News Column

Fitch Affirms Colleyville, TX Waterworks and Sewer System Rev Bonds at 'AAA'; Outlook Stable

June 23, 2014

AUSTIN, Texas--(BUSINESS WIRE)-- Fitch Ratings has affirmed its 'AAA' rating on the following Colleyville, Texas (the city) waterworks and sewer system (the system) bonds:

--$1,130,000 waterworks and sewer system revenue refunding bonds, series 2010.

The Rating Outlook is Stable.

SECURITY

The bonds are secured by a pledge and first lien on net revenues of the system.

KEY RATING DRIVERS

CONSERVATIVE FINANCIAL MANAGEMENT: Conservative management is evidenced by a stable operating history, historically strong debt service coverage and sound liquidity.

RATE FLEXIBILITY: Water and sewer rates remain well below 2% of median household income (MHI) despite annual pass-through of rate hikes and above-average per-customer water use. High wealth levels afford this flexibility given that the local MHI is 3x the national average.

LOW DEBT; LIMITED CAPITAL NEEDS: The system features low leverage with rapid amortization, and limited capital needs that are being funded on a pay-go basis.

RELIANCE ON WHOLESALE PROVIDER: The city is susceptible to operating cost pressure from Trinity River Authority (TRA), its wholesale water and wastewater provider. Credit concerns regarding its reliance on TRA services are somewhat offset by the city's policy to pass through rate hikes.

STABLE SERVICE AREA: The city's water and sewer system provides an essential service to a small but stable service area within the broad and diverse Dallas-Fort Worth metro area.

RATING SENSITIVITIES:

MAINTENANCE OF STRONG FINANCIAL POSITION: The rating is sensitive to shifts in fundamental credit factors. Preservation of the system's solid financial profile and modest debt levels consistent with the high credit rating is a key consideration. The Stable Rating Outlook reflects Fitch's opinion that such changes are unlikely.

CREDIT PROFILE

The city (GO bonds rated 'AAA' by Fitch) is located in the Dallas Fort-Worth Metroplex, 11 miles northeast of Fort Worth and 22 miles northwest of Dallas. The system serves a population estimated at 24,000 with 9,325 water and 8,675 sewer connections. Build-out is estimated at a population of 26,000.

STRONG FINANCIAL METRICS

Annual debt service (ADS) coverage levels in fiscal 2009-2013 have ranged between 1.3x to a high 3.8x net of pay-go spending and transfers out to the general fund for administrative overhead and franchise fees. The city annually budgets coverage levels at a minimum of 1.2x, taking into account transfers out to the general fund and $250,000 in annual outlays for repair and replacement projects. Five-year projections from fiscal 2014 through 2018 anticipate coverage ranging from 2.2x to 9.4x, net of transfers out. The wide range of coverage stems from the descending nature of the debt service payments due in the next five years. The system has only one series of bonds outstanding with final maturity in 2018. Liquidity levels are also solid. At the close of fiscal 2013, the city reported 385 days cash on hand and 395 days of working capital.

RATE FLEXIBILITY

The city maintains rate flexibility as user charges are slightly below the average of seven other regional cities. Moreover, it is the city's policy to pass through rate increases of TRA and, as such, annual rate hikes have been implemented to maintain its strong financial metrics. The system's outstanding debt is low and future capital needs, which are planned to be funded on a pay-go basis, are limited. Fitch rates TRA's revenue bonds 'AA+.'

RELIANCE ON WHOLESALER

Treated water is provided by the TRA's Tarrant County Water Project (TCWP). Under the contract with TRA, the city pays a participant share equal to just over 16% of TRA's operations and maintenance (O&M) expenses and debt service costs associated with the TCWP. Its contract with TRA extends until all of the TCWP related bonds are paid off.

Additional water supply needs may be met through TRA capacity, or the city may purchase treated water from the city of Fort Worth through an existing emergency interconnect with its neighboring city of North Richland Hills. The construction of a groundwater storage tank on the western part of the city is projected to provide sufficient storage for full build-out.

The city's wastewater is treated by TRA's Central Regional Wastewater Project. Similar to the water contract, the city makes equal monthly payments for TRA's O&M and debt service costs associated with the wastewater project based on its participant share (about 2% of projects costs). In both cases, the contract payments made by the city constitute an O&M expense of the system.

Additional information is available at 'www.fitchratings.com'.

In addition to the sources of information identified in Fitch's Tax-Supported Rating Criteria, this action was additionally informed by information from Creditscope, University Financial Associates, S&P/Case-Shiller Home Price Index, IHS Global Insight, Zillow.com, National Association of Realtors, and the Municipal Advisory Council of Texas.

Applicable Criteria and Related Research:

--'Tax-Supported Rating Criteria' (Aug. 14, 2012);

--'U.S. Local Government Tax-Supported Rating Criteria' (Aug. 14, 2012).

Applicable Criteria and Related Research:

Tax-Supported Rating Criteria

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=686015

U.S. Local Government Tax-Supported Rating Criteria

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=685314

Additional Disclosure

Solicitation Status

http://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=835994

ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: HTTP://FITCHRATINGS.COM/UNDERSTANDINGCREDITRATINGS. IN ADDITION, RATING DEFINITIONS AND THE TERMS OF USE OF SUCH RATINGS ARE AVAILABLE ON THE AGENCY'S PUBLIC WEBSITE '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. FITCH MAY HAVE PROVIDED ANOTHER PERMISSIBLE SERVICE TO THE RATED ENTITY OR ITS RELATED THIRD PARTIES. DETAILS OF THIS SERVICE FOR RATINGS FOR WHICH THE LEAD ANALYST IS BASED IN AN EU-REGISTERED ENTITY CAN BE FOUND ON THE ENTITY SUMMARY PAGE FOR THIS ISSUER ON THE FITCH WEBSITE.



Fitch Ratings

Primary Analyst

Gabriela Gutierrez, CPA

Director

+1-512-215-3731

Fitch Ratings, Inc.

111 Congress Avenue, Suite 2010

Austin, TX 78701

or

Secondary Analyst

Shane Sellstrom

Analyst

+1-512-215-3727

or

Committee Chairperson

Amy Laskey

Managing Director

+1-212-908-0568

or

Media Relations

Elizabeth Fogerty, New York, +1-212-908-0526

elizabeth.fogerty@fitchratings.com

Source: Fitch Ratings


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