Fitch Rates San Antonio City Public Service's (TX) Electric & Gas System Jr. Lien Rfdg Bonds 'AA+'

AUSTIN, Texas--()--Fitch Ratings assigns an 'AA+' rating to the following city of San Antonio, Texas' electric and gas systems variable rate junior lien revenue refunding bonds, issued on behalf of San Antonio City Public Service (CPS):

--Approximately $250 million SIFMA index mode bonds, series 2015A and 2015B.

Bond proceeds will be used to refund outstanding series 2003 variable rate bonds. Bonds are expected to price on Dec. 11, 2014.

In addition, Fitch affirms the following outstanding CPS ratings:

--$3.57 billion senior lien obligations at 'AA+';

--$1.64 billion outstanding junior lien obligations at 'AA+';

--$47.18 million in outstanding junior lien term bonds series 2012A at 'AA+';

--$47.8 million in outstanding junior lien 2012B term bonds at 'AA+/F1+';

--$360 million outstanding commercial paper (CP) notes at 'F1+' and a bank note rating of 'AA+' on each series of CP.

The Rating Outlook is Stable.

SECURITY

Payment of principal and interest on the series 2015A and 2015B SIFMA index mode bonds are secured by a junior lien pledge on net revenues. However, the purchase price of a tender (either optional or mandatory) is secured solely by remarketing proceeds. In the event of a failed remarketing, CPS has no obligation and no intent to pay the purchase price from net revenues.

KEY RATING DRIVERS

COMBINED SYSTEM: The utility is a combined municipal utility that provides retail electric and natural gas services to the city of San Antonio. The service area continues to enjoy modest but consistent growth.

SOLID FINANCIAL PERFORMANCE: Financial margins experienced some pressure in the past two years as a result of increased borrowing and delayed rate increases. However, financial margins remain healthy at over 2x debt service coverage, or 1.4x all-in coverage including all obligations and a large transfer made annually to the city's general fund.

STRONG POLICIES AND PLANNING: CPS exhibits strong management practices, including responsive, long-range financial and rate forecasting that reflects rapidly changing market conditions. Management sets rates to achieve a minimum of 1.5x all-in coverage.

COMPETITIVE RATES: Electric rates are low for the region. CPS offers the community highly competitive power prices. Both electric and gas rates have automatic adjustment mechanisms to recover fuel costs.

DIVERSE, LONG GENERATION PORTFOLIO: CPS enjoys a competitively priced and sufficient generation portfolio. In practice, CPS is usually in a long resource position, resulting in the need for some amount of wholesale sales to balance assets with demand. The long position is more pronounced following the acquisition of the Rio Nogales gas plant in fiscal 2013.

POWER SUPPLY CHANGES: CPS is in the process of reinvesting in its generation portfolio to include more renewable generation and to replace older coal-fired resources with lower emission gas-fired generation and energy efficiency programs.

MODERATE CAPITAL DEMANDS: The utility's debt burden and equity position are average relative to Fitch's median ratios. Additional capital needs of around $2.87 billion over the next five years is expected to fund primarily distribution system improvements and will require additional debt funding; debt levels and rate increases should remain manageable.

SHORT-TERM RATINGS: The 'F1+' rating on CPS' tax-exempt CP program is based on the long-term credit quality of CPS and internal liquidity support that exceeds Fitch's 1.25x threshold. The 'F1+' rating assigned to the SIFMA index mode bonds corresponds to the long-term ratings on CPS's revenue bonds.

RATING SENSITIVITIES

WEAKER FINANCIAL MARGINS: The rating and Stable Outlook reflect Fitch's expectation that financial margins will improve by fiscal 2015. Should financial margins decline further or remain consistently at lower levels, there could be pressure on the ratings.

CREDIT PROFILE

CPS provides exclusive electric service to 749,454 primarily residential electric customers and to 332,457 primarily residential gas customers in fiscal 2014 (Jan. 31 fiscal year). CPS is the sole supplier of electricity in its service area and is not subject to retail competition unless city council determines that CPS will opt into retail electric competition.

CPS' customer base is large and diverse, and San Antonio continues to attract new industry to the CPS service area. CPS owns sufficient generation totaling 6,550 MW to serve its own native load with a system peak of 4,911 MW. Coal is still the predominant fuel type (42.3% of energy in 2014) but this is expected to decline in 2018 with the closure of its oldest coal plant.

SIFMA INDEX MODE BONDS

The 2015A and 2015B bonds will be issued in the index mode. Fitch's rating does not cover the potential conversion to another interest rate mode. The index mode will pay bondholders a rate equal to the SIFMA Average Index Rate (SIFMA) and a fixed index spread that will be determined at the time of pricing and will be in place through the initial interest period, which will be established at pricing but is expected to be two years for the series 2015A bonds and three years for the 2015B bonds. Bondholders have no right to put the bonds prior to the mandatory tender at the end of the interest period and no liquidity facility or self-liquidity requirement is in place. CPS retains the option to schedule an optional tender up to 180 days prior to the mandatory tender that occurs at the end of the interest period.

In either an optional or mandatory tender, the payment of the purchase price of the bonds is secured only by remarketing proceeds. In the event of a failed remarketing, CPS is not obligated to use net revenues or cash on hand to redeem bonds. The failure to pay the purchase price does not constitute an event of default under the bond ordinance. Bondholders are required to hold the bonds until such times as CPS does execute a successful remarketing.

The structure provides CPS with access to variable rate debt but with a high degree of flexibility. Bondholders are reliant on the market access of CPS at the time of the tender in order to receive payment at the optional or mandatory tenders.

For additional information see Fitch's Report, 'San Antonio City Public Service, TX', dated Nov. 13 2014.

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

In addition to the sources of information identified in Fitch's Revenue-Supported Rating Criteria, this action was additionally informed by information from Creditscope.

Applicable Criteria and Related Research:

--'Revenue Supported Rating Criteria' (June 2013);

--'U.S. Public Power Rating Criteria' (March 2014);

--'Rating U.S. Public Finance Short-Term Debt' (December 2013);

--'US Public Power Peer Study' (June 2014).

Applicable Criteria and Related Research:

Revenue-Supported Rating Criteria -- Effective June 12, 2012 to June 3, 2013

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=681015

U.S. Public Power Rating Criteria

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=740841

Rating U.S. Public Finance Short-Term Debt

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=724680

U.S. Public Power Peer Study -- June 2014

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=749789

Additional Disclosure

Solicitation Status

http://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=939795

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.

Contacts

Fitch Ratings
Primary Analyst
Kathy Masterson
Senior Director
+1-512-215-3730
Fitch Ratings, Inc.
111 Congress Avenue, Suite 2010
Austin, TX 78701
or
Secondary Analyst
Dennis Pidherny
Managing Director
+1-212-908-0738
or
Committee Chairperson
Christopher Hessenthaler
Senior Director
+1-212-908-0773
or
Media Relations
Elizabeth Fogerty, +1 212-908-0526
elizabeth.fogerty@fitchratings.com

Contacts

Fitch Ratings
Primary Analyst
Kathy Masterson
Senior Director
+1-512-215-3730
Fitch Ratings, Inc.
111 Congress Avenue, Suite 2010
Austin, TX 78701
or
Secondary Analyst
Dennis Pidherny
Managing Director
+1-212-908-0738
or
Committee Chairperson
Christopher Hessenthaler
Senior Director
+1-212-908-0773
or
Media Relations
Elizabeth Fogerty, +1 212-908-0526
elizabeth.fogerty@fitchratings.com