Fitch Rates Grand Prairie, Texas $5.7MM Water/Wastewater Revs.

AUSTIN -- Fitch Ratings assigns an 'AA' rating to Grand Prairie, Texas' approximately $5.7 million water and wastewater system revenue bonds, new series 2005. In addition, Fitch has affirmed the 'AA' rating on the city's $29 million of outstanding prior and parity lien system revenue bonds. The Rating Outlook is Stable.

The bonds are scheduled to sell via a syndicate managed by RBC Dain Rauscher Inc. on or about March 14. The bonds are payable from and secured by a pledge of and lien on the net revenues of the city's water and wastewater system (the system), on parity with $21.1 million of bonds, but subordinate to $8 million of prior lien bonds. Proceeds of the bonds will be used to fund system improvements and pay costs of issuance.

The 'AA' rating reflects the city's sound policies, which have provided a foundation of solid financial performance and substantial liquidity. Capital costs are manageable and coverage levels are expected to remain strong. Rates will increase at a slightly higher rate than previously forecasted, but should remain competitive. The service area continues to expand, benefiting from continued growth of the city's central location in the Dallas/Fort Worth region.

The water system serves approximately 53,000 customers. Treated water supplies are provided primarily from Dallas Water Utilities (DWU) under a contract extending through 2012; for fiscal 2004, DWU met 92% of the city's consumptive demands. The city's remaining consumptive demands for fiscal 2004 were derived from the city of Fort Worth (6%), pursuant to a contract that expires in 2010, and city wells (2%). The wastewater system also serves approximately 53,000 customers, and treatment is provided by the Trinity River Authority (TRA) under a 50-year contract that will be up for renewal in 2007.

Financial performance has been favorable and liquidity is healthy. For fiscal 2003, the system's liquidity position was equal to over 200 days of operating expenditures in unrestricted cash and investments as well as about 220 days of working capital. Unaudited fiscal 2004 results indicate liquidity and working capital more than double prior year results, although restricted assets are decreased. Fiscal 2004 annual debt service (ADS) coverage was strong at 2.9 times (x), down slightly from 3.6x at the end of fiscal 2003. Coverage levels are projected to be at the 1.9x-2.1x level for fiscal 2004-2008, despite planned debt issuances. Debt levels are low for a utility system with total debt-to-net plant at 24% for fiscal 2004. Also, amortization is rapid, with 60% of all principal retiring within 10 years.

The city maintains formal financial management policies that are a positive rating factor. These policies include maintenance of a rate stabilization fund equal to 7.5%-10% of budgeted operating expenditures, budgeting for 1.5x ADS with an informal target of 2x, budgeting renewal and replacement funding for 1% of the undepreciated value of the system annually, and maintaining working capital of 12.5% of budgeted expenditures.

System capital needs for fiscal 2005-2008 total $86 million, and funding for the plan is expected to be derived largely from bond proceeds with the balance funded from pay-as-you-go sources. To fund the CIP (community improvement plan) as well as pay for increased water and wastewater service charges from regional providers, moderate annual rate increases of 4.5% are anticipated through fiscal 2008. However, rates are currently in line with other area providers and should remain so through the planning horizon.