OREANDA-NEWS. Fitch Ratings affirms its 'AA-' rating on the following Cleburne, Texas (the city) revenue bonds:

--$3 million waterworks and sewer system (the system) revenue refunding bonds, series 2010.

The Rating Outlook is Stable.

SECURITY

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

KEY RATING DRIVERS

SOUND FINANCIAL PROFILE: Sound financial performance is expected to weaken but should remain adequate through the 2020 forecast period.

HIGHLY LEVERAGED: The system is highly leveraged and capital needs are currently under evaluation. Resolving a high level of water losses may help to mitigate or defer large water supply related needs.

CONCENTRATED CUSTOMER BASE: The top 10 water users account for more than 25% of total water sales, although these customers have had stable water usage.

DIMINISHED RATE FLEXIBILITY: The city prudently adopted a series of annual rate increases to counter the anticipated rise in fixed costs. Rates are high relative to median household income (MHI) levels, which may limit future rate flexibility.

AMPLE REGIONAL ECONOMY: The city benefits from its location within the Dallas-Fort Worth regional economy. Recent completion of State Highway 121, which connects the city to Fort Worth, will likely spur additional commercial and residential development.

RATING SENSITIVITIES

DETERIORATION OF FINANCIAL PROFILE: A material decline in the system's sound financial profile could put pressure on the rating. The Stable Outlook reflects Fitch's belief that this is unlikely.

CREDIT PROFILE
Located in the Dallas-Fort Worth metroplex, Cleburne is 30 miles south of Fort Worth and 55 miles southwest of Dallas. As the former site of Santa Fe Railroad's shop yard, the city's economy diversified into manufacturing and distribution after the yard's closing in the 1980s with further diversification into natural gas extraction given its location over the Barnett Shale formation.

As the seat of Johnson County, the city's estimated 2014 population was approximately 30,000, reflecting a modest 1.7% increase since the 2010 census. The recent expansion of State Highway 121, which connects the city to Fort Worth, is likely to spur additional commercial and residential development in the near term.

SOUND FINANCIAL METRICS
Financial performance has been strong with all-in debt service coverage (DSC) ranging between 1.8x and 2.8x, before transfers out, in the last five audited fiscal years. The strong coverage levels reflect a series of rate hikes that were implemented ahead of rising debt service costs. The city's internal goal is to maintain 1.4x coverage with ongoing revenues and 1.6x including the rate mitigation fund.

Total DSC remained strong through 2014 at 2.1x and unaudited results point to 1.9x for fiscal 2015. The city's five-year forecast (2016-2020) shows all-in DSC from net revenues before transfers ranging between 1.6x and 1.8x. After transfers to the general fund, the projected coverage is a low 1.2x to 1.3x. The city's forecasted all-in DSC is in line with Fitch's median for the 'AA' rating category.

System liquidity is high, reflective of the recent rate hikes. At the close of fiscal 2014, the city had a sizeable 680 days of cash on hand. Liquidity is enhanced by the maintenance of a rate mitigation fund which currently totals $2.9 million. To date, the city has not drawn on the rate mitigation fund.

HIGH CUSTOMER CONCENTRATION
The system's top 10 customer concentration is very high. For fiscal 2014, the top 10 customer water users accounted for 29% of water sales and 25% of sewer flows. Moreover, the top user, Hardie Building Products (Fitch Issuer Default Rating 'BBB-'; Stable Outlook), comprised nearly 10% of each, followed by the Brazos Electric Cooperative (Fitch implied senior secured obligations rated 'A'; Stable Outlook) at about 5%. Although customer concentration is very high, these entities have been operating in the service area for more than 10 years. Economic growth stemming from the completion of State Highway 121 may bode well for system user diversification.

AMPLE WATER RIGHTS
The waterworks and sewer system provides treatment, distribution, collection and disposal services within Cleburne's city limits and certain outlying areas. In fiscal 2014, the city served 10,949 water and 10,346 sewer customers. Lake Pat Cleburne is the city's primary water source, which it supplements with raw water transported from Lake Aquilla via a 34-mile pipeline. A local well field provides additional water for peaking purposes.

The city's water supply is projected to be adequate through 2045-2050 due to its remaining water rights with the Brazos River Authority, newly acquired rights for return flows from its wastewater treatment plant in the Brazos River basin, and an active water reuse program. However, additional conveyance, distribution and treatment works will be required at a later date to deliver these supplies to the city.

Management is investigating and working to resolve above-average unaccounted for water losses (22% in fiscal 2015). Successful resolution to this issue could mitigate or defer water conveyance capital projects.

DECLINING RATE FLEXIBILITY
Water and sewer rates are high at 2.5% of MHI, compared to the category 'AA' median of 1.6%. However, rates reportedly are competitive with certain neighboring providers. Assuming no growth in connections or consumption, the city currently projects annual rate hikes for both water and wastewater at 2.5% annually for 2017 through fiscal 2020, which will push the average monthly service bill further above the median level. While this is a credit concern, the city has consistently demonstrated willingness to raise rates as needed to pay for capital and preserve financial margins.

HIGHLY LEVERAGED SYSTEM
Leverage ratios are high, with outstanding long-term debt per customer of roughly $3,687, nearly twice the 'AA' category median. Amortization is rapid with 71% and 100% of debt amortizing in the next 10 and 20 years, respectively. The fiscal 2016 capital improvement program (CIP) totals $16 million and is planned to be funded with debt previously issued. New management is assessing capital needs and preparing a longer-term CIP that will likely include debt issuance for water conveyance projects and a water treatment plant.