OREANDA-NEWS. Fitch Ratings assigns an 'F1+' rating to the following Tarrant Regional Water District, Texas (TRWD) bonds:

--Up to $150 million in aggregate extendable commercial paper (ECP) bonds, series A (tax-exempt) and series A (taxable).

Draws on the ECP bonds will commence in the next two months. Proceeds will be used to fund system improvements.

In addition, Fitch affirms the ratings on the district's outstanding rated bonds as follows:

--$843 million in outstanding water revenue bonds at 'AA'.

The Rating Outlook is Stable.

SECURITY

The water revenue bonds are payable from a first lien on pledged revenues, which consist mainly of payments made by the cities of Fort Worth, Arlington, Mansfield and the Trinity River Authority (TRA; combined, the contractors) pursuant to the Tarrant County Regional Supply Facilities Amendatory Contract (the contract) between TRWD and the contractors. The ECP bonds have a subordinate lien on pledged revenues and are further secured from proceeds of ECP bonds issued to refinance maturing ECP bonds as well as from proceeds of any senior lien bonds issued to refund the ECP bonds.

KEY RATING DRIVERS

SOUND MEMBER CREDIT PROFILES: The rating is based principally on the credit quality of the contractors. The contractors account for the vast majority of the district revenues and all have ratings consistent with at least the 'AA' rating category.

STRONG LEGAL COVENANTS: The joint and several contract among the contractors for the repayment of obligations to TRWD is treated as an unlimited step-up. The payment history of the contractors is exemplary.

SUBSTANTIAL CAPITAL NEEDS: Expected capital needs remain sizable over the next 10 years, which will lead to higher costs to members. However, charges to members are expected to remain manageable for the foreseeable future.

ESSENTIAL SERVICE: The contractors are either entirely or almost entirely dependent on TRWD for supplies, and development of alternative sources likely would be cost prohibitive.

SHORT-TERM RATING: The 'F1+' rating on the ECP bonds is based on TRWD's long-term credit quality, recognizing the bonds' subordinate lien on pledged revenue and extendable nature of the repayment obligation.

RATING SENSITIVITIES

MEMBER CREDIT PROFILES: Deterioration of the credit quality of the contractors could have negative credit implications for the bonds.

TIMELY CONTRACTOR ANNUAL PAYMENTS: Failure by a contractor to pay its contracted amounts in a timely fashion would be viewed negatively.

CREDIT PROFILE

TRWD operates as a water control and improvement district, providing raw water service to about 50 municipal and non-municipal entities located both within and outside of Tarrant County. Overall, the district provides water either directly or indirectly to about 95% of Tarrant County and an estimated 1.9 million people. The district is governed by a five-member, publicly elected board. Board members are elected to four-year terms.

JOINT AND SEVERAL WATER CONTRACT

Effective in 1982, the contract provides the terms under which TRWD shall supply raw water to the contractors and the contractors agree to pay for such service. The contractors agree to make monthly payments to TRWD equal to the annual requirement of the district's operating and maintenance (O&M) expenses, debt service requirements (including debt service on the bonds), and any other requirement under the district's bond resolution (including replenishment of any draws on the debt service reserve fund).

If there is a deficiency in the district's revenues required to fund such items, the contractors are required to make up this difference proportionally to their level of consumption relative to all non-delinquent customers and prior to the next debt service payment date. To date, the contractors have never failed to make timely payments to the district required under the contract. The contract is in effect until all outstanding debt obligations are paid in full.

The contractors accounted for about 89% of all water deliveries and water payments made to TRWD in fiscal 2015. The obligation of each contractor to make TRWD annual payments is payable as an O&M expense from each contractor's water and sewer system (in the case of Fort Worth, Arlington, and Mansfield) or Tarrant County Water Project (in the case of TRA) and superior in priority to the contractor's own debt obligations. Fort Worth's (60% of TRWD fiscal 2015 water payments) water and sewer revenue bonds are rated 'AA' by Fitch, while Arlington (17%) and Mansfield's (4%) water and sewer revenue bonds are rated 'AAA' and 'AA', respectively. Fitch rates the TRA's debt pertaining to the Tarrant County Water Project at 'AA'; TRA contributed 9% of the district's fiscal 2015 water payments. Since the district's financial capacity is limited essentially to contractor payments, Fitch basis the district's rating primarily on the credit quality of the contractors.

ADEQUATE FINANCIAL PERFORMANCE AND GROWING RATES

Financial performance is typical for a wholesale provider where revenues are derived from take-or-pay contracts. Annual debt service coverage has been, and is expected to continue to be, at or about 1.0x, per the contract. In terms of liquidity, because the contract delineates what constitutes part of the annual charge that contractors pay, reserves are limited to those pertaining to the bond covenants.

Rate setting is done by the district board. Rates are adjusted annually as needed to meet the annual requirements of the district and have increased 23% over the last two years. Annual requirements are expected to rise by another 33% over six years (from fiscal 2016 price of $1.18 per $1,000 gallons to the projected $1.57 per 1,000 gallons in fiscal 202). Despite these increases, the rates are very reasonable at $385 per acre foot (AF) and currently projected to rise to $513 per AF in 2022.

SIZEABLE CAPITAL PLAN

TRWD's entirely debt funded capital improvement plan (CIP) totals an estimated $300 million through fiscal 2022. Approximately 42% of the plan is for the integrated pipeline (IPL) project that has been underway since 2010. The IPL is a 150-mile pipeline to deliver 347 million gallons per day (mgd) of water from East Texas to the Dallas-Fort Worth metroplex. The project will provide the additional water supply the district anticipates will be needed beginning in the 2018-2020 timeframe. The district has already issued more than $800 million in bonds for this project. The remaining 58% CIP costs are primarily for the Kennedale Balancing Reservoir improvements, as well as other miscellaneous system improvements. Beyond completion of the IPL projects, future capital needs relate to securing additional water sources as needed including a second phase to the IPL project and a reservoir project.

NEW EXTENDABLE COMMERCIAL PAPER PROGRAM

TRWD has authorized a new subordinate lien extendable CP bond program (the series A bonds) for up to $150 million. The bonds will originally have maturities of between one and 90 days. However, the district has the right to extend the maturity to up to 270 days from the original issuance date. If the bonds are extended, the interest rate is reset to the greater of SIFMA or LIBOR (depending whether taxable or tax-exempt) plus a fixed number of basis points or a fixed interest rate, both of which are determined based on the ECP bonds' credit ratings at the time. However, the reset rate shall not exceed a maximum of 10% per annum.

STRONG ECONOMIC FUNDAMENTALS

Tarrant County's economic indicators are strong. Wealth levels as measured by median household income are above average at about 110% and 108% that of the state and national levels, respectively. The county's May 2016 unemployment rate of 3.6% was below state (4.2%), and national (4.5%) averages for the month. The county's abundant undeveloped land, within the broad and diverse Dallas-Fort Worth metroplex, and ongoing transportation infrastructure investment are expected to sustain the expansion of its economy over the long term.