OREANDA-NEWS. Fitch Ratings affirms its 'AA-' rating to North Texas Municipal Water District's (the district) regional solid waste disposal system (the system) revenue bonds as follows:

--\$5.4 million solid waste disposal system revenue bonds, series 2006;
--\$17.5 million solid waste disposal system revenue bonds, series 2009.

The Rating Outlook is Stable.

SECURITY

The bonds are secured by a first lien on gross revenues of the system, primarily derived from the annual required payments under the regional solid waste system contracts entered into with the cities of Plano, McKinney, Frisco, Richardson, and Allen (member cities). The annual requirement has two components, operating costs and debt service. The debt service component is paid on an unconditional basis.

KEY RATING DRIVERS

TAKE OR PAY CONTRACT PROVISIONS: The district's contract provisions with the five member cities constitute an unconditional joint and several obligation among the member cities for the payment of the system expenses, including debt service on the bonds.

STRONG MEMBER CREDIT PROFILES: The member cities have credit profiles that are consistent with at least the 'AA' rating category.

RESERVES PROVIDE OPERATING FLEXIBILITY: While member cities' payments are designed to recover system costs by just 1.0x, the system maintains certain reserves and cash balances that provide some cushion to timely recalculate member's annual payments for the year.

HEALTHY OPERATIONS/MANAGEABLE NEEDS: Conservative budgeting practices enabled the system to continue to achieve sound debt service coverage amidst a volatile operating environment. Amortization of existing debt is rapid, aided by deferral of system capital projects. Future borrowing plans appear manageable.

GROWING SERVICE AREA: The North Texas Municipal Water District's waste disposal system provides an essential service to five member cities with strong credit fundamentals, serving a growing population in a service area with very healthy economic underpinnings.

RATING SENSITIVITIES

TIMELY RATE ADJUSTMENTS: The North Texas Municipal Water District's ability to continue to manage volatility in waste flow through prudent budget practices and rate adjustments as needed to maintain adequate debt service coverage is essential to the rating.

MEMBERS FINANCIAL FLEXIBILITY MAINTAINED: Material change to the individual member's strong credit fundamentals could apply pressure to the rating.

CREDIT PROFILE
The district was created in 1951 by the Texas Legislature as a conservation and reclamation district. The district has broad powers with the specific authority to construct, own, and operate, water supply, sewage treatment, and waste disposal facilities such as the regional solid waste disposal system (the system). The system serves the cities of Plano (GOs rated 'AAA' by Fitch), Richardson, McKinney, Allen, and Frisco in northern Texas.

SOUND CONTRACT PROVISIONS

All five member cities have contracts with the district to deliver all waste generated within each city to district facilities. The contract terms match the life of the district's assets and exceed the life of the bonds. There has been some tonnage volatility over the last 10 years due to the recession and likely also due to recycling efforts, nonetheless the system revenues have been adjusted by a corresponding amount due to the cost reimbursement nature of the contract.

Member cities are unconditionally required to pay a proportionate share of the system's annual requirement (AR), which consists of O&M expenses, debt service, and any amount required under the contracts and bond resolutions, including replenishment of any draws on the debt service reserve fund. The AR is based on the contributing weight of solid waste to the system. The obligation of each city to make its annual payments (APs) to the district is an O&M expense of each city's solid waste system and is superior in priority to the city's own enterprise debt obligations. Payment of debt service is still required in the unlikely event that solid waste disposal services are disrupted.

While the contracts between the district and the cities do not contain explicit step-up provisions in the event of a default by a city in paying its AP, the contracts allow for a recalculation of the proportionate annual requirements of the non-defaulting cities in order for the district to eventually recover the full AP. However, no city has ever failed to make timely payments to the district as required under their respective contracts.

SOLID MEMBER CREDIT PROFILES

Combined, the member cities accounted for around 75% of the system's total operating revenues with the other 25% comprised of spot waste and sludge disposal in fiscal 2014. The largest member city is Plano, supplying 28% of district revenues and 25% of district tonnage in fiscal 2014, followed by McKinney with 17% and 15%, respectively. Each city provides for its own waste collection and by contract delivers waste to district facilities consisting of a landfill and three transfer stations.

Fitch assessed the credit profile of each of the five member cities solid waste enterprise systems to be very strong, consistent with the 'AA' rating category. To determine the rating on the district's bonds, Fitch considered the strong credit characteristics of each of the member solid waste systems.

AFFORDABLE SERVICE FEES PROVIDE AMPLE FLEXIBILITY

The member cities charge garbage fees on a combined utility bill. To aid in enforcing the collection of garbage fees, the cities suspend service from the waterworks system for customer non-payment. Rate flexibility is a credit strength, as the average combined utility bill across the five member cities is below 2% of median household income (MHI).

SUM-SUFFICIENT RATE COVENANT CONSIDERED A WEAKNESS

Payments to the district are made monthly based on waste flow estimates with an annual true-up. The rate covenant and additional bonds test are weak, requiring sum-sufficient coverage although the system maintains certain reserves for capital outlays, maintenance expense, and equipment replacement, providing additional cushion. Revenues derived from contracted waste provide less than 100% of operations and debt service, but a competitive location and rate structure continue to attract non-member (spot) waste. Revenue derived from non-member waste disposal totaled 14% of fiscal 2014 revenues. This source of revenue has been stable mitigating concerns over the lower coverage generated from annual requirements billed to member cities.

SOUND FINANCIAL OPERATIONS

Financial operations of the district are strong. Gross revenues covered debt service a high 5.7x in fiscal 2014, with net revenues providing a more modest but still strong 1.6x coverage. Annual debt service coverage on a net basis regularly exceeds 1.2x due to strong spot waste and other revenues. Key rating drivers are the district's ability to maintain efficiency in operations with competitive fees for both member participants and nonmember spot waste, as well as stability in the competitive environment, as projected. Rate-raising flexibility is due to the current low combined utility bill of each member city, mitigating against future potential reductions in spot waste revenue.

HIGH DEBT WITH MANAGEABLE CAPITAL NEEDS

Deferral of capital projects over the last few years has enabled improvement in the system's debt metrics. Debt to net plant has declined to 58% in 2014 from 78% in 2010. Future capital needs include a transfer station expansion, a transition of an existing transfer station, construction of a new transfer station and a service center. The district plans to issue approximately \$15 million in bonds in 2016, \$7 million in 2018, and another \$12 million in 2019 for these projects.