Fitch Rates Arlington, Texas' $38MM Water & Sewer Revs 'AA+'; Outlook Stable

Business Wire,  June 17, 2008  

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AUSTIN, Texas -- Fitch assigns an 'AA+' rating to the Arlington, Texas $38 million water and wastewater system revenue bonds, series 2008. The bonds are scheduled to be privately placed with the Texas Water Development Board within the next several weeks. 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 water and wastewater system (the system). Bond proceeds will be used to improve and extend the system and to pay costs of issuance. Fitch also affirms the 'AA+' on the city's $90.8 million of outstanding parity water and wastewater system revenue bonds. The Rating Outlook is Stable.

The 'AA+' rating reflects the system's consistently favorable financial performance, manageable capital improvement program (CIP), competitive user rates, and healthy service area economy. Liquidity, in terms of unrestricted cash, is well below other comparably rated systems. However, Fitch believes that this financial metric is offset by the mature nature of the system, the stability of ongoing revenues, the healthy amount of capital reserves, and the ample amount of current revenues budgeted annually for pay-as-you-go system renewal. Proposed capital outlays have increased moderately over the last few years as the city increases treatment capacity, but overall increases in the CIP are well within the city's ability to absorb with little impact to operations.

Capital needs through fiscal 2012 total a manageable $179 million and include funding for completion of the city's Kubala water treatment plant, but also include a sizeable component for routine rehabilitation. Over 40% of all capital items will be funded on a pay-as-you-go basis, with the remaining being debt financed, including the current offering. 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 rapid with 70% of all principal maturing in 10 years. Also, the system's debt to net plant ratio of 17% is approximately one-half that of comparably-rated credits.

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 is 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. For fiscal 2007 annual debt service (ADS) coverage was a healthy 2.2x, despite sales volumes which were 27% below the prior year. 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.

Unrestricted cash, equal to 73 days of operating expenses for fiscal 2007, 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 256 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.

The water system serves more than 104,000 customers with raw water supplied by the Tarrant Regional Water District under a long-term contract. The wastewater system serves more than 96,000 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 2007 population in excess of 364,000. 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.

Fitch's rating definitions and the terms of use of such ratings are available on the agency's public site, www.fitchratings.com. Published ratings, criteria and methodologies are available from this site, at all times. Fitch's code of conduct, confidentiality, conflicts of interest, affiliate firewall, compliance and other relevant policies and procedures are also available from the 'Code of Conduct' section of this site

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