Fitch Rates San Antonio, TX's Elec and Gas System Revenue Refunding Bonds 'AA+'; Outlook Stable

AUSTIN, Texas--()--Fitch Ratings has assigned its 'AA+' rating to the following bonds issued by the city of San Antonio:

--Approximately $315.7 million electric and gas systems revenue refunding bonds, new series 2015.

Bond proceeds will be used to refund outstanding senior lien series 2007 bonds for level savings with no maturity extension and pay costs of issuance. Bonds are expected to price on July 14, 2015 via negotiated sale.

In addition, Fitch affirms the following outstanding San Antonio electric and gas system revenue bond ratings:

--$3.41 billion senior lien obligations at 'AA+';

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

--$47.14 million in outstanding junior lien term bonds series 2012A at 'AA+/F1+';

--$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.

In addition, Fitch Ratings has withdrawn the 'AA+' rating on San Antonio (TX) electric and gas system revenue bonds series 2009B as the bond was not sold.

The Rating Outlook is Stable.

SECURITY

Senior lien bonds are secured by net revenues of the combined electric and gas system, operating as San Antonio City Public Service (CPS Energy). The junior lien bonds are secured by CPS Energy net revenues after the payment of debt service on the senior lien bonds. CP repayment is secured by a third lien on net revenues.

KEY RATING DRIVERS

COMBINED SYSTEM: CPS Energy provides retail electric and natural gas services to the city of San Antonio. The service area continues to enjoy modest but consistent growth.

STRONG FINANCIAL METRICS: Financial margins for bondholders were strong in fiscal 2015 with 2.47x debt service coverage of revenue bonds and 1.71x all-in coverage after the large transfer made annually to the city's general fund. Liquidity is healthy with 206 days operating cash.

COMPETITIVE RATES: Electric rates are low for the region. Both electric and gas rates have automatic adjustment mechanisms to recover fuel costs.

DIVERSE, LONG GENERATION PORTFOLIO: CPS Energy enjoys a competitively priced and sufficient generation portfolio and is in a long resource position, resulting in the need for some amount of wholesale activity to balance assets with demand. CPS Energy continues to add renewable purchase power agreements to achieve its self-elected renewable portfolio standard.

MODERATE CAPITAL DEMANDS: The utility's debt burden and equity position are average for the rating. Additional capital of around $2.75 billion over the next five years is expected. Debt levels and rate increases should remain manageable.

RATING SENSITIVITIES

WEAKENING FINANCIAL MARGINS: The Stable Outlook reflects San Antonio City Public Service's (CPS Energy's) consistently strong financial metrics. Should financial margins exhibit a sustained decline as a result of increased operating costs and a reluctance to increase rates, if needed, there could be pressure on the ratings.

CREDIT PROFILE

CPS Energy provides exclusive electric service to over 760,000 primarily residential electric customers and to around 335,000 primarily residential gas customers. CPS Energy is the sole supplier of electricity in its service area and is not subject to retail competition introduced in Texas in 2000. Municipal utilities in the state have the option to offer retail competition in their services areas and CPS Energy has given no indication of its intent to do so.

CPS Energy's customer base is large and diverse, and San Antonio continues to attract new industry to the service area. CPS Energy owns sufficient generation totaling 6,355 MW to serve its own native load with a system all-time peak of 4,911 MW. Coal is still the predominant fuel type (42% of energy in 2015) but this is expected to decline in 2018 with the deactivation of its oldest coal plant in favor of greater natural gas-fired and renewable resources.

STABLE RETAIL SERVICE AREA; INCREASING WHOLESALE ACTIVITY

Retail sales growth has averaged 1.8% over the past decade. CPS Energy management projects annual retail energy and gas sales growth to average around 1.5% and 0.9%, respectively as a result of extensive investments in energy efficiency programs and industry-wide technology changes that offset customer and load growth in the service area.

In addition to its retail customer base, CPS Energy sells energy under firm contracts to a number of regional cities and cooperatives under fixed-price contracts with termination dates ranging from 2016-2023 and makes short-term economic energy sales within the Electric Reliability Council of Texas (ERCOT).

Wholesale sales, including the firm contracts, increased to 33% of total sales in fiscal 2015, up from 13% in 2010, reflecting the long generation position of the utility. Fitch views the potential revenue fluctuation that may result from the short-term energy sales as a risk that should be manageable even though spot market prices in ERCOT have been soft in the past couple of years.

COMPETITIVE RATES; SOME RATE PRESSURE

Rates are competitive, and regular rate increases have occurred historically approximately every two years. CPS Energy rates must be approved by the San Antonio City Council. The last base rate increase occurred in February 2014 at 4.25% for both the electric and gas system, which was slightly below the amount requested by CPS Energy of 4.75%. Prior to 2014, the last rate increase had not occurred since 2010. CPS Energy does not expect to need an additional base rate increase for either system in the next few years. While overall financial performance has been healthy, management's decision to forgo rate action may also reflect some rate sensitivity in the service area, despite the utility's comparatively low rates. Both electric and gas rates have automatic fuel adjustment factors that help recover variable fuel costs in a timely manner.

CONSISTENTLY STRONG FINANCIAL PERFORMANCE

CPS Energy's financial performance has consistently remained in a strong range for a number of years. With the rate increase in fiscal 2015, Fitch-calculated annual debt service coverage was 2.47x on the revenue bonds and an all-in 1.71x coverage when general fund transfers are included. CPS Energy's consistent financial performance is supported by financial policies and rate setting that target minimum all-in debt service coverage of 1.5x. Although CPS Energy makes a large annual transfer to the city's general fund equal up to 14% of gross revenues, the consistent margins for bondholders and competitive rates mitigate concerns about this practice. Management's financial and rate model indicates continued strong financial margins without base rate increases over the next few years.

Unrestricted cash of $895 million at the end of fiscal 2015 includes the repair and replacement fund. Liquidity is healthy at 206 days cash on hand. Debt levels are above average at $7,550 debt per electric customer. Free cash flow is consistently only around 50% of annual depreciation although improved to 79% in fiscal 2015. Reinvestment in the system, as well as new asset investment, is being funded primarily via debt. CPS targets maintaining debt to equity below 65%.

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

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

Applicable Criteria

Rating U.S. Public Finance Short-Term Debt (pub. 07 Jan 2015)

https://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=846969

Revenue-Supported Rating Criteria (pub. 16 Jun 2014)

https://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=750012

U.S. Public Power Rating Criteria (pub. 18 May 2015)

https://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=864007

Additional Disclosures

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Solicitation Status

https://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=986714

Endorsement Policy

https://www.fitchratings.com/jsp/creditdesk/PolicyRegulation.faces?context=2&detail=31

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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
Amy Laskey
Managing Director
+1-212-908-0568
or
Media Relations:
Sandro Scenga, New York, +1 212-908-0278
Email: sandro.scenga@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
Amy Laskey
Managing Director
+1-212-908-0568
or
Media Relations:
Sandro Scenga, New York, +1 212-908-0278
Email: sandro.scenga@fitchratings.com