Fitch Rates Fort Worth, Texas' $174MM Water and Sewer Revs 'AA'; Outlook Stable

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

--Approximately $172.1 million water and sewer system revenue refunding and improvement bonds, series 2014.

The bonds are expected to sell via negotiated sale the week of Feb. 3, 2014. Proceeds will be used to fund improvements and extensions to the system, refund a portion of the city's outstanding debt for cost savings, and pay costs of issuance.

In addition, Fitch affirms the following ratings:

--$530.7 million in outstanding water and sewer system (the system) revenue bonds at 'AA'.

The Rating Outlook is Stable.

SECURITY

The bonds are secured by a first lien on the net revenues of the combined water and sewer system including any additional pledged revenues. Pledged revenues exclude impact fees.

KEY RATING DRIVERS

IMPROVED DEBT SERVICE COVERAGE EXPECTED: System financial performance dipped in fiscal 2012 and rates were not increased for fiscal 2013 after a year of weak financial performance. However, rate increases were adopted and are in effect for fiscal 2014 and city-provided cash flow projections indicate total debt service coverage (DSC) should range between 1.6x and 1.8x over the fiscal 2014 to 2018 period.

INCREASING PURCHASED WATER COSTS: The city's cost of purchased water is forecast to increase by approximately 8% annually over the next five years, which could result in rate pressure or narrowed financial margins.

AFFORDABLE RATES: The system maintains ample rate flexibility, but rates could be pressured over time to support wholesale pass-through costs and additional system debt issuances.

MODERATELY HIGH DEBT BURDEN; RAPID AMORTIZATION: System debt levels are moderate but high when taking into consideration off-balance-sheet debt of Tarrant Regional Water District (the district; water revenue bonds rated 'AA') and Trinity River Authority (the authority; regional wastewater system revenue bonds rated 'AA+'). Direct debt levels are projected to remain at similar levels over the forecast period given the rapid amortization of existing and current bonds, with principal payout at 65% and 99% in 10 and 20 years, respectively.

LARGE AND DIVERSE REGIONAL ECONOMY: Fort Worth is a major anchor in the Dallas-Fort Worth regional economy, with a population of roughly 6.5 million.

RATING SENSITIVITIES

WEAKENED FINANCIAL RESULTS: A change in liquidity or total coverage levels could result in a change in the rating.

CREDIT PROFILE

COVERAGE MARGINS EXPECTED TO IMPROVE TO HISTORICAL NORMS WITH RATE HIKES

Following one of the driest years on record, system financial performance dipped in fiscal 2012 as the city spent most of the year with water use restrictions in place leading to reduced system revenues. A few one-time expenditures did not help to offset the decline in water sales. Consequently, senior lien debt service coverage (DSC) dropped to 1.6x in fiscal 2012 (1.2x net of transfers out) and total DSC declined to 1.4x for the year (1.1x net of transfers out). Furthermore, the city failed to raise rates for fiscal 2013 after a year of weak financial performance.

Nevertheless, the water bill was increased by 5% (assuming usage of 10.22 ccf per month) and the sewer bill was increased by 4% (assuming usage of 6.12 ccf per month) for fiscal 2014 and the city is planning to annually raise rates anywhere from 4% to 7% over the fiscal 2015 to 2018 period. City financial projections point to total DSC ranging between 1.6x to 1.8x over the fiscal 2014 to 2018 period. The forecast assumes the aforementioned additional annual rate hikes and accounts for increased debt service costs from the current debt issuance. While there is some concern that DSC levels have been declining since fiscal 2006, the city has expressed its commitment to maintaining all-in coverage at its policy of 1.5x or above before transfers by adjusting rates as needed. Fitch notes that this DSC policy is below Fitch's 'AA' category medians.

Liquidity levels were also affected by the drought, declining to 88 days cash on hand in fiscal 2012. While cash and investments levels are below Fitch's 'AA' category medians, the city annually contributes an impressive $52 million on average, or close to 42% of capital spending, in equity funding towards capital needs, resulting in a reduced liquidity position. Fitch will continue to monitor the system's financial performance. Some level of at least moderate rate increases during the forecast period will be necessary to preserve existing margins and allow for continued cash-funded capital spending. Maintenance of good DSC given below-average liquidity is a key credit consideration.

