates are lower than the regional average level and should remain competitive even with planned moderate near-term hikes.
Fitch issued an exposure draft on July 31, 2008 proposing a recalibration of tax-supported and water/sewer revenue bond ratings which, if adopted, may result in an upward revision of this rating (see Fitch research 'Exposure Draft: Reassessment of the Municipal Ratings Framework'.) At this time, Fitch is deferring its final determination on municipal recalibration. Fitch will continue to monitor market and credit conditions, and plans to revisit the recalibration in the first quarter of 2009.
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