Fitch Rates Arlington, Texas' $22MM Water & Wastewater Revs 'AAA'; Outlook Stable
Source: Business Wire
--$21.7 million series 2010.
The bonds are expected to sell via negotiation on June 22 and are secured by a pledge of and first lien on net revenues of the system.
In addition, Fitch takes the following actions:
--$118.2 million in outstanding water and wastewater system revenue bonds affirmed at 'AAA' (prior to the refunding).
The Rating Outlook is Stable.
RATING RATIONALE:
--The financial performance of the city of Arlington's water and wastewater system has consistently been favorable.
--The capital improvement program (CIP) is manageable.
--User charges are competitive with those of other regional providers.
--The system benefits from a healthy service area.
--Liquidity, in terms of unrestricted cash, is well below that of other comparably rated systems, but this financial metric is offset by the mature nature of the system, stability of ongoing revenues, healthy amount of capital reserves, and ample amount of current revenues budgeted annually for pay-as-you-go capital projects.
--Operating expenses are directly linked to the costs of external service providers and the city has a policy of passing through cost increases.
KEY RATING DRIVERS:
--Adherence to the city's formalized capital and reserve policies is considered critical in ensuring continued strong operating flexibility.
--Significant increases in wholesale charges could pressure user charges, but financial margins should remain consistent, given the city's policy of passing through provider charges.
SECURITY:
The bonds are special obligations of the city, payable from and secured by a pledge of and first lien on the net revenues of the system.
CREDIT SUMMARY:
Fiscal performance and operating flexibility are solid. To improve operating consistency, the city began a five-year rate structure transition in fiscal 2004 (fiscal 2008 was the final year of the transition) whereby base rates were increased while volumetric charges decreased. This change has 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. For fiscal 2009 annual debt service (ADS) coverage was a good 3.3 times (x). Coverage is projected at 2.2x based on budgeted figures for fiscal 2010, though estimates are conservative.
Unrestricted cash, equal to 70 days of operating expenses for fiscal 2009, is low for the rating level. Offsetting this concern, the city maintains sizeable restricted assets in its capital construction fund, which include annual unbudgeted surpluses generated by the system that are deposited to the fund by policy. Including these reserves, liquidity improves to 176 days cash, more in line with the rating. Also, because of the consistency of operating revenues, the lack of growth pressures, and the city's practice for budgeting annual depreciation, the system operating environment is very stable, thereby mitigating the need for higher fund balances.
Capital needs through fiscal 2014 total a manageable $162 million including the completion of the city's Kubala water treatment plant and a sizeable component for routine rehabilitation. About 40% of the CIP is anticipated to be funded on a pay-as-you-go basis, with the remainder of the plan anticipated to be debt financed. System leverage is low, partially as a result of the city's purchase of wholesale service, but also because of the limited growth pressures and the city's proactive policies of debt amortization and funding annual depreciation from current revenues. As a result, amortization of debt is above average with 66% of all principal maturing in 10 years and 100% in 20 years. Also, the system's debt to net plant ratio of 19% is approximately one-half that of comparably-rated credits.
The water system provides treated water to approximately 105,000 customers. The city purchases raw water from the Tarrant Regional Water District (revenue bonds rated 'AA+' by Fitch) under a long-term contract. The wastewater system serves nearly 99,000 customers with treatment provided under a contract with the Trinity River Authority that extends to 2023. Arlington is located in the center of the Dallas-Fort Worth metroplex and had an estimated 2009 population of approximately 370,450. 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.
Applicable criteria available on Fitch's web site at 'www.fitchratings.com':
--'Revenue-Supported Rating Criteria (Dec. 29, 2009);
--'Water and Sewer Revenue Bond Rating Guidelines' (Aug. 6, 2008).
Additional information is available at 'www.fitchratings.com'.
Contact:
Fitch Ratings
Julie Seebach, +1-512-215-3740, Austin
Steve Murray, +1-512-215-3729, Austin
Cindy Stoller, +1-212-908-0526, New York
cindy.stoller@fitchratings.com
