Fitch Affirms Burleson, TX Water and Sewer Revs at 'AA-'; Outlook Stable

Fitch Ratings affirms its 'AA-' rating on the following Burleson (the city), TX water and sewer revenue bonds:

--$4 million waterworks and sewer system revenue bonds, series 2005 at 'AA-';

--$4.5 million waterworks and sewer system revenue refunding bonds, series 2006 at 'AA-'.

The Rating Outlook is Stable.

SECURITY

The bonds are secured by a first lien on net revenues of the water and sewer system (the system).

KEY RATING DRIVERS

SOUND FINANCIAL METRICS: Senior lien debt service coverage (DCS) is strong at over 3.5x, but all-in coverage registers at a weaker 1.2x, pressured by additional system supported tax secured debt. Liquidity levels registered at 160 days cash on hand are below average for the rating but adequate for a system with limited operational needs.

HIGH DEBT LEVELS: Debt levels are fairly high for a collection and distribution system, and are expected to climb further within the next five years due to planned debt financing of capital improvements.

WHOLESALE PROVIDER COST PRESSURES: Wholesale charges from the system's water and wastewater service provider limits local control over a significant portion of operating costs, reducing flexibility and establishing a measure of uncertainty over expenditures.

SOLID ECONOMIC BASE: While the local economy has some concentration in natural gas exploration, Burleson also benefits from its location in the large and diverse Dallas-Fort Worth metropolitan area. Wealth levels are above the state and national averages by more than 20% and unemployment in relatively low.

RATING SENSITIVITIES

DETERIORATION OF FINANCIAL POSITION: Preservation of the system's sound financial profile in light of increasing debt load and wholesale water costs will be critical to maintaining the current rating.

CREDIT PROFILE

STABLE FINANCIAL RESULTS

System financial results are generally consistent with the rating level. Senior lien coverage registered a healthy 4.4x and 3.6x for fiscal years 2012 and 2013 respectively, while all-in DSC was a weaker 1.3x and 1.2x for the same period, due to use of system supported certificates of obligation (COs).

Management financial forecasts point to continued strong senior lien coverage of over 4x, with DSC on an all-in basis hovering around 1.3x through 2020. Liquidity as measured by days cash-on-hand was around 160 days for fiscal years 2012 and 2013, or approximately $4.7 million. While these levels are satisfactory they are below the median of 398 days for Fitch 'AA' rated utility credits.

WHOLESALE COSTS PRESENT RATE PRESSURE

Burleson contracts with the city of Fort Worth for both wholesale water and wastewater treatment services, and increasing wholesale costs are an ongoing challenge for management in terms of budgeting and rate setting. Wholesale water and wastewater costs accounted for more than half of the system's total operating expenses. The city does not directly pass through wholesale service rate increase but rather absorbs the rate adjustments into its own cost structure.

A 2008 rate study resulted in a series of wastewater rate increases for Burleson customers, including 10% increases in fiscal 2009 and 2012 which outpaced the wholesale rate increases. For fiscal 2014, the council adopted a 13% water rate increase and a slight 2% decrease in sewer rates. The rate structure features a fixed base component for both water and sewer which combined accounts for 37% of an average bill and is viewed favorably by Fitch, as it provides stability to the revenue stream.

Management anticipates 5% water increases annually through 2020 and a 4.5% sewer increase in 2020. Fitch believes these increases will assist the city is maintaining stable financial margins, but also is concerned that the system could see financial pressure given that additional debt is planned and continued increases in wholesale rates are anticipated.

Current average monthly bills (based on water consumption of 7,500 gallons) represent an affordable 1.2% of median household income (MHI) and grow to 1.6% of MHI by 2020 with planned rate hikes; the projected 2020 rate would still be below Fitch's 2% affordability threshold. This cushion provides flexibility to increase rates to maintain financial margins while not being overly burdensome to rate payers.

DEBT FINANCING OF CAPITAL ELEVATES BURDEN

The city's 2014-2018 capital improvement plan (CIP) includes $31 million in system projects, with projects divided evenly between water and sewer. Historically the city has used a combination of utility revenue bonds and COs to finance system improvements. Debt outstanding at fiscal 2013 year-end included $12.7 million in utility revenue bonds and $37.1 million in COs.

Fiscal 2013 debt per customer of $1,667 compared favorably to the 'AA' rating category median of $1,812 but is above average for a system with only collection and distribution facilities. The ratio is expected to grow to roughly $2,000 within five years and would be elevated compared to the projected $1,973 'AA' median. The increasing debt burden is offset to a degree by the relatively high wealth levels in the city and rapid amortization (99% payout in 20 years). Most of the system's CIP is anticipated to be debt funded and will likely keep debt levels elevated for the foreseeable future.

EXPANDING RESIDENTIAL SUBURB

Located in the Dallas-Fort Worth metroplex, Burleson is 15 miles south of Fort Worth. The retail system provides water and wastewater service to approximately 13,400 sewer and 13,200 water customers. The city has grown rapidly in recent years, with a 2013 estimated population of over 40,000, an increase of 11% from 2010. Historically a residential suburb of Fort Worth, the rapid population growth has been spurred by various commercial developments in the past decade. Natural gas exploration in recent years provided a new component to the local economy (the city is located over the Barnett Shale, a large gas formation in north central Texas).

Residents of the large unincorporated areas to the south and west of the city utilize various services in Burleson, which has contributed to commercial expansion and public school enrollment gains in recent years. Wealth levels are comfortably above the state and national averages by roughly 30%. Unemployment for May 2014 of 4.1% was below the 5% MSA average and also less than the state (5.1%) and national (6.1%) levels.

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 Municipal Advisory Council of Texas.

Applicable Criteria and Related Research:

--'Revenue-Supported Rating Criteria' (June 2014);

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

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=861234

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