Fitch Rates Victoria, TX $25.5MM Utility Sys Rev Refunding Bonds 'A+'; Outlook Stable

• Press Release
• Source: Fitch Ratings
• On 4:46 pm EST, Tuesday November 10, 2009

AUSTIN, Texas--(BUSINESS WIRE)--Fitch Ratings assigns an 'A+' rating to Victoria, Texas' (the city) $25.5 million utility system revenue refunding bonds, series 2009. The bonds are scheduled to price on Nov. 17 via a negotiated offering. In addition, Fitch affirms the 'A+' rating on the city's outstanding $43.3 million senior lien utility system revenue bonds (net of bonds to be refunded). The Rating Outlook is Stable.

The bonds are secured by net revenues of the city's water and wastewater system. Proceeds will be used to refund outstanding obligations for savings and to pay issuance costs.

The 'A+' rating reflects the system's favorable financial profile and debt service coverage, stable and modestly growing service area, and ample water supply. Financial flexibility is afforded with solid liquidity and adequate working capital, although these metrics have declined somewhat over the last few years primarily due to the ramp up of cash funded capital outlays. While debt per customer levels are moderately high, utility system borrowing plans appear manageable, with a portion of future capital needs expected to be met through sales taxes and available resources.

Victoria (general obligation bonds rated 'AA-' by Fitch) has an estimated population of about 62,500, 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 shown some modest growth over the past five years and the local unemployment rate has 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 permits 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 ground water stored in off-channel reservoirs. For emergency purposes, the city maintains 10 wells that supply ground water from the Gulf Coast Aquifer. Officials estimate that these combined supplies will provide an adequate water supply through approximately 2085 or even beyond, depending on the rate of growth in the service area and conservation efforts. The wastewater system is made up of city-owned treatment facilities that are currently operated by the Guadalupe-Blanco River Authority (GBRA) under a regional disposal contract that is set to expire in the near term. The city plans to operate its own wastewater system upon termination of the contract and is planning to expand the system to accommodate ongoing growth. 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 sound. Senior lien debt service coverage in fiscal 2008 was 2.1 times (x) and 1.4x on combined senior and subordinate lien debt service. Days of cash on hand in fiscal 2008 totaled a solid 180 days, while working capital totaled an adequate 67 days and the operating margin was a solid 42%. There is no customer concentration, with the top 10 water customers accounting for roughly 5% of water revenues. While the city has imposed regular rate increases to offset increasing operating costs and to fund capital projects, rates remain affordable when compared to similarly sized cities in the state.

Scheduled to mature in December 2010, contract revenue bonds issued by the GBRA for the city's wastewater treatment plants are paid as an operating expense of the system. Future capital needs appear manageable at about $57 million over the next five fiscal years. The largest components of the capital improvement plan (CIP) are line replacements in the downtown area and a wastewater treatment plant expansion. The utility benefits from sizable contributions from the city's sales tax development corporation, which is estimated to contribute roughly 30% of capital needs. The remainder will be funded primarily through revenue bonds. 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.

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Fitch Ratings, Austin
Gabriela Gutierrez, 512-215-3731
Steve Murray, 512-215-3729
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