OREANDA-NEWS. Fitch Ratings affirms at 'AA+' the following Coastal Water Authority, Texas' (the authority) contract revenue bonds:

--$33.5 million outstanding contract revenue refunding bonds, series 2010 (City of Houston Projects);

--$37.6 million outstanding contract revenue refunding bonds, series 2014 (City of Houston Projects).

The Rating Outlook is Stable.

SECURITY

The bonds constitute a special obligation of the authority payable from contract revenues pursuant to a projects contract between the authority and the City of Houston, Texas (the city). Pursuant to the contract, the pledged revenues include the debt service payments, bond reserve fund payments and any interest income earned on monies or investment securities held in the bond fund or bond reserve fund.

The city is obligated to make payments under the projects contract as an operations and maintenance (O&M) expense from the gross revenues of the city's water and wastewater system (the system), and payment by the city of its obligations under the projects contract is on parity with payment of all other O&M expenses of the system.

KEY RATING DRIVERS

HOUSTON CREDIT QUALITY DRIVES RATING: The pledge securing the authority's contract revenue bonds is an O&M expense of Houston's water and wastewater system. Consequently, the rating on the authority's bonds is directly tied to that of the system. Fitch currently rates the system's senior lien revenue bonds 'AA+'/Stable Outlook.

UNCONDITIONAL PAYMENT OBLIGATION: Bondholders are secured by an unconditional payment obligation of the city to pay debt service requirements from gross system revenues. Debt service payments are deposited directly to the Paying Agent.

ESSENTIALITY OF SERVICE: The authority operates and maintains the Trinity River Water Conveyance System (TRWCS), an essential component of the city's system operations.

HEALTHY FINANCIAL MARIGNS: The authority maintains a healthy financial position in the TRWCS enterprise with solid liquidity and generally better than sum-sufficient debt service coverage (DSC) due to cash funding of capital outlays.

RATING SENSITIVITIES

CHANGES TO OBLIGOR RATING: Either positive or negative changes to the credit quality of the Houston, TX water and wastewater system would translate into a corresponding change to the authority's ratings.

CREDIT PROFILE

The authority was created by the Texas Legislature in 1967 to serve as a conservation and reclamation district and political subdivision covering a part of southwest Liberty County, southwest Chambers County, and most of Harris County. Under the act, the primary purpose of creating the authority was to provide an agency to finance and construct a water conveyance and distribution system to transport surface water from Lake Livingston and the Trinity River into the above mentioned counties. The authority is also charged with conveying water to a point where it will be available for Galveston County, and its authorizing legislation was amended in 2005 with additional rights and responsibilities to enable the authority to carry out its purposes.

The authority is governed by a seven-member board of directors who serve staggered two-year terms. Three board members (one from each county) are appointed by the governor, with the consent of the state senate, and four are appointed by the mayor of the city, with the consent and approval of the city council.

ESSENTIAL HOUSTON PROJECT

The authority's primary project with the city is the TRWCS which collectively includes a number of essential projects that effectively transport the city's water allocations from the Trinity River and Lake Livingston to the Lynchburg Reservoir. This water accounts for approximately 75% of the city's total water production each year. Presently, the project has sufficient capacity to transport all of the water rights belonging to the city, thus additional capital projects related to the TRWCS are anticipated to be minimal.

The city and authority entered into two contracts, one for the projects and one for operations. Under the projects contract, the city is obligated to repay debt service related to the authority's contract revenue bonds issued in conjunction with the TRWCS projects. The operations contract stipulates the authority's responsibility to operate and maintain the TRWCS. The city's payment obligation under this contract is on parity with its obligation to pay for debt service under the project's contract.

UNCONDITIONAL PAYMENT OBLIGATION AND STRONG FLOW OF FUNDS

Pursuant to the projects contract, the city has an unconditional obligation to pay debt service requirements from gross system revenues. The pledged revenues are directly deposited as follows: (1) by the city into the bond fund with the paying agent and disbursed for payment of debt service; (2) into the reserve fund (if necessary); and (3) any unused revenue remains deposited in the bond fund. The authority is required to maintain a bond reserve fund with a minimum balance of average annual aggregate debt service funded with $4.3 million cash and $2.9 million surety. Additional parity obligations may be issued subject to amendment to the projects contract to provide an adjustment to pledged revenue.

ADEQUATE FINANCIAL MARGINS OF THE AUTHORITY

The authority maintains a healthy financial position overall and in the pledged TRWCS enterprise fund. As a single-purpose enterprise fund, the operations of the TRWCS are strategically intended to be on a break-even basis with maintenance of certain reserves for operations and debt service. As such, coverage is designed to be sum sufficient although actual DSC has been in excess of 1.25x the past three years. As of Dec. 31, 2015, the authority's liquidity position in the TRWCS enterprise fund was solid at 572 days cash on hand and 553 days of working capital, including a $5.5 million operating reserve. All required reserves are fully funded including an additional $3 million reserve that is restricted for repairs.

STRONG HOUSTON SYSTEM RATING ATTRIBUTES

The city system rating reflects its strong financial position resulting from a series of rate increases that were implemented to support the system's growing capital needs. The rate increases produced solid operating margins and above-average working capital and liquidity.

All-in DSC ranged between 1.5x to 1.6x from fiscal 2011 to fiscal 2014 as the rate increases took effect. Fiscal 2015 results slipped to 1.36x all-in DSC due to extremely wet weather. Although these coverage levels are weaker than that of similarly rated credits, an offset to this lower coverage is the substantial liquidity that the city has built-up. At the close of fiscal 2015, the system maintained over 600 days' cash on hand and nearly 10 months in working capital.

Moreover, the flow of funds ends with the accumulation of monies after all obligations are satisfied in the general purpose fund (GPF). The use of the GPF is restricted for system improvements and a limited portion for city drainage purposes. At the close of fiscal 2015, the GPF had an available balance for debt service of $487 million, more than double the $222 million available in the GPF in fiscal 2011.

The system's updated projections, through fiscal 2020, reflect that all-in annual DSC will hover between 1.3x and 1.4x, which is unchanged from prior forecasts. It will be important for the system to meet or exceed these projections given the expected operating and capital pressures associated with the system's sizeable CIP.