AUSTIN, Texas--(BUSINESS WIRE)--Fitch Ratings has assigned a 'AA' rating to the following San Antonio, TX water system junior lien bonds, issued for the benefit of the San Antonio Water System (SAWS):
--$303.9 million water system junior lien revenue and refunding bonds, series 2016C (no reserve fund);
--$12.5 million water system junior lien revenue bonds, series 2016D (TWDB DWSRF);
--$14.4 million water system junior lien revenue bonds, series 2016E (TWDB CWSRF).
The series 2016C bonds will be sold via negotiation during the week of Oct. 3. The series 2016D and 2016E bonds will be privately placed with the Texas Water Development Board. Proceeds of the bonds will be used for system improvements and to refund commercial paper that was initially issued to fund system projects. A portion of the series 2016C bonds will be used to refund outstanding series 2007 and 2009 bonds for savings.
In addition, Fitch affirms the following ratings (pre-refunding):
--$1.1 billion in outstanding water system revenue bonds (senior lien) at 'AA+';
--$1.4 billion in outstanding water system junior lien revenue bonds at 'AA'.