OREANDA-NEWS. Fitch Ratings assigns an 'AA' rating to the following Fort Worth, Texas (the city) revenue bonds:

--Approximately $127.5 million water and sewer system revenue refunding and improvement bonds, series 2015A.

The bonds are expected to sell via competitive bid July 28, 2015. Proceeds will be used to fund improvements and extensions to the system, refinance a portion of the system's debt to provide for savings and restructuring to provide level debt service and pay costs of issuance. The bonds will not be secured by a debt service reserve fund.

In addition, Fitch affirms the 'AA' ratings on the following outstanding bonds:

--$113.6 million water and sewer system revenue bonds series 2007 (pre-refunding), 2010C;
--$411.4 million water and sewer system revenue refunding and improvement bonds series 2005, 2005A (pre-refunding), 2010, 2012, 2011, 2014.

The Rating Outlook is Stable.

SECURITY
The bonds are payable from a first lien on the net revenues of the combined water and sewer system (the system). Pledged revenues exclude impact fees. The series 2015A bonds will not be secured by debt service reserve fund.

KEY RATING DRIVERS

IMPROVED FINANCIAL PERFORMANCE EXPECTED: System financial performance has fluctuated in the last several fiscal years, having been pressured by declining water consumption and rate increases that did not sufficiently offset water demand reductions. However, a series of five annual rate increases beginning in fiscal 2014 are expected to improve debt service coverage and liquidity. Management forecasts point to all-in debt service coverage (DSC) ranging from 1.7x to 2.2x through fiscal 2020.

WHOLESALER PRESSURES: The city's dependence on wholesale providers creates cost pressures outside of the utility's direct control. System debt levels are elevated when taking into account off-balance sheet debt of its wholesale providers Tarrant Regional Water District (the district) and Trinity River Authority.

AVERAGE DIRECT DEBT/RAPID AMORTIZATION: Direct system debt levels are comparable to similarly rated credits and benefit from rapid amortization. Planned debt issuance to support capital spending should keep debt levels relatively flat over the intermediate term.

AFFORDABLE RATES: Despite anticipated rate increases, system rates remain affordable and retain ample rate flexibility. However, rates could be pressured over the long term to support wholesale pass-through costs and additional system debt issuances.

LARGE AND DIVERSE SERVICE AREA: Fort Worth is a major anchor in the Dallas-Fort Worth regional economy, with a population of roughly 6.5 million. The system continues to experience moderate growth in its customer base.

RATING SENSITIVITIES
Deterioration of Financial Margins: Weakening financial metrics, pressured by wholesaler cost pressures or reduced water demands, could negatively impact the rating. Achieving improved financial metrics as outlined in management's system forecasts will be key to maintaining the rating.

CREDIT PROFILE
The system provides retail service to the city and a portion of the surrounding area through over 200,000 separate user accounts. The system continues to record steady customer growth, averaging 1% annually over the past five years. With an estimated 2014 population of about 797,000, Fort Worth's population continues to grow (up 9% annually since 2010). In addition, the city's extraterritorial jurisdiction is sizable and provides opportunity for future annexation and growth.

RATE ADJUSTMENTS SHOULD IMPROVE FINANCIAL METRICS
Due to the state-wide drought in Texas during 2011-2015 the city spent much of the last three years with tighter water restrictions in place, which impacted water service revenues. The system also absorbed additional debt during this timeframe, and made two large one-time payments in fiscal 2012. These pressures resulted in weaker financial performance of 1.4x all-in debt service coverage and $52 million or just 88 days of operating cash in fiscal 2012. Financial results in fiscal years 2013 and 2014 improved with all-in coverage of 1.8x and 1.6x, respectively. Cash levels also improved modestly to 100 days of cash on hand as of the end of fiscal 2014.

In fiscal 2014 the city adopted 6% water and 5% sewer rate increases and adopted an additional 7% water rate increase and 5% sewer rate increase in fiscal 2015. Further, the city plans to continue to implement rate increases ranging 3.4% to 12.3% annually for the next five years. Continued implementation of rate adjustments should strengthen financial metrics further, while continuing to support system maintenance.

