TEXT-Fitch affirms Burleson, Texas

Sept 14 - Fitch Ratings affirms Burleson, Texas (the city) bonds as follows: --Approximately $4.1 million waterworks and sewer system revenue bonds, series 2005 at 'AA-'; --Approximately $5.4 million waterworks and sewer system revenue refunding bonds, series 2006 at 'AA-'. The Rating Outlook is Stable. SECURITY Bonds are secured by a first lien on net revenues of the water and sewer system (the system). KEY RATING DRIVERS ELEVATED DEBT LEVELS: Debt levels remain above average, although this factor is mitigated to a degree by high wealth levels and rapid amortization. A substantial amount of system debt, almost 70%, is in the form of general obligation certificates of obligation (COs). Levels are expected to remain elevated due to planned financings to support capital improvements. SOUND FINANCIAL METRICS: System debt service coverage (DCS) on an all-in basis registered a solid 1.8x for fiscal 2011, bolstered by strong water consumption due to the Texas drought. Liquidity levels, below average for the rating category, grew modestly in fiscal 2011 to 200 days of cash on hand. WHOLESALE PROVIDER COST PRESSURES: Wholesale charges from the system's water and wastewater service provider limits local control over a significant portion of operating expenditures, reducing flexibility and establishing a measure of uncertainty over costs. ABOVE-AVERAGE USER RATES: User rates for the city are higher than those of surrounding communities; however, combined system rates fall under Fitch's affordability threshold of 2.0% MHI. The city anticipates increasing rates from 4% to 12% starting in 2014 through 2018, which will preserve financial margins, but may limit future rate-raising flexibility. SOLID ECONOMIC BASE: While the local economy has some concentration in natural gas exploration, Burleson also benefits from its location in the large and diverse Dallas-Fort Worth metropolitan area. Wealth levels are above the state and national averages by more than 20% and unemployment is relatively low. WHAT COULD TRIGGER A DOWNGRADE DETERIORATION OF FINANCIAL POSITION: Preservation of the system's solid financial profile in light of increasing debt load and wholesale water costs will be key to maintaining the current rating. CREDIT PROFILE STABLE FINANCIAL RESULTS System financial results remain sound despite recent weather related events. DSC on outstanding revenue debt in fiscal 2010 dipped to 1.8x, and coverage on all utility-related debt, including outstanding COs totaled a weak 1.2x, primarily due to low water consumption driven by a wetter than average year. In contrast, fiscal 2011 posted higher coverage of 2.8x on revenue bonds and 1.8x on all system debt, due to higher water consumption as a result of the Texas drought. Prospectively, management provided financial forecasts that anticipate DSC on an all-in basis ranging from 1.3x to 1.4x through 2018. Liquidity as measured by days cash-on-hand fell to a five-year low of 143 days in fiscal 2010 and then rebounded in 2011 to 200 days, or just over $5.5 million. While these levels are acceptable they are below the median levels for Fitch 'AA' rated utility credits (309 days). WHOLESALE COSTS PRESENT RATE PRESSURE Burleson contracts with Fort Worth for both wholesale water and sewer services, and increasing wholesale costs are an ongoing challenge for management in terms of budgeting and user charges. Wholesale water and wastewater costs averaged 58% of total operating expenses for the past three fiscal years and grew by roughly 1% each year. A 2008 rate study resulted in a series of wastewater rate increases for Burleson customers, including 10% to 12% increases in fiscal 2009 through 2012. Management anticipates more modest increases ranging from 4% to 12% through fiscal 2018. Rates are structured to provide a fixed base rate, which is viewed favorably by Fitch as it provides stability to the revenue stream. Fitch believes these rate hikes will help the system maintain liquidity and coverage consistent with historical levels. While current average monthly bills are high on an absolute basis, they represent an affordable 1.7% of median household income. The city's 2012-2015 capital improvement plan includes $19 million in system projects, with over 60% of those being water system related. In spring 2012, Burleson issued just over $4 million in revenue bonds to finance system improvements and extensions. Historically the city has used a combination of utility revenue bonds and COs to finance system improvements with currently $14.4 million in utility revenue bonds and $32.1 million in COs outstanding. Debt levels per capita are above average at over $1,200, compared to the 'AA' rating category median level of $433; however, this is mitigated to a degree by the relatively high wealth levels in the city and rapid amortization. Although the current estimate of project costs appears manageable, the fact that most of the plan will likely be debt funded will keep debt levels elevated for the foreseeable future. EXPANDING RESIDENTIAL SUBURB Located in the Dallas-Fort Worth metroplex, Burleson is 15 miles south of Fort Worth. The retail system provides water and wastewater service to approximately 12,900 sewer and 12,700 water customers. The city has grown rapidly in recent years, with the population climbing since 2000 from 21,708 to an estimated 37,000 in 2011. This population gain, along with residential and commercial development, has resulted from the city's location south of and adjacent to Fort Worth and along Interstate Highway 35. Residents of the large unincorporated areas to the south and west of the city utilize various services in Burleson, which has contributed to commercial expansion and public school enrollment gains in recent years. Natural gas exploration and related activities have emerged as significant economic contributors given the city's location over the Barnett Shale. Wealth levels are comfortably above the state and national averages by more than 20%. Unemployment for June 2012 (6.4%) is down 1% over last and is below the Dallas-Fort Worth metro area (7.4%), state (7.6%) and national (8.4%) levels.