Fitch Rates Victoria, Texas Utility Rev Rfdg Bonds 'A+'; Upgrades Outstanding Bonds.

AUSTIN, Texas -- Fitch assigns an 'A+' rating to Victoria, Texas' (the city) $16.7 million (preliminary, subject to change) utility system revenue refunding bonds, series 2005. The bonds are scheduled to price June 21 via a syndicate led by First Southwest Co. In addition, Fitch upgrades to 'A+' from 'A' the rating on the city's outstanding $34.6 million (net of refunded bonds) parity utility system revenue bonds. The Rating Outlook is Stable.

The bonds are secured by first lien on net revenues of the city's water and wastewater system. Proceeds will refund a portion of outstanding parity bonds for interest savings and pay costs of issuance.

The rating upgrade to 'A+' reflects the system's favorable finances and debt service coverage, stable and modestly growing service area, and ample water supply. While debt per customer levels are high, utility system borrowing plans appear manageable, with a portion of future capital needs expected to be met through property and sales taxes.

Victoria (general obligation bonds rated 'AA-' by Fitch) has an estimated population of about 62,000, and is located between Houston and Corpus Christi, 30 miles inland from the Gulf of Mexico. A barge canal connects the city to the gulf intra-coastal waterway, allowing access to ports on the Gulf and Atlantic coasts, as well as destinations on the Mississippi River. The city has emerged as a regional service and supply center for heavy industry, including petrochemical and plastics manufacturing. The development of the service and retail sectors has complemented the industrial base and added a measure of diversity and stability to the local economy. As a regional center for trade, per capita retail sales in the city are substantially higher than state and national levels. Additionally, the labor force of the city has remained fairly constant over the past five years, and local unemployment rates have consistently been below both state and national figures over the past several years.

The city's primary water supply comes from the Guadalupe River; the city's permit allows it to withdraw up to 20,000 acre feet annually, or about twice its annual pumpage. Additionally, the city has about a one-year supply of surface water and shallow alluvial groundwater stored in off-channel reservoirs. For emergency purposes, the city maintains 10 wells that supply groundwater from the Gulf Coast Aquifer. Officials estimate an adequate water supply through 2060 or even beyond, depending on the success of conservation and blending efforts. The wastewater system is handled through city-owned treatment facilities operated by the Guadalupe-Blanco River Authority (GBRA) under a long-term regional disposal contract. The utility system is in compliance with all state and federal regulations and has received a superior rating from the state's regulatory agency.

Financial operations are well maintained. Senior lien debt service coverage in fiscal 2004 was over 2 times (x) and 1.4x on combined senior and subordinate lien debt service. Days cash on hand as well as days of working capital in fiscal 2004 were both over 200, while the operating margin was a solid 44%. Projected maximum annual debt service (MADS) coverage on senior lien debt service is about 1.2x and combined MADS for senior and subordinate lien debt was about 1x based on fiscal 2004 net revenues. Customer growth has been modest but stable, increasing about 1% annually. There is no customer concentration, with the top 10 water customers accounting for less than 5% of water revenues. While the city has imposed periodic rate increases to offset increasing operating costs and to fund capital projects, rates remain below average for similarly sized cities in the state.

After this issuance, the utility system will have approximately $42.3 million in outstanding senior lien bonds and $24.6 million in subordinate lien bonds (not rated by Fitch) placed with the Texas Water Development Board. Contract revenue bonds issued by the GBRA for the city's wastewater treatment plants are paid as an operating expense of the system. Total senior and subordinate lien debt per customer is well above Fitch's median for 'A' rated credits. However, future borrowing plans appear reasonable, with the city planning to issue approximately $6 million in parity revenue bonds in 2007 to fund a portion of two major capital projects. The remainder of project funding is expected to come from the issuance of general obligation bonds and certificates of obligations, both payable from property taxes, as well as excess sales taxes collected by the city's economic development corporation. The GBRA may also issue an additional $10 million-$15 million in contract revenue bonds in 2012 or 2013 to fund expansion at the city's wastewater treatment plants. Legal covenants are adequate, although the city is required to maintain a debt service reserve fund only if senior lien debt service coverage is less than 1.35x the average annual debt service.

Fitch's rating definitions are available on the agency's public web site, www.fitchratings.com. Published ratings, criteria and methodologies and relevant policies and procedures are also available from this site, at all times. This document will remain on the public site for seven days.