AUSTIN, Texas--(BUSINESS WIRE)--Fitch Ratings has assigned the following ratings to San Antonio, TX's water system junior lien bonds, issued for the benefit of the San Antonio Water System (SAWS):
--$26.3 million water system junior lien revenue bonds, series 2013C, rated 'AA';
--$60.1 million water system junior lien revenue bonds, series 2013D, rated 'AA';
--$81.8 million water system junior lien revenue and refunding bonds, series 2013E (no reserve fund), rated 'AA';
--$100 million water system variable rate junior lien revenue and refunding bonds, series 2013F (no reserve fund), rated 'AA'.
The series 2013C and 2013D bonds will be privately placed with the Texas Water Development Board. The series 2013E and 2013F bonds will be sold via negotiation during the second week of October. Proceeds of the bonds will be used for system improvements and to refund commercial paper that was initially issued to fund system projects.
In addition, Fitch affirms the following ratings:
--$1.6 billion in outstanding water system revenue bonds (senior lien) at 'AA+';
--$512 million in outstanding water system junior lien revenue bonds at 'AA'.
Finally, Fitch has withdrawn the 'AA' rating on San Antonio (TX) water system junior lien rev bonds series 2013 as the bond was not sold.
The Rating Outlook is Stable.
SECURITY
Repayment security of the water system senior lien revenue bonds is provided by a pledge of net revenues of SAWS's water and wastewater system (the system). The junior lien revenue bonds are paid subsequent to the senior lien bonds.
KEY RATING DRIVERS
ADEQUATE FINANCIAL PERFORMANCE: Financial margins have experienced some pressure in recent years as a result of extreme weather conditions. However, financial margins remain healthy with senior lien debt service coverage at 2.1x, and all-in coverage at 1.6x in 2012. Fitch expects SAWS's strong financial planning and careful rate management to support outperformance of projections over the long term while keeping pace with ongoing capital needs.
STRONG MANAGEMENT WITH EXTENSIVE PLANNING: SAWS maintains strong management practices, including a 20-year long-range financial and rate forecasting model that incorporates future capital investment and related rising operating expenditures.
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.
SUBSTANTIAL CAPITAL NEEDS: The system's $1.5 billion capital improvement program (CIP) over the next five years, although lower than the prior plan, remains substantial. Needed improvements are mostly driven by wastewater capital needs to comply with regulatory standards, as well as the higher cost of water supply. Fitch believes credit concerns regarding the system's sizeable CIP are somewhat offset by the system's planned use of available reserves.
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 materially higher cost.
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.
RATING SENSITIVITIES
MAINTENANCE OF STRONG FINANCIAL PROFILE: Fitch cautions that a decline in debt service coverage could put downward pressure on the rating given the recent coverage volatility and the burden that the system's substantial capital program is putting on key financial metrics, especially as they compare to the medians of similarly rated credits.
CREDIT PROFILE
HISTORICALLY STRONG FINANCIAL PERFORMANCE
Debt service coverage appears to be rebounding after experiencing some volatility due to extreme weather years. Historical all-in debt service coverage typically exceeded 1.7x prior to 2009, but these levels materially declined during years of extreme weather with coverage dropping in 2009 and 2010 to a low point at 1.2x; a level inconsistent with the system's rating. A rate increase and rising water sales produced results closer to historical levels with all-in debt service coverage rebounding to 1.7x by 2011. The 2012 all-in debt service coverage remained above the system's target at 1.6x and preliminary financial statements for 2013 reflect similar all-in debt service coverage.
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. The five-year projections reflect all-in coverage ranging from a low 1.35x to 1.5x from 2013 to 2017, which has gradually declined from previous forecasts. SAWS typically outperforms its projections and exceeds its all-in target of 1.5x due to conservative assumptions. A key rating driver is Fitch's expectation that SAWS will continue to manage its operating profile to outperform these projections, maintaining coverage levels above its target despite the system's substantial capital needs.
