OREANDA-NEWS. Fitch Ratings affirms the following bonds issued by North Fort Bend Water Authority, TX (the authority):

--Approximately \\$271 million in outstanding water system revenue bonds at 'A+'.

The Rating Outlook is Stable.

SECURITY
The bonds represent senior lien obligations of the system payable from pledged revenues and pledged funds. Pledged revenues include net operating revenues of the system after payment of operations and maintenance (O&M) expenses plus amounts transferred to the revenue fund from the coverage fund.

KEY RATING DRIVERS

IMPROVED FINANCIAL CUSHION: Historically, authority operations produced only a modest financial cushion, a practice common for many wholesalers. Going forward, all-in debt service coverage (DSC) is forecast to improve marginally as rate increases and low-cost financing combine to offset increases in operational and debt service carrying costs.

WEAK DEBT PROFILE: The authority's debt levels are high compared to Fitch's 'A' category rating median. Additional capital needs which will require debt funding are projected to continue to pressure already high debt levels.

AMPLE RATE FLEXIBILITY: Despite recent hikes, rates are very low relative to median household income (MHI), limiting direct pressure on the rate base. However, individual end-user charges may vary.

ESSENTIAL SERVICE: The authority is the sole provider of surface water supplies to an area that is required to reduce groundwater pumping pursuant to strict guidelines developed by the Fort Bend Subsidence District (FBSD).

STRONG SERVICE AREA: The authority serves customers in the rapidly growing Houston-Sugar Land-Baytown metropolitan statistical area (MSA). County-level income statistics are strong and unemployment rates are low.

RATING SENSITIVITIES

MAINTENANCE OF FINANCIAL PROFILE: With the already elevated debt levels expected to more than double, maintenance of sound reserves and at least sum-sufficient DSC are necessary to achieve rating stability

CREDIT PROFILE
The authority was created in 2005 to address groundwater resource and land subsidence issues caused by years of groundwater pumping in Fort Bend County. The Groundwater Reduction Plan (GRP), a mandate by the FBSD, is designed to meet increasingly stringent pumping restrictions by replacing groundwater supply needs with surface water. The additional surface water attained by the authority is provided by a water supply contract with the City of Houston (utility system revenue bonds rated 'AA'; Stable Outlook by Fitch).

The first phase of the GRP required groundwater withdrawals by major pumpers within the county to be limited, either individually or collectively, to no more than 70% of total water use by 2014 (a goal achieved by the authority ahead of schedule). The second part of the plan, intended for completion by 2025, limits groundwater pumping to 40% of total water use.

SIGNIFICANT CAPITAL NEEDS WILL PRESSURE ALREADY HIGH DEBT LEVELS
The scope of phase two of the GRP includes additional supply rights, new transmission lines, large booster pumps, and expansion to Houston's Northeast Water Purification Plant. The total cost of the plant expansion is expected to approximate \\$1.3 billion, with the authority responsible for about 21% (or about \\$252 million) of the total cost. In turn, the authority will own 21% of the plant capacity, which will increase its supply rights from 19.5 millions of gallons per day (MGD) to around 84 MGD, enough to meet its needs through 2040. The new transmission lines and booster pumps, which will move the water from the plant to the authority's service area, are expected to cost the authority around \\$304 million.

Encompassing the cost of expansion, the authority's capital improvement plan (CIP) through 2022 totals \\$715 million. Financing is expected to be provided primarily (81%) by low-cost, junior lien debt provided by the Texas Water Development Board through the State Water Implementation Fund for Texas (SWIFT) program. The remaining costs are expected to be financed by senior lien bonds.

Existing debt levels are high, as the authority funded most of phase one of the GRP with debt. At \\$1,450, debt-per-capita in fiscal 2014 was approximately three times Fitch's 'A' median. Implementation of the CIP, which mostly relates to phase two of the GRP, could result in debt-per-capita of \\$3,088 by 2019. Upon completion of phase two, debt should peak and then begin to decline. Fitch will continue to monitor the authority's debt levels and the potential impact they could have on overall credit quality. Thus far, the size of the authority's remaining CIP has been consistent over the past several years as the GRP-related costs have been known for some time.

ADEQUATE FINANCIAL PROFILE
As is typical for wholesaler providers, the authority's financial margins are below average in comparison to retail systems. All-in annual DSC coverage finished fiscal 2014 at 1.1x, which was consistent with performance demonstrated over the past few years. Going forward, coverage is expected to marginally improve as rate increases and low-cost financing combine to offset increases in operational and debt service carrying costs.

Liquidity has declined over the past several years, but still finished fiscal 2014 at an exceptionally strong 1,094 days cash. Fitch views the authority's strong liquidity balances as somewhat of an offset to the below-average DSC.

RATES EXPECTED TO REMAIN AFFORDABLE
While the capital costs associated with the GRP are large, costs to end users are manageable. The cost of water charged by the authority in 2014 was just \\$2.20 and \\$2.55 per 1,000 gallons for ground and surface water, respectively. Consequently, pass-through costs to a retail customer using 7,500 gallons per month are just 0.25% of median household income (MHI), well below Fitch's affordability threshold of 1% for a single system. Rates are expected to continue increasing to pay for the cost of new debt service associated with authority's large capital plan, but should remain affordable.

RAPIDLY GROWING SERVICE AREA
The authority provides potable water service to a rapidly growing population of approximately 200,000. The county's unemployment and wealth levels are strong. As of March 2015, the county's unemployment rate of 3.9% was below that of the state's (4.2) and nation's (5.6). Income levels were very strong with MHI at 164% and 161% of the state and national levels, respectively. However, the fact that the authority's service area is predominately suburban in nature could lead to slightly worse, but still sound, economic statistics.