AUSTIN, Texas--()--Fitch Ratings has assigned the following ratings to San Antonio, TX's water system bonds, issued for the benefit of the San Antonio Water System (SAWS):
--$245.7 million water system revenue refunding bonds, series 2012, rated 'AA+'.
The bonds are expected to price via negotiation the week of Feb. 7, 2012. Proceeds will be used to refund certain outstanding obligations for debt service savings, and pay costs of issuance.
In addition, Fitch affirms the following ratings:
--$1.5 billion in outstanding water system revenue bonds (senior lien) at 'AA+'
--$386 million in outstanding water system junior lien revenue bonds at 'AA'
The Rating Outlook is Stable.
SECURITY
Repayment security of the water system revenue bonds is provided by a senior lien pledge of net revenues of SAWS' water and wastewater system. The junior lien revenue bonds have a subordinate position in the system's flow of funds and therefore carry a lower rating.
KEY RATING DRIVERS
ADEQUATE FINANCIAL PERFORMANCE: SAWS' financial performance is typically strong, although debt service coverage declined in 2009 and 2010 due to extreme weather conditions. Unaudited results for 2011 point to improved coverage resulting from increased water sales in light of drought conditions affecting the state as well as from a rate hike implemented in November 2010. The board has approved another rate increase effective Jan. 1, 2012 and management is recommending additional rate hikes to keep pace with ongoing capital needs and maintain sound financial results.
COMPETITIVE RATES: The system's rates are competitive compared with area and statewide peer systems despite its most recent rate increases. Additional rate hikes are planned to support the system's substantial capital needs, but Fitch believes they will remain competitive with peer systems and affordable relative to area wealth levels.
COSTLY SUPPLY DIVERSIFICATION EFFORTS: Successful conservation efforts have enabled pumping levels of the Edwards Aquifer to stabilize despite rapid population growth, but SAWS remains heavily reliant on this single water source. SAWS' water supply diversification efforts continue to introduce new non-aquifer sources to its water supply inventory but at a higher cost
SUBSTANTIAL CAPITAL NEEDS: The system's $1.4 billion capital improvement program (CIP) over the next five years remains substantial. The needs are mostly driven by wastewater capital needs to comply with regulatory standards as well as the higher cost of additional water supplies. Fitch believes credit concerns regarding the system's sizeable CIP are somewhat offset by the system's planned use of available reserves for about 23% of the capital program, although this is slightly lower than the 28% planned use of reserves at the last rating.
STRONG AND DIVERSE SERVICE AREA: The trend of San Antonio's overall economic activity and diversification remains relatively stable, with the softening in residential building activity partially offset by steady commercial and military construction.
CREDIT PROFILE
HISTORICALLY STRONG FINANCIAL PERFORMANCE
SAWS generated actual debt service coverage on an all-in basis ranging from 1.7 times (x) to 2.2x from 2005 to 2008. However, the region experienced extreme drought conditions, most notably between 2007 and 2009, that forced water providers to implement stringent water use restrictions, reducing water sales and producing debt service coverage below historical levels.
All-in debt service coverage in fiscal 2009 was below historically strong levels at 1.4x. In 2010, weather conditions took a turn to the other extreme, with heavy rainfall resulting in even lower all-in debt service coverage at 1.2x. Despite severe drought conditions in 2011, unaudited results for the year point to improved all-in coverage at 1.7x in light of higher water sales and a rate increase.
RATE AFFORDABILITY
In order to provide a dedicated funding source for securing additional water resources, San Antonio adopted a separate water supply fee in 2000. The fee generated $82.4 million or 22% of system operating revenues in 2010. A new rate structure took effect on Nov. 1, 2010, which was aimed at water conservation as well as cost recovery.
Under the new rate structure, the water supply component of the rate is tiered to provide an incentive for water conservation. Under this rate structure, the highest water users will pay increasingly higher rates as levels of water consumption beyond non-discretionary needs are exceeded. In addition to the new rate structure, a 6.5% total bill increase took effect on Nov. 1, 2010, which along with the new rate structure generates an additional $20 million in annual revenue.
Another 7.9% rate increase took effect Jan. 1, 2012. Planned rate hikes for water and wastewater service from 2013-2016 average nearly 8% annually. Despite these planned rate hikes, SAWS' average monthly residential bill currently totals $50, which is lower than all other Texas urban systems except El Paso, affording the system significant rate flexibility - an important credit strength.
MULTIYEAR PLANNING A POSITIVE
SAWS has prudently developed and annually updates a multiyear financing plan that includes expected capital and operational costs and incorporates its planned rate increases. While the five-year projections reflect all-in coverage ranging from 1.35x to 1.4x from 2012 to 2016, this is only slightly lower than the previous forecast which reflected a low point at 1.4x. SAWS typically outperforms its projections and exceeds its all-in target of 1.5x due to conservative assumptions. Future maintenance of strong debt service coverage will remain a key credit consideration for the system's ratings.
CAPITAL IMPROVEMENT PLAN
Starting in 2002, SAWS began adding several modest non-Edwards Aquifer water sources to its portfolio. Additional projects are expected to increase the composition of non-Edwards Aquifer water over time. Capital costs associated with these projects are significant and will require a sizeable amount of additional leveraging in the future. SAWS has developed its current five-year CIP (2012-2016), which totals a large $1.4 billion and encompasses a portion of these long-term supply and delivery projects as well as address wastewater system maintenance needs. Sources of funding include future debt issuance (77% of total sources) and pay-go monies derived from service revenue and impact fees (23%). The currently planned pay-go funding is slight lower than SAWS' target range of 25% to 30%. Although the planned pay-go remains adequate, Fitch believes continued funding below its target levels could lead to elevated debt levels over the long term.
GROWING SERVICE AREA
SAWS is the predominant service provider in Bexar County, serving about 360,000 water and 405,000 wastewater retail and wholesale customers. The waterworks system extends approximately 627 square miles and 93% of customers are residential. The wastewater treatment boundaries cover 504 square miles and provide service to 1.3 million people. SAWS' main challenge continues to be the development of supplemental water resources given the projected doubling of population for the area by the year 2050 and the ongoing sewer system maintenance program.
BEXAR METROPOLITAN WATER DISTRICT
Recent legislative action calls for the system to take over the operations of the Bexar Metropolitan Water District (the district), which is expected to be turned over at the end of this month. The district predominantly serves the residential areas in the south and growing west portions of Bexar County. SAWS already serves the wastewater needs of a majority of the district customers and the addition of water services should be manageable. Financial operations relating to the district are expected to be treated separate and distinct from system finances. Consequently, there is no credit impact to the system as a result of SAWS' increased responsibilities.
Additional information is available at 'www.fitchratings.com'. The ratings above were solicited by, or on behalf of, the issuer, and therefore, Fitch has been compensated for the provision of the ratings.
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', dated June 20, 2011;
--'Water and Sewer Revenue Bond Rating Guidelines', dated Aug. 10, 2011;
--'2012 Water and Sewer Medians', dated Dec. 8, 2011;
--'2012 Outlook: Water and Sewer Sector', dated Dec. 8, 2011.
For information on Build America Bonds, visit www.fitchratings.com/BABs.
Applicable Criteria and Related Research:
U.S. Water and Sewer Revenue Bond Rating Criteria
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=647331
2012 Water and Sewer Medians
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=657111
2012 Outlook: Water and Sewer Sector
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=657110
Revenue-Supported Rating Criteria
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=637130
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.
Facebook
Twitter
LinkedIn
Delicious
Reddit
StumbleUpon
Digg
MySpace
Newsvine
Google Bookmark
Yahoo! Bookmark
Email
Email 
