Fitch Ratings assigns an 'AA' rating to the following Tarrant Regional Water District, Texas (TRWD) revenue bonds:

--$160.1 million water revenue refunding bonds, series 2015.

The bonds are expected to sell via negotiation on Jan. 28, 2015. Proceeds will be used to refund a portion of the district's currently outstanding obligations for debt service savings and to pay issuance costs.

In addition, Fitch affirms the following TRWD ratings:

--$934 million (pre-refunding) in outstanding water revenue bonds at 'AA'.

The Rating Outlook is Stable.

SECURITY

The series 2015 bonds are special limited obligations of TRWD payable from pledged revenues, which consist mainly of payments made by the cities of Fort Worth, Arlington, Mansfield and the Trinity River Authority (TRA; combined, the contractors) pursuant to the Tarrant County Regional Supply Facilities Amendatory Contract (the contract) between TRWD and the contractors.

KEY RATING DRIVERS

STRONG LEGAL COVENANTS: The joint and several contract among the contractors for the repayment of obligations to TRWD is treated as an unlimited step-up. The payment history of the contractors is exemplary.

SOUND MEMBER CREDIT PROFILES: The contractors account for the vast majority of the district revenues and all have ratings or (for the contractor not rated by Fitch) a credit profile that is consistent with at least the 'AA' rating category. The contractors have the capacity to make up any revenue shortfalls of the district from delinquent customers if necessary.

INCREASING CAPITAL AND DEBT NEEDS: Expected capital needs are sizable and will substantially increase the TRWD's debt burden over the next five years.

ESSENTIAL SERVICE: The contractors are either entirely or almost entirely dependent on TRWD for supplies, and development of alternative sources likely would be cost prohibitive.

RATING SENSITIVITIES

MEMBER CREDIT PROFILES: Deterioration of the credit quality of the contractors would likely have negative credit implications for the bonds.

TIMELY CONTRACTOR ANNUAL PAYMENTS: Failure by a contractor to pay its contracted amounts in a timely fashion would be viewed negatively.

CREDIT PROFILE

TRWD operates as a water control and improvement district, providing raw water service to about 50 municipal and non-municipal entities located both within and outside of Tarrant County. Overall, the district provides water either directly or indirectly to about 95% of Tarrant County and an estimated 1.6 million people. The district is governed by a five-member, publicly elected board. Board members are elected to four-year terms.

JOINT AND SEVERAL WATER CONTRACT

Effective in 1982, the contract provides the terms under which TRWD shall supply raw water to the contractors and the contractors agree to pay for such service. The contractors agree to make monthly payments to TRWD equal to the annual requirement of the district's operating and maintenance (O&M) expenses, debt service requirements (including debt service on the bonds), and any other requirement under the district's bond resolution (including replenishment of any draws on the debt service reserve fund).

If there is a deficiency in the district's revenues required to fund such items, the contractors are required to make up this difference proportionally to their level of consumption relative to all non-delinquent customers and prior to the next debt service payment date. To date, the contractors have never failed to make timely payments to the district required under the contract. The contract is in effect until all outstanding debt obligations are paid in full.

SOUND PAYMENT PROVISIONS, UNLIMITED STEP-UP

The contractors accounted for about 89% of all water deliveries and water payments made to TRWD in fiscal 2014. The obligation of each contractor to make TRWD annual payments is payable as an O&M expense from each contractor's water and sewer system (in the case of Fort Worth, Arlington, and Mansfield) or Tarrant County Water Project (in the case of TRA) and superior in priority to the contractor's own debt obligations. Fort Worth's (58% of TRWD fiscal 2014 water payments) water and sewer revenue bonds are rated 'AA' by Fitch, while Arlington (17%) and Mansfield's (3%) water and sewer revenue bonds are rated 'AAA' and 'AA', respectively. Fitch does not rate TRA's debt pertaining to the Tarrant County Water Project but believes TRA's credit profile is also very strong; TRA contributed 10% of the district's fiscal 2014 water payments.

Because of the joint and several nature of the district revenues Fitch evaluates the ability of a group of contractors to cover payment defaults from other district purchasers without impairing the non-defaulting members' own credit quality beginning with the smallest group of and strongest credit quality contractors. In determining the appropriate group of contractors, Fitch considers the non-defaulting customers' ability to absorb any delinquencies by other TRWD water purchasers from both one time sources and then on a recurring basis. In the event of revenue shortfalls from district customer payments, Fitch believes a group consisting of Fort Worth, Arlington, and Mansfield combined have the capacity to absorb such shortfalls.

Fitch estimates these three contractors have more than sufficient cash resources to pay any immediate TRWD revenue shortfall. Further, Fitch estimates that if the customer defaults described above continued indefinitely, only a single moderate rate increase in the 4%-5.4% range by Fort Worth, Arlington and Mansfield would be necessary to offset the ongoing costs.

The lowest rating of the non-defaulting group is 'AA', which reflects the de facto lowest quality of revenues available to pay debt service, and the district's financial capacity is limited essentially to contractor payments. Therefore, Fitch uses the 'AA' rating as a significant determinant in assigning the district's rating.

ADEQUATE FINANCIAL PERFORMANCE AND AFFORDABLE RATES

Financial performance is typical for a wholesale provider where revenues are derived from take-or-pay contracts. Annual debt service coverage has been, and is expected to continue to be, at or about 1.0x, per the contract. In terms of liquidity, because the contract delineates what constitutes part of the annual charge that contractors pay, reserves are limited to those pertaining to the bond covenants.

Rate setting is done by the district board. Rates are adjusted annually as needed to meet the annual requirements of the district. As the district embarks on its large capital program, annual requirements are expected to rise by 86% over 10 years (from FY 2014 price of $0.98 per $1,000 gallons, to the projected $1.82 per 1,000 gallons in FY 2024). Despite these increases, the rates are very reasonable at $319 per acre foot (AF) and expected to rise to $594 per AF in 2024. This compares favorably to water rates in excess of $800 in California and the expected rate in excess of $2,000 per AF to be paid by San Antonio for water that will be transported via a 140 mile pipeline and will become available in 2020.

SIZABLE CAPITAL IMPROVEMENT PLAN

TRWD's large capital improvement plan (CIP) totals an estimated $968 million through fiscal 2020 that will increase TRWD's debt burden by an estimated 76% over the next five fiscal years. Fitch believes the resulting cost increases will be manageable for member agencies but will monitor the impact, if any, on member agencies' capacity to meet their debt service obligations to the TRWD. The primary CIP project is the design, permitting, project management, and construction costs of a 150-mile pipeline to deliver 347 million gallons per day of water from East Texas to the Dallas-Fort Worth metroplex. The project will provide the additional water supply the district anticipates will be needed in the 2018-2020 timeframe.

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 the Municipal Advisory Council of Texas.

Applicable Criteria and Related Research:

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

--'Water and Sewer Revenue Bond Rating Guidelines' (July 2013);

--'2015 Water and Sewer Medians' (December 2014);

--'2015 Outlook: Water and Sewer Sector' (December 2014).

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

2015 Water and Sewer Medians

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=818409

2015 Outlook: Water and Sewer Sector

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=818410

Additional Disclosure

Solicitation Status

http://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=977615

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