Fitch Rates Trinity River Authority, TX Regional Wastewater System Revs 'AA+' & Extendable CP 'F1+'

Fitch Ratings assigns the following ratings to Trinity River Authority, Texas' (TRA) bonds:

--$100.6 million central regional wastewater system (the system) revenue refunding bonds, series 2014 at 'AA+';

--Up to $175 million in authorized central regional wastewater system series A, tax-exempt extendable commercial paper (ECP) bonds and series A taxable ECP bonds at F1+.

The bonds are scheduled to sell via negotiation the week of Oct. 13. Bond proceeds will be used to refund certain outstanding bonds for interest savings, and pay costs of issuance. The ECP bonds program is scheduled to close later this month and the first draws will occur at the beginning of calendar 2015. Proceeds from the ECP bonds will be used to fund system improvements.

In addition, Fitch affirms the rating on the authority's outstanding bonds as follows:

--$38 million regional wastewater treatment system revenue refunding bonds, series 2011 at 'AA+';

--$41 million regional wastewater treatment system revenue improvement and refunding bonds, series 2013 at 'AA+'.

The Rating Outlook is Stable.

SECURITY

The bonds are payable from a first lien on and pledge of net revenues of the system. The ECP bonds have a subordinate lien on net water system revenues of the authority.

KEY RATING DRIVERS

SOLID CONTRACT PROVISIONS: The authority's customer contract provisions are sound and effectively constitute a joint and several obligation among the customers for the payment of the regional wastewater system (the system) bonds.

STRONG PARTICIPANT PROFILES: Large customers, constituting about 80% of payments, exhibit strong credit fundamentals. The payment history of the contractors is exemplary.

OPERATING FLEXIBILITY: While customer payments are designed to recover TRA's system costs by just 1.0x, the system's reserves and cash balances provide some financial flexibility.

LARGE, DIVERSE SERVICE AREA: The system serves an essential purpose within a broad and diverse service territory.

ABOVE-AVERAGE DEBT AND CAPITAL NEEDS: Debt levels are expected to remain moderately high given future borrowing plans. Favorably, amortization of existing debt is above average.

SHORT-TERM RATING: The 'F1+' rating on the ECP bonds is based on TRA's long-term credit quality, recognizing the bonds' subordinate lien on pledged revenue.

RATING SENSITIVITIES

MEMBER CREDIT PROFILES: Deterioration of the credit quality of one or more of the major customers could have negative credit implications for credit quality.

TIMELY CONTRACTOR ANNUAL PAYMENTS: Failure by a customer to pay its contracted amounts in a timely fashion would be viewed negatively.

ADDITIONAL REGULATORY REQUIREMENTS: Enhanced treatment requirements likely would necessitate additional borrowing beyond amounts currently contemplated, with a further impact on the system's debt burden of end users.

CREDIT PROFILE

Created in 1955 by the Texas Legislature as a conservation and reclamation district, the authority has broad powers to construct, own, and operate water and wastewater treatment, collection, and transportation systems. The system provides collection, treatment, and disposal of wastewater flows on a wholesale basis to a large and diverse service area that includes about 1.8 million people located within the central portion of the Dallas-Fort Worth (DFW) MSA. Unemployment levels at 5.5% as of July 2014 were better than the state's 5.6% and the national unemployment rate of 6.5%. Wealth indicators for the MSA as measured by median household income are also favorable to the state and national levels.

Wastewater flows are conveyed to the system for treatment by 19 cities, one town, and the Dallas-Fort Worth International Airport Board through long-term all-service contracts that extend beyond the life of the bonds. Ample treatment capacity remains with recent expansion.

SOUND CONTRACT PROVISIONS

Customers pay a proportionate share of the system's annual requirement (AR), which consists of system O&M expenses, debt service, and any amount required under the contracts and bond resolutions, including replenishment of any draws on the debt service reserve fund. The amount that each customer pays to the authority annually is based on its proportionate share of estimated flows for the upcoming year. The obligation of each customer to make its annual payments (APs) to the authority is an O&M expense, superior in priority to the customer's own debt obligations.

While the contracts between the authority and its customers do not contain explicit step-up provisions in the event of a default by a customer in paying its AP, the contracts create an implied step-up. Fitch believes the authority would be able to discontinue service to the defaulting customer, which in turn would result in a recalculation of the proportionate contributing flows by non-defaulting customers and lead to recovery of the system's full AR should this be through an increase in the non-defaulting customers' APs. However, no customer has ever failed to make timely payments to the authority as required under their respective contracts.

SOLID MEMBER CREDIT PROFILES

Of the customers served by the system, Fitch rates the water and wastewater revenue bonds of the cities of Arlington, Carrollton, Colleyville (all rated 'AAA' with a Stable Outlook), Fort Worth and Mansfield (both 'AA', Stable Outlook), and Grand Prairie ('AA+', Stable Outlook). Combined these customers accounted for around 58% of the system's total customer payments in fiscal 2013.

To determine the rating on the authority's bonds, Fitch also considered the strong credit characteristics of the utility systems for the cities of Irving and Dallas, which combined accounted for 23% of the system's total customer payments in fiscal 2013. Fitch estimates that the combined Fitch-rated entities along with Irving and Dallas could reasonably cover a one-time increase in their APs from existing cash resources in the event of a default by all remaining customers. Furthermore, Fitch estimates that these customers could absorb any permanent increase to their APs without materially elevating their existing rate structure in the unlikely event that all other customers default indefinitely.

In addition to the ability by major customers to absorb any potential payment defaults by other members, the system maintains some internal financial flexibility, which serves to offset customer payment risk. The system had 157 days' worth of operating expenses in unrestricted cash at fiscal year-end 2013, as well as a cash-funded debt service reserve fund and $22 million accumulated in the interest and sinking fund from pre-collections. These additional funds provide the authority some cushion in the event that customer delinquencies occur and APs must be recalculated for performing customers.

MODERATELY HIGH DEBT BURDEN

Somewhat offsetting the overall strong financial profiles of the system's major customers are the system's moderately high debt metrics and the expectation of additional borrowings by the authority over the next several years. As part of the authority's most recently updated capital improvement plan (CIP), approximately $389 million in capital projects are expected to be constructed through the fiscal 2015 to 2019 horizon.

Given the authority's practice of debt financing essentially all of its capital expenditures, this is expected to result in an increased debt profile and rising rates by the end of the CIP period. Budgeted rates for fiscal 2015 are $2.22 per 1,000 gallons treated and are projected to rise roughly 36%, to $3.03 per 1,000 gallons, inclusive of the additional debt projected in the system's CIP.

NEW EXTENDABLE COMMERCIAL PAPER PROGRAM

TRA has authorized a new subordinate lien extendable CP bond program (the series A bonds) for up to $175 million. The bonds will originally have maturities of between one and 90 days. However, the authority has the right to extend the maturity to up to 270 days from the original issuance date. If the bonds are extended, the interest rate is reset to the greater of SIFMA plus a fixed number of basis points or a fixed interest rate, both of which are determined based on the ECP bonds' credit ratings at the time. However, the re-set rate shall not exceed a maximum of 9% per annum.

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.

Applicable Criteria and Related Research:

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

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

--'Rating U.S. Public Finance Short-Term Debt' (December 2013);

--'2014 Water and Sewer Medians' (December 2013);

--'2014 Outlook: Water and Sewer Sector' (December 2013).

Applicable Criteria and Related Research:

Revenue-Supported Rating Criteria

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=750012

Rating U.S. Public Finance Short-Term Debt

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=724680

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=887454

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