Fitch Rates Fort Worth, Texas' $50MM Water and Sewer Revs 'AA+'; Outlook Stable

AUSTIN, Texas--(BUSINESS WIRE)--Fitch Ratings assigns an 'AA+' rating to the following Fort Worth, TX (the city) revenue bonds:

--$50 million water and sewer system revenue refunding bonds, series 2010C.

In addition, Fitch takes the following action on the city's outstanding parity revenue bonds:

--Approximately $460.5 million affirmed at 'AA+'.

The Rating Outlook is Stable.

RATING RATIONALE:

--Financial metrics are good, although debt service coverage has declined. However, coverage levels should be considered in light of substantial annual equity contributions towards the city's capital improvement plan (CIP).

--The increasing cost of water will likely continue to result in rate pressure; rates as a percentage of median household income (MHI) are above Fitch's 'AA' category medians.

--Debt levels are low, and amortization is rapid.

--The system is highlighted by comprehensive capital planning with consistent pay-as-you-go funding.

--The service area, which includes the city of Fort Worth and a portion of the surrounding area, is diverse and experiencing rapid growth; city wealth levels are at state but below national averages while county wealth levels are above both state and national averages.

KEY RATING DRIVERS:

--An expected return to historical financial metrics over the medium term is key to the current 'AA+' rating.

--Maintenance of annual rate increases will be necessary to preserve the system's good financial margins.

SECURITY:

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

CREDIT SUMMARY:

The system's financial metrics are good, although debt service coverage levels have declined from all-in coverage of 3.5 times (x) in fiscal 2005 to 1.6x in fiscal 2009. Coverage levels remain above the city's policy of 1.5x. Based on the city's projections assuming zero percent rate increases, all-in coverage levels are projected to decline to a low of 1.3x by fiscal 2014 as fixed costs rise; however, the city expects to maintain coverage at 1.5x or above by adjusting rates as needed. Liquidity levels have improved in recent years to 144 days cash on hand as of fiscal 2009. While cash and investments levels are below Fitch's 'AA' category medians, the city annually contributes on average an impressive $70 million of cash or close to 50% equity funding towards capital needs, resulting in a reduced liquidity position. Liquidity is projected to slightly decline based on continued 42% pay-go funding for capital expenditures and rising operating costs. Fitch will continue to monitor the system's financial performance; further marked declines in coverage or liquidity beyond projected levels could result in negative rating action.

The system's fiscal 2010-2014 CIP totals $841 million with 61% devoted to sewer projects and 39% devoted to water projects. Approximately 40% of the CIP is projected to be funded with future debt including a zero percent American Recovery and Reinvestment Act (ARRA) loan, with the remainder to be funded with cash, existing debt and an ARRA grant. The system's leverage ratios are low with debt per customer at $1,054. Furthermore, principal amortization is rapid with payout at 72% and 100% in 10 and 20 years, respectively. Given budgeted pay-go for capital expenditures, debt ratios should remain low for the foreseeable future.

Previously, the city had extensive delays in the completion of its comprehensive annual financial reports (CAFRs). Though the reports were issued late, the city released the fiscal 2006, 2007 and 2008 CAFRs last year and was able to complete the fiscal 2009 CAFR on time. Furthermore, the city will complete Phase I of its new payroll and accounting software system later this year and plans to complete Phase II in October 2012. The city is on target to have its fiscal 2010 CAFR released on time.

All of the city's water is purchased from Tarrant Regional Water District (TRWD, or the district). Fort Worth is the district's largest customer accounting for 57% of the district's sales. The district's debt burden is estimated to increase by 71% over the next five years, translating into higher purchased water costs for the city. TRWD's proposed rate increases for the city averages 5% over the next five years. Purchased water costs currently comprise one-third of the city's operating expenses. Thus, as the district ramps up its capital plan, the city will be faced with having to raise rates which are already relatively high as a percentage of area MHI. The city's combined monthly bill at $76.90 - assuming usage of 10,000 gallons per month for both water and sewer - is at 1.9% and 1.6% of the city and county's MHI, respectively. The city council has typically adjusted rates when necessary, but implementation of future large rate increases may be more difficult given the system's already above average rates compared to area wealth levels.

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 6% annually over the past five years. While officials report that military-related spending still accounts for 25% of the local economy, recent growth in other sectors, such as services, construction, and trade, has helped diversify the labor force. The city's unemployment rate at 8.9% for June 2010 is slightly above county (8.5%) and state (8.5%) levels, but below the national unemployment rate for the month (9.6%). City wealth levels are at state, though below national levels.

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

Related Research:

--'Revenue-Supported Rating Criteria', dated Dec. 29, 2009;

--'Water and Sewer Revenue Bond Rating Guidelines', dated Aug. 6, 2008.

Related Research:

Revenue-Supported Rating Criteria

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=548606

Water and Sewer Revenue Bond Rating Guidelines

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=395918

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