Fitch Rates $2.65MM Grand Prairie, Texas Water/Wastewater Revs 'AA'.

Business Editors

AUSTIN, Texas--(BUSINESS WIRE)--Aug. 30, 2002

Fitch Ratings assigns an 'AA' rating to Grand Prairie, Texas' (the city or the system) $2,650,000 water and wastewater system revenue bonds, series 2002-A. In addition, Fitch has affirmed the 'AA' rating on the city's $22,595,000 of outstanding parity water and wastewater system revenue bonds. The bonds are scheduled to sell competitively on Sept. 3. Dated Sept. 1, the bonds mature serially Jan. 1, 2003-2022. Bonds maturing on or after Jan. 1, 2013 are subject to optional redemption on Jan. 1, 2012, or any date thereafter, at par plus accrued interest to the date of redemption. 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. Proceeds of the bonds will be used to fund water and wastewater system improvements and pay costs of issuance.

The 'AA' rating represents the system's solid financial performance and substantial liquidity. Established financial policies have provided a foundation for solid performance that provides flexibility to the system. The rate structure is reasonable and is supported by a fully funded rate stabilization fund. The capital program appears manageable and the service area continues to expand, benefiting from continued growth of Grand Prairie's central location in the Dallas/Fort Worth Metroplex.

The water system serves approximately 51,000 customers and approximately 90% of all treated water is supplied by the Dallas Water Utilities under a contract extending through 2012. Roughly 6% 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. The wastewater system serves approximately 50,000 customers and treatment is provided by the Trinity River Authority under a contract renewed annually.

For fiscal 2001 financial performance was strong with an annual debt service (ADS) coverage margin of 3.2 times (x) on outstanding water and sewer revenue bonds. For the same period, the utility also maintained a substantial amount of liquidity with cash and investments totaling 161 days of operating expenditures and accounts receivable totaling 30 days of operating expenditures. Additional liquidity was provided from reserved retained earnings for construction projects that are available to meet operating needs (approximately $12 million) as well as the rate stabilization trust fund (over $2 million). Including the reserved retained earnings for construction projects and the rate stabilization trust fund, the utility's liquidity position improved to an extremely strong 421 days of operating expenditures in cash and investments.

For fiscal 2002, the city anticipates water revenues to be $1.2 million (7%) lower than budgeted estimates as a result of above-average rainfall received during summer months. However, much of the decline in revenues should be offset with reduced water purchase costs ($400,000) and declines in wastewater treatment costs ($500,000). Budgetary figures project capital spending from cash resources for the year at $6.2 million or 19% of total appropriated expenditures. Of the capital contributions $1.1 million is for maintenance of the system, in accordance with the city's policy of annually replacing 1% of net undepreciated system assets, and $4 million is for improvements that are done on a discretionary basis. As a result of the decline in water sales and the large amount of capital contributions, the ADS coverage margin is projected to be 1.8x on a budgetary basis.

For fiscal 2003, proposed budget figures project system revenues to roughly correspond to fiscal 2002 budgeted amounts. However, expenditures are anticipated to decrease from budgeted fiscal 2002 levels by $465,000, primarily as a result of a $347,000 reduction in transfers for debt service costs. Overall, long-term projections for fiscal years 2003-2007 point to continued performance both in terms of solid coverage margins and substantial liquidity. On balance, ADS coverage levels are expected at between 1.8x-2.6x with liquidity levels between 99-176 days of cash on hand.

Utility rates have historically been slightly higher than the average among several area providers. However, rates have remained stable since fiscal 1996 and are not projected to increase through fiscal 2007. As a result, utility rates will likely decline to below average over the next few years. If future rate adjustments are deemed necessary, the city maintains considerable flexibility with $2.5 million of rate stabilization monies, which can be used to offset costs to customers.

The system's proposed 2003-2007 capital improvement plan (CIP) totals $20.7 million, down from $27.1 million for fiscal 2002-2006. The CIP focuses on continued expansion and replacement of water and wastewater lines and mains with total water projects accounting for $11.7 million and wastewater projects identified at $9 million. Funding for fiscal 2003 projects is expected to be derived from available cash balances ($2 million or 39%) and revenue bonds ($3.2 million or 61%). Funding sources for fiscal 2004-2007 projects ($15.5 million) is yet to be determined, but it is likely that revenue bonds will be issued for at least a portion; the city conservatively estimates $4 million in annual debt issuance for capital projects in forecasting future system results.