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

--$27.4 million water revenue bonds, series 2016.

The bonds are expected to sell via competitive bid on Feb. 2, 2016. Proceeds will be used to pay for project costs related to the Kennedale Balancing Reservoir and to pay issuance costs.

In addition, Fitch affirms the following TRWD rated debt:

--$821.4 million in outstanding water revenue bonds at 'AA'.

The Rating Outlook is Stable.

SECURITY

The series 2016 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.

KEY RATING DRIVERS

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.

SOUND MEMBER CREDIT PROFILES: The contractors account for the vast majority of the district revenues and all have ratings consistent with at least the 'AA' rating category. The contractors have the capacity to make up any revenue shortfalls of the district from delinquent customers if necessary.

SUBSTANTIAL CAPITAL AND DEBT NEEDS: Expected capital needs remain sizable over the next 10 years and will be entirely debt-funded. Amortization is slow with 29% and 63% of debt amortizing in 10 and 20 years, respectively.
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.

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.

SOUND PAYMENT PROVISIONS, UNLIMITED STEP-UP

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 are 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.

Because of the joint and several nature of the district revenues, Fitch evaluates the ability of a group of contractors to cover payment defaults from other district purchasers without impairing the non-defaulting members' own credit quality beginning with the smallest group of and strongest credit quality contractors. In determining the appropriate group of contractors, Fitch considers the non-defaulting customers' ability to absorb any delinquencies by other TRWD water purchasers from both one-time sources and then on a recurring basis. In the event of revenue shortfalls from district customer payments, Fitch believes a group consisting of Fort Worth, Arlington, and Mansfield combined have the capacity to absorb such shortfalls.

Fitch estimates these three contractors have more than sufficient cash resources to pay any immediate TRWD revenue shortfall. Further, Fitch estimates that if the customer defaults described above continued indefinitely, only a single moderate rate increase in the 3.8%-4.9% range by Fort Worth, Arlington and Mansfield would be necessary to offset the ongoing costs.

The lowest rating of the non-defaulting group is 'AA', which reflects the de facto lowest quality of revenues available to pay debt service, and the district's financial capacity is limited essentially to contractor payments. Therefore, Fitch uses the 'AA' rating as a significant determinant in assigning the district's rating.

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 1x, 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 43% over 10 years (from fiscal 2016 price of $1.18 per $1,000 gallons to the projected $1.75 per 1,000 gallons in fiscal 2026). Despite these increases, the rates are very reasonable at $385 per acre foot (AF) and currently projected to rise to $570 per AF in 2024.

SIZEABLE CAPITAL PLAN ENTIRELY DEBT-FUNDED

TRWD's large capital improvement plan (CIP) totals an estimated $1 billion through fiscal 2026. The fiscal 2016-2020 plan totals $576.5 million and includes $300 million already funded with debt privately placed with the Texas Water Development Board along with this issuance. Fitch believes the resulting cost increases will be manageable for member agencies but will monitor the impact, if any, on member agencies' capacity to meet their debt service obligations to the TRWD. The primary CIP project is the integrated pipeline project, 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.

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 November 2015 unemployment rate of 4.1% was below state (4.5%), and national (4.8%) 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.