Fitch Rates Mansfield, TX Water and Sewer Rev Bonds 'AA'; Outlook Stable

Fitch Ratings assigns an 'AA' rating to the following Mansfield, Texas' waterworks and sewer system (the system) revenue bonds:

--$10.47 million waterworks and sewer system revenue refunding bonds, series 2015.

The bonds are scheduled for a negotiated sale the week of December 7. Proceeds of the bonds will be used to refund certain outstanding obligations for interest savings.

In addition, Fitch affirms the following:

--$48.9 million waterworks and sewer system revenue bonds (pre-refunding) at 'AA'.

The Rating Outlook is Stable.

SECURITY

The bonds are secured by a first lien on and pledge of net system revenues, plus any other available system resources.

KEY RATING DRIVERS

SOUND FINANCIAL PROFILE: The system has generated consistently healthy debt service coverage (DSC) and built up solid liquidity. Projections anticipate coverage levels will remain healthy, and the use of cash reserves to fund about 65% of the five-year capital plan will reduce liquidity but improve leverage metrics.

SIGNIFICANT RATE FLEXIBILITY: Despite annual rate increases, the system has ample rate flexibility with an average monthly utility bill well below Fitch's affordability threshold. Continued rate increases will be necessary to keep pace with rising wholesale water costs while maintaining solid financial metrics.

WHOLESALE PROVIDER COST INCREASES: Raw water and wastewater treatment costs have increased substantially over the last few years, pressuring management to keep pace with rate recovery. The ample rate flexibility and the demonstrated willingness to raise rates mitigate concerns over the near term; however, these pressures could limit the system's financial flexibility over the longer term.

MANAGEABLE CAPITAL IMPROVEMENT PLAN/DEBT BURDEN: Capital costs and debt levels are moderate, but manageable. A combination of pay-go funding and rapid amortization is expected to improve the system's leverage metrics over the medium term.

ESSENTIAL SERVICE: The system provides an essential service to a growing service area, benefiting from its central location in the broad and diverse Dallas-Fort Worth metro area.

RATING SENSITIVITIES

OPERATING COST PRESSURE: The rating is susceptible to operating cost pressure from its wholesale water and wastewater providers. The Stable Outlook reflects Fitch's expectation that a shift in fundamental credit characteristics due to wholesale cost pressures is unlikely over the next review cycle.

CREDIT PROFILE

Mansfield (GO bonds rated 'AA+' by Fitch with a Stable Outlook) is located within the Dallas-Fort Worth metro area. The waterworks and sewer system serves primarily the city's current population of 60,872 through approximately 19,900 water and 17,700 sewer connections. Additionally, the city provides treated water to a portion of a neighboring utility district via a wholesale contract and also sells water to Arlington on a demand basis. A significant amount of developable land remains within Mansfield's 38.6 square-mile boundary.

CONTINUED HEALTHY FINANCES EXPECTED

Financial operations are characterized by positive operating margins, solid cash positions, and generally strong annual debt service (ADS) coverage. Between fiscal years 2009 and 2013, ADS coverage has ranged from a low of 1.7x (fiscal 2010) to a high of 2.2x (fiscal 2013). Unaudited fiscal 2014 results point to ADS coverage at 1.9x.

Additionally, management has built up cash reserves to fund a large portion of system capital needs. Liquidity at the close of fiscal 2013 peaked at 567 days cash on hand (DCOH). Cash reserves of approximately $12.6 million were used in fiscal 2014 for construction of a new service center, so Fitch expects liquidity will decline but remain healthy at more than 300 DCOH cash on hand by the close of fiscal 2014.

The system's five-year forecast (fiscals 2015 to 2019) anticipates ADS coverage will decline slightly in fiscals 2015 and 2016 to 1.7x (before transfers to the general fund), but projections also point to coverage in excess of 2x by fiscal 2017. The city also plans to cash fund an aggregate of $30 million in projects during the forecast period, which will further reduce liquidity but help debt metrics.

AFFORDABLE RATES

The average monthly residential utility bill totals $72 per connection (assuming 7,500 gallons of monthly water use and 6,000 gallons of monthly sewer flows). Rates have increased annually by roughly 7% since fiscal 2009 due primarily to escalating wholesale charges. While more rate increases are considered likely, Fitch notes that Mansfield's comparatively high wealth levels offer the city a significant amount of rate flexibility. The combined water and sewer residential bill is very affordable at only 1% of MHI, well below Fitch's 2% affordability threshold. Moreover, approximately 64% of the total utility bill is collected as a fixed base rate, adding stability to operations.

WHOLESALER COST PRESSURES

The city obtains raw water from the Tarrant Regional Water District (water revenue bonds rated 'AA' with a Stable Outlook by Fitch), and wastewater treatment is provided by the Trinity River Authority (wastewater revenue bonds rated 'AA+' with a Stable Outlook). Projections anticipate additional annual increases in wholesale charges (for raw water and wastewater treatment combined) ranging from 10% to 12% over the next five to seven years. Fitch believes that Mansfield's experienced, proactive management team will continue to respond to wholesale cost pressures in a prudent manner.

MANAGEABLE DEBT AND CAPITAL PLAN

The city's CIP for fiscal years 2015-2019 totals about $50 million and is anticipated to be funded by a combination of bond proceeds (35%) and available reserves and impact fees (65%). System debt metrics are mixed, with below-average debt-to-net plant at 35% and high outstanding debt per capita at approximately $859 (compared to the category 'AA' rating medians of 47% and $514, respectively). Nevertheless, the pace of amortization of system debt is rapid; principal payout is at 70% and 100% in 10 and 20 years, respectively, which should result in steady improvement of these metrics.

EXPANDING SERVICE AREA

Located in the southeastern portion of Tarrant County, the city is directly connected to nearby Dallas and Fort Worth, the DFW International Airport and surrounding communities by a robust and expanding transportation network. Median household income is a high 174% of the national average; wealth as measured by per capita money income is also above average at 124% of the U.S. average. The city's levels of educational attainment trend well above average and contribute to a low unemployment rate of 4.6% as of August 2014.

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 2014);

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

--'2014 Water and Sewer Medians' (Dec. 2013);

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

Applicable Criteria and Related Research:

2014 Outlook: Water and Sewer Sector

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

2014 Water and Sewer Medians

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

U.S. Water and Sewer Revenue Bond Rating Criteria

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

Revenue-Supported Rating Criteria

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

Additional Disclosure

Solicitation Status

http://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=931417

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