Fitch Rates San Antonio, Texas' Jr. Lien Water System Revenue Rfdg Bonds 'AA-'; Outlook Stable
Source: Business Wire
The bonds are expected to sell via negotiation on Feb. 8, 2010.
Fitch also affirms the following bonds:
--Approximately $1.4 billion in outstanding senior lien revenue bonds at 'AA'; and
--Approximately $359.1 million in outstanding junior lien revenue bonds at 'AA-'.
The Rating Outlook is Stable.
RATING RATIONALE:
--The San Antonio Water System's (SAWS) strong financial performance has historically enabled ample debt service coverage and increased liquidity with lower-than-projected rate increases and still competitive rates.
--Successful conservation efforts have enabled pumping levels of the Edwards Aquifer to stabilize despite rapid population growth. However, SAWS remains heavily reliant on this single water source, although water supply diversification efforts continue to introduce new non-aquifer sources.
--SAWS' massive CIP comprises large and complex water supply projects that require substantial development periods.
--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.
KEY RATING DRIVERS:
--Maintenance of strong debt service coverage commensurate with the rating category is key to the rating.
--The success of management's decision to position itself as the future wholesale provider for the region will hinge on the extent of cooperation between SAWS and surrounding utilities, many of which are in the faster-growing parts of the region.
--The financing plan conservatively assumes the worst case scenario of no contributions for capital or operating expenses from surrounding utilities, resulting in considerable leveraging in the future.
SECURITY:
Repayment security of the water system revenue bonds is provided by a junior lien pledge of net revenues of the SAWS water and wastewater system. The senior lien revenue bonds have a priority position in the system's flow of funds and therefore, carry a higher rating.
CREDIT SUMMARY:
SAWS is the predominant service provider in Bexar County, serving 349,000 water and 390,000 wastewater retail and wholesale customers. The waterworks system extends about 627 square miles, and approximately 91% of customers are residential. The wastewater treatment boundaries cover about 424 square miles and provide service to about 1.3 million people. SAWS' main challenge continues to be the development of supplemental water resources given the projected doubling of population for the San Antonio area by the year 2050 and the system's reliance on groundwater from the Edwards Aquifer.
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. Encompassing a portion of these long-term supply and delivery projects, SAWS has developed its current five-year CIP, which totals a large $1.5 billion. SAWS maintains a goal of funding 30%-35% of capital costs on a pay-as-you-go basis, which is planned to range between roughly $60 million and $100 million annually over the next five years.
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 $87.4 million or 23% of system operating revenues in 2008. Although the city did not increase service rates for 2010, SAWS plans to increase water and wastewater rates an average of 6.5% annually from 2011-2014 to fund capital and operational needs stemming from the growth of its service area. Despite the sizable rate hikes, SAWS' average monthly residential bill currently totals $43, which is lower than all other Texas urban systems except El Paso, affording the system sufficient rate flexibility.
Historically, SAWS has generated actual debt service coverage on an all-in basis ranging from 1.7 times (x) to 2.3x over the last five audited years. In 2009, the region experienced extreme drought conditions that forced water providers to implement stringent water use restrictions, reducing water sales and producing debt service coverage levels below historical levels. The 2009 unaudited results point to senior lien debt service coverage at 1.81x and 1.43x on an all-in basis. SAWS' liquidity levels also declined in 2009 due primarily to funding $30 million in the debt service reserve fund as a result of surety provider downgrades. Although the 2010 budgeted debt service coverage ratios are similar to 2009 performance, management expects to exceed these projections. SAWS has developed a multiyear financing plan that includes expected capital and operational costs. Incorporating planned rate increases results in sound debt service coverage on all bonds. While all-in coverage levels are projected to decline in the future to a minimum of 1.4x through fiscal 2013 as a result of the increased fixed-cost pressure, SAWS typically outperforms its projections and exceeds its all-in target of 1.5x due to conservative assumptions.
These rating actions reflect the application of Fitch's current criteria which are available at www.fitchratings.com and specifically include the following reports:
--'Revenue-Supported Rating Criteria', dated Dec. 29, 2009;
--'Water and Sewer Revenue Bond Rating Guidelines', dated Aug. 6, 2008.
Additional information is available at 'www.fitchratings.com'.
Contact:
Fitch Ratings, Austin
Gabriela Gutierrez, +1-512-215-3731
Jose Acosta, +1-512-215-3726
or
Cindy Stoller, +1-212-908-0526
(Media Relations, New York)
cindy.stoller@fitchratings.com
