OREANDA-NEWS. November 18, 2015. Fitch Ratings has assigned an 'A+' rating to the following West Harris County Regional Water Authority, Texas (the authority) bonds:

--Approximately \\$53.8 million water system revenue and revenue refunding bonds, series 2015A.

The bonds are scheduled to sell the week of November 30 via negotiation. Bond proceeds will be used for capital improvement projects and to refund certain outstanding bonds for interest savings without extension of maturity.

In addition, Fitch affirms the following ratings of the authority:

--\\$224 million in outstanding (pre-refunding) water system revenue bonds, series 2006, 2007, 2009, 2013 and 2014 (pre-refunding) at 'A+'.

The Rating Outlook is Stable.

SECURITY

The bonds are payable from a first lien on net revenues of the authority's water system (the system) plus amounts transferred to the revenue fund from the coverage fund.

KEY RATING DRIVERS

SOUND FINANCIAL PROFILE: Annual debt service (ADS) coverage is sound and liquidity remains solid. Rising fixed costs are expected to push ADS coverage to more modest levels over the longer term.

SUBSTANTIAL CAPITAL AND DEBT NEEDS: The authority's capital improvement program (CIP) to meet future groundwater reduction restrictions is substantial and is anticipated to be almost entirely debt-financed. This borrowing program will push the authority's moderately high debt burden to a very high level over the next five years.

RISING RATES: User charges are expected to continue rising incrementally to fund additional capital needs, although rates are expected to remain moderate over long term. Given that other regional water purveyors are currently facing similar pressures, rates are likely to be comparable in the long term.

BELOW-AVERAGE LEGAL COVENANTS: Legal provisions are somewhat weaker than peer wholesale systems but are adequate overall.

ESSENTIAL PROVIDER WITH STRONG ENFORCEMENT: The authority provides an essential service as a wholesale water provider to the city of Katy and 110 utility districts in the suburban areas west of the city of Houston (the city) that must reduce their overall groundwater pumping. Enforcement provisions in place are expected to ensure timely recovery of revenues by the authority.

RATING SENSITIVITIES

ACCELERATING CAPITAL COSTS: Significant increases in conversion cost requirements beyond what is currently planned would further pressure the authority's debt profile and rate structure. The Stable Outlook reflects the expectation that capital and debt pressures will remain consistent with the current rating level.

CREDIT PROFILE
The authority is a wholesale water provider serving a 226 square mile suburban area west of Houston in western Harris County and a small portion of Fort Bend County. With an aggregate population estimated at 477,000, its customers include the city of Katy and 110 utility districts. The region historically experienced extensive land subsidence as a result of groundwater pumping, which in turn led to the Harris Galveston Subsidence District (HGSD) promulgating strict requirements for pumpers to convert to alternative sources of supplies (i.e. surface water) either individually or collectively in stages.

The authority has adopted, and the HGSD has approved, the authority's groundwater reduction plan (GRP), which incorporates construction of a surface water distribution system and purchase of treated water from the city for sale to groundwater users and other retail agencies within the authority's service area.

SIGNIFICANT CAPITAL NEEDS TO MEET REQUIRED GROUNDWATER REDUCTIONS BY 2025

The GRP is designed to meet increasingly stringent pumping restrictions in 2010, 2025, and 2035; the authority met the 2010 conversion requirements ahead of schedule. Total capital costs for conversion to surface water supplies through 2025 are estimated at \\$1.15 billion, 14% above prior projections. Major projects include the authority's share of a regional project with Houston to expand the Northeast Water Purification Plant, a 40-mile transmission line to deliver treated water from the plant to the authority, and an internal distribution system to finally convey the water to the member retail municipal utility districts. Beyond 2025, most capital needs will be growth related and are expected to average about \\$15 million annually.

Capital sources are expected to be predominantly future borrowings, comprising approximately \\$338 million in parity bonds sold in the open market and \\$812 million junior lien bonds to be purchased by the Texas Water Development Board (TWDB). Concurrently with this financing, the authority is issuing \\$18.7 million in junior lien bonds to the TWDB and plans to be issuing another \\$852.6 million, in aggregate, senior and junior lien bonds through 2020. These borrowings will push currently above-average debt to very high levels within the next five years.

ADEQUATE FINANCIAL METRICS EXPECTED

ADS coverage improved over the past four years from 1.0x in 2010 to a range of 1.3x-1.5x from 2011-2014. The rise in ADS coverage resulted from GRP and water sale fee (WSF) increases implemented in preparation for CIP-related debt issuances. For 2014, ADS coverage was 1.4x, slightly below prior projections due to lower than projected water demand.

Significant debt issuances planned in the 2016-2025 timeframe to meet the 2025 pumping restrictions are ultimately expected to lead to a weakening in ADS coverage over the long term. The five-year forecast through 2020 shows similar to higher ADS coverage from 2015-2017 as the authority continues to implement rate hikes in preparation for upcoming debt plans. However, ADS coverage is projected to decline and level off at around 1.1x beginning in 2019, comparable to other Fitch rated wholesale providers and commensurate with the current rating level.

Liquidity levels traditionally have been very strong, and this remained the case over the last two years despite a \\$12 million cash defeasance of debt in 2014. Liquidity at the end of 2014 remained solid at 451 days cash on hand.

AFFORDABLE CHARGES DESPITE PLANNED HIKES

The authority's WSF and GRP fees are expected to increase significantly. While the planned increases on a percentage basis appear substantial, charges should remain affordable relative to median household income, although retailers will add their distribution costs to the ultimate consumer bills. Currently, the authority's WSF and GRP fees equal \\$2.65 and \\$2.25 per 1,000 gallons of water pumped, respectively. The current pro forma shows both fees increasing about 7-8% annually over the next five years. Revenue collections from retail customers is near 100% and should remain so, given that the expense of developing alternative supplies for retailers (apart from the authority) is cost prohibitive and failure to reduce groundwater pumping levels to HGSD requirements is subject to punitive disincentive fees.

BELOW-AVERAGE LEGAL COVENANTS

Legal provisions are somewhat weaker than other peer covenants given the allowance for the use of fund balance in the rate covenant calculation. Nevertheless, legal provisions are adequate overall due to several required reserves. Per the indenture, there is a coverage reserve equal to 25% of maximum ADS. There is also a common debt service reserve pledged to bondholders. In addition, the authority is required to maintain an operating and maintenance (O&M) reserve equal to two months of budgeted O&M expenditures.