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 system currently generates about 31% of system operating revenues from the fee. Also, a new rate structure took effect on Nov. 1, 2010, which was aimed at water conservation as well as cost recovery. Under this new rate structure, the water supply component is tiered to provide an incentive for water conservation. The city has increased rates about every 14 months since November 2010.
An 8.4% overall rate increase for water supply, delivery, and wastewater took effect March 2013. Planned rate hikes for total water and wastewater service from 2014-2018 average nearly 5.7% annually. Despite these planned rate hikes, SAWS' average monthly residential bill currently totals $53, which is lower than all other Texas urban systems except El Paso, affording the system significant rate flexibility, an important credit strength.
SUBSTANTIAL CAPITAL IMPROVEMENT PLAN
SAWS began adding several modest non-Edwards Aquifer water sources to its portfolio in 2002. 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 (2014-2018), which totals a high $1.5 billion.
Total CIP costs are down from the previously presented plan due to the exclusion of certain water supply projects. However, it does include the incremental cost of wastewater projects over the CIP period to reduce sanitary sewer overflows in compliance with a U.S. Environmental Protection Agency consent decree; the 10-year incremental cost associated with the consent decree is $490 million.
About one-half of the CIP will address the wastewater infrastructure improvements, with the remainder addressing long-term supply and delivery projects. Sources of funding include future debt issuance (74% of total sources) and pay-go monies derived from service revenue and impact fees (26%). Although the planned pay-go remains adequate, Fitch believes continued funding below SAWS' 35% target level could lead to elevated debt levels and pressure the rating over the long term.
MULTI-MODAL BONDS
The series 2013F bonds are being issued in a multi-modal bond structure providing for various interest rate and term structures within the bond documents. These bonds will initially be issued in the SIFMA Index mode. The rating on these bonds reflects a final maturity date of 2043 and only applies to the bonds while in this mode. Bondholders are subject to the mandatory tender but payment of the purchase price at the mandatory tender date (which will initially be for three years) is secured only by remarketing proceeds. In a failed remarketing, bondholders retain the bonds and receive a higher 'stepped' interest rate. A failed remarketing does not result in an acceleration of the bonds, nor a cross-default to any of SAWS' other outstanding debt.
GROWING SERVICE AREA
SAWS is the predominant service provider in Bexar County, serving about 365,000 water and 412,000 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.
FORMER BEXAR METROPOLITAN WATER DISTRICT NOW OPERATING AS SAWS DISTRICT SPECIAL PROJECT
SAWS recently took control of the operations of the former Bexar Metropolitan Water District (BMWD) as a result of a public election to dissolve the BMWD. After years of public criticism and numerous complaints regarding service and management of the system, the state passed legislation requiring the public to vote on dissolution of the district. The election was held in November 2011 at which time 74% of the voters approved the dissolution of BMWD and for the operations to be taken over by SAWS.
SAWS took over operations effective Jan. 28, 2012. In order to protect bondholders and maintain credit neutrality, operating revenues and debt obligations of BMWD will remain separate from the system until certain requirements are met for full integration. The San Antonio City Council by resolution adopted an ordinance creating a separate 'District Special Project' (DSP) and the DSP is now reported as a separate component unit of SAWS beginning with the Dec. 31, 2012 financial statements.
Additional information is available at 'www.fitchratings.com'.
In addition to the sources of information identified in the 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 2013)
--'Water and Sewer Revenue Bond Rating Guidelines' (July 2013)
--'2013 Water and Sewer Medians' (December 2012)
--'2013 Outlook: Water and Sewer Sector' (December 2012).
Applicable Criteria and Related Research:
2013 Outlook: Water and Sewer Sector
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=695755
2013 Water and Sewer Medians
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=695756
U.S. Water and Sewer Revenue Bond Rating Criteria
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=715275
Revenue-Supported Rating Criteria
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=709499
Additional Disclosure
Solicitation Status
http://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=802732
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