MANAGEABLE CAPITAL NEEDS BUT ABOVE-AVERAGE DEBT LOAD

The system's fiscal years 2014 to 2018 capital improvement plan (CIP) totals a manageable $627 million, with 42% devoted to water projects and 58% devoted to sewer projects. 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 $1,627 and debt to net plant at 38%.

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 around 70% 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 58% 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 average 8% over the next five years. 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 recently shifted a greater portion of its variable volume water charges to fixed charges with the latest fiscal 2014 rate increase. This is the first year of a five-year plan to improve revenue stability by recovering a greater portion of system revenues through service fees. No increases were made to the water volume rates affecting the typical user. The water fixed charge currently comprises 29% of the total water bill and the sewer fixed charge comprises 22% of the total sewer bill.

The combined water and sewer monthly bill of $54.44 (assuming usage of 10.22 ccf per month for water and 6.12 ccf per month for sewer) equals an affordable 1.2% 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 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 2012 population of about 778,000, Fort Worth's population continues to grow (up 2.6% annually since 2008). In addition, the city's extraterritorial jurisdiction is sizable and provides opportunity for future annexation and growth.

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. The city's unemployment rate at 5.9% for October 2013 is slightly below state (6.0%) levels, and below the national unemployment rate for the month (7.0%). City wealth levels approximate those of the state but are about 4% below the national average.

Additional information is available at 'www.fitchratings.com'.

In addition to the sources of information identified in Fitch's U.S. Municipal Revenue-Supported Rating Criteria, this action was additionally informed by information from Creditscope and the Municipal Advisory Council of Texas.

Applicable Criteria and Related Research:

--'Revenue-Supported Rating Criteria' (June 3, 2013);

--'U.S. Water and Sewer Revenue Bond Rating Criteria' (July 31, 2013);

--'2014 Water and Sewer Medians' (Dec. 12, 2012);

--'2014 Outlook: Water and Sewer Sector' (Dec. 12, 2013).

Applicable Criteria and Related Research:

Revenue-Supported Rating Criteria

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=709499

U.S. Water and Sewer Revenue Bond Rating Criteria

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=715275

2014 Water and Sewer Medians

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=724358

2014 Outlook: Water and Sewer Sector

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=724357

Additional Disclosure

Solicitation Status

http://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=817352

ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: HTTP://FITCHRATINGS.COM/UNDERSTANDINGCREDITRATINGS. IN ADDITION, RATING DEFINITIONS AND THE TERMS OF USE OF SUCH RATINGS ARE AVAILABLE ON THE AGENCY'S PUBLIC WEBSITE 'WWW.FITCHRATINGS.COM'. PUBLISHED RATINGS, CRITERIA AND METHODOLOGIES ARE AVAILABLE FROM THIS SITE AT ALL TIMES. FITCH'S CODE OF CONDUCT, CONFIDENTIALITY, CONFLICTS OF INTEREST, AFFILIATE FIREWALL, COMPLIANCE AND OTHER RELEVANT POLICIES AND PROCEDURES ARE ALSO AVAILABLE FROM THE 'CODE OF CONDUCT' SECTION OF THIS SITE. FITCH MAY HAVE PROVIDED ANOTHER PERMISSIBLE SERVICE TO THE RATED ENTITY OR ITS RELATED THIRD PARTIES. DETAILS OF THIS SERVICE FOR RATINGS FOR WHICH THE LEAD ANALYST IS BASED IN AN EU-REGISTERED ENTITY CAN BE FOUND ON THE ENTITY SUMMARY PAGE FOR THIS ISSUER ON THE FITCH WEBSITE.

Fitch Ratings
Media Relations
Elizabeth Fogerty, New York, [phone]
[e-mail]
or
Primary Analyst
Julie G. Seebach, [phone]
Director
Fitch Ratings, Inc.
111 Congress, Suite 2010
Austin, TX 78701
or
Secondary Analyst
Teri Wenck, CPA, [phone]
Associate Director
or
Committee Chairperson
Michael Rinaldi, [phone]
Senior Director