Fitch Rates West Harris County Regional Water Authority, TX Revs 'A+'; Outlook Stable

Fitch Ratings assigns an 'A+' rating to the following West Harris County Regional Water Authority, Texas' (the authority) bonds:

--Approximately $47.7 million water system revenue refunding bonds, series 2014.

The bonds are scheduled to sell the week of August 18 via negotiation. Bond proceeds will be used to refund certain outstanding bonds of the authority for interest savings without extension of maturity.

In addition, Fitch affirms the following ratings of the authority:

--$245.2 million in outstanding water system revenue bonds, series 2005, 2006, 2007, 2009 and 2013 (pre-refunding) at 'A+'.

The Rating Outlook is Stable.

SECURITY

The bonds are payable from a first lien on net revenues of the authority's water system (the system) plus amounts transferred to the revenue fund from the coverage fund.

KEY RATING DRIVERS

SOUND FINANCIAL PROFILE: Annual debt service (ADS) coverage margins have improved and are expected to rise further over the next few years. However, rising fixed costs are expected to push ADS coverage to more modest levels over the longer term.

SUBSTANTIAL CAPITAL AND DEBT NEEDS: The authority's capital improvement program (CIP) to meet future groundwater reduction restrictions is substantial and is anticipated to be almost entirely debt financed. This borrowing program will push the authority's moderately high debt burden to a very high level over the next 10 years.

RISING BUT AFFORDABLE RATES: User charges are expected to increase incrementally to fund additional capital needs, although rates are expected to remain moderate over the intermediate term.

BELOW-AVERAGE LEGAL COVENANTS: Legal provisions are somewhat weaker than peer wholesale systems but are adequate overall.

ESSENTIAL PROVIDER WITH STRONG ENFORCEMENT: The authority provides an essential service as a wholesale water provider to 110 utility districts in the suburban areas west of the city of Houston (the city) that must reduce their overall groundwater pumping. Enforcement provisions in place are expected to ensure timely recovery of revenues by the authority.

RATING SENSITIVITIES

ACCELERATING CAPITAL COSTS: Significant increases in conversion cost requirements beyond what is currently planned would further pressure the authority's debt profile and rate structure.

CREDIT PROFILE

Predominantly residential in nature, the authority's service territory is located in western Harris County as well as a small portion of Fort Bend County; the customer base includes less than 10% of Harris County's population. The area has experienced extensive land subsidence as a result of groundwater pumping, which has resulted in the Harris Galveston Subsidence District (HGSD) promulgating strict requirements for pumpers to convert to alternative sources of supplies (i.e. surface water) either individually or collectively in stages.

The authority has adopted, and the HGSD has approved, the authority's groundwater reduction plan (GRP), which incorporates construction of a surface water distribution system and purchase of treated water from the city for sale to groundwater users and other retail agencies within the authority's service area.

SIGNIFICANT CAPITAL NEEDS TO MEET REQUIRED GROUNDWATER REDUCTIONS

The GRP is designed to meet increasingly stringent pumping restrictions in 2010, 2025, and 2035; the authority met the 2010 conversion requirements ahead of schedule. Total capital costs for conversion to surface water supplies through 2025 are estimated at around $1.036 billion, with an additional $148.5 million necessary thereafter to meet the 2035 conversion requirements. Capital sources are expected to be predominantly future borrowings, particularly for the 2025 conversion costs. These borrowings will push currently above average debt levels to very high levels within the next 10 years.

STRONG FINANCIAL RESULTS

ADS coverage has improved over the past few years from increased GRP fees and water sale fees (WSF) that have kept pace with rising debt service costs. For 2013, ADS coverage was 1.3x, slightly above prior projections. Liquidity levels traditionally have been very strong, and this remained the case over the last two years.

Days cash on hand exceeded 800 days in 2013, enabling the authority to redeem certain outstanding bonds prior to maturity. The five year forecast through 2019 shows strengthening ADS coverage as the authority implements rate hikes in preparation for upcoming debt plans. Significant debt issuances planned in the 2015-2024 timeframe to meet the 2025 pumping restrictions ultimately are expected to lead to a weakening in ADS coverage more commensurate with the rating level.

AFFORDABLE CHARGES DESPITE PLANNED HIKES

The authority's WSF and GRP fees are expected to increase significantly. Currently, the authority's WSF - the highest of the authority's two charges - equals $2.30 per 1,000 gallons of water pumped, but the current model shows it to reach $3.45 by 2020 before leveling off. The GRP fee is currently $1.90 per 1,000 gallons and is projected to rise to $3.05 by 2020. While the planned increase on a percentage basis is substantial, the combined charges are expected to remain moderate and well below Fitch's affordability threshold. Revenue collections from retail customers is near 100% and should remain so, given that the expense of developing alternative supplies for retailers (apart from the authority) is cost prohibitive and failure to reduce groundwater pumping levels to HGSD requirements is subject to punitive disincentive fees.

BELOW-AVERAGE LEGAL COVENANTS

Legal provisions are somewhat weaker than other peer covenants given the allowance for the use of fund balance in the rate covenant calculation. Nevertheless, legal provisions are adequate overall due to several required reserves. Per the indenture, there is a coverage reserve equal to 25% of maximum ADS. There is also a common debt service reserve pledged to bondholders. In addition, the authority is required to maintain an operating and maintenance (O&M) reserve equal to two months of budgeted O&M expenditures.

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

In addition to the sources of information identified in the 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 16, 2014;

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

--'2014 Water and Sewer Medians', dated Dec. 12, 2013;

--'2014 Outlook: Water and Sewer Sector', dated Dec. 12, 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=841736

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.