City financial projections point to all-in DSC ranging between 1.7x to 2.2x over the fiscal 2015 to 2020 period. The forecast assumes the aforementioned additional annual rate increases and accounts for increased debt service costs from current and planned debt issuances. Management has expressed its commitment to maintaining all-in coverage at its policy of 1.5x or above before transfers by adjusting rates as needed. The city also anticipates adopting formal policies relating to minimum cash balances by the end of fiscal year 2015. Fitch notes that the rating reflects management's forecast that anticipates exceeding its minimum policy level.

Liquidity levels were also affected by the drought, declining to a low of 88 days cash on hand in fiscal 2012 and ending fiscal 2014 at $129.6 million, or 100 days cash. While cash and investments levels are below Fitch's 'AA' category medians, the city contributes an impressive $52 million on average annually, or close to 42% of capital spending, in equity funding towards capital needs, resulting in a reduced liquidity position and providing financial flexibility.

Fitch will continue to monitor financial performance. Some level of moderate rate increases during the forecast period will be necessary to preserve existing margins and allow for continued cash-funded capital spending. Maintenance of robust DSC given the system's below-average liquidity is a key credit consideration.

MANAGEABLE CAPITAL NEEDS BUT ABOVE-AVERAGE DEBT LOAD
The system's fiscal years 2016 to 2020 capital improvement plan (CIP) totals a manageable $725 million. Approximately 58% of the CIP is projected to be funded with debt, with the remainder to be funded from cash from operations. The system's leverage ratios are moderate, with debt per customer at $1,539 and debt to net plant at 35%; comparing favorable to the 'AA' median of $ 1,934 per customer and 50% debt to net plant ratio.

Direct debt levels are projected to remain at similar levels over the next five years given upcoming debt plans and rapid principal amortization. However, including district and authority obligations supported by the system, system debt levels increase by 67% and exceed category 'AA' rating median levels. Fitch expects this level to rise, as the district has significant additional debt plans.

Fitch notes that the system debt structure also includes a subordinate lien direct purchase note program with a $100 million authorization. The intended use of the program is to provide short-term internal liquidity. The city has not drawn upon the notes to date and has no current plans to do so.

WATER SUPPLY AND RISING WHOLESALE PROVIDER RATES
All of the city's water is purchased from the district. Fort Worth is the district's largest customer, accounting for 55% of the district's sales. The district's debt burden is estimated to increase by 76% over the fiscal years 2014 to 2018, translating into higher purchased water costs for the city.

The district's proposed rate increases for the city peak at 12% in fiscal 2015 before starting to stair-step down. Rates through fiscal 2019 will range 6% to 10% and then decline to 5% or less through 2026. Purchased water costs comprise one-third of the city's operating expenses. Thus, as the district ramps up its capital plan, rate adjustments will be necessary to support rising wholesale pass-through costs.

Favorably, the city began shifting a greater portion of its variable volume water charges to fixed charges starting with the fiscal 2014 rate adjustments. This was the first year of a multi-year plan to improve revenue stability by recovering a greater portion of system revenues through service fees. The water fixed charge currently comprises 25% of the total water bill and the sewer fixed charge comprises 15% of the total sewer bill. The city's goal is to increase the fixed to variable revenue recovery until the water rates reach 30% fixed to 70% variable and the sewer rates reach 25% fixed to 75% variable.

The combined water and sewer monthly bill of $57.8 (assuming usage of 10.22 ccf per month for water and 6.12 ccf per month for sewer) equals an affordable 1.3% of median household income, providing the system sufficient rate flexibility. City council has typically adjusted rates when necessary, and it will be important that this continue in order to keep purchased water costs from eroding financial performance and to ensure adequate funding of capital.

SOUND ECONOMIC FUNDAMENTALS
The metropolitan area employment base is extensive, and while military-related spending still accounts for an estimated one-quarter of the economy, recent gains in other sectors, such as services, construction, and trade have helped diversify the labor force. City job growth remained strong through the recessionary years, increasing 19% from May 2005 to May 2015. For April 2015, the city's unemployment stood at 3.7%, down from 5.2% the year prior and below the state (4.2%) and the nation (5.4%). City wealth levels are on par with the region and state although slightly below the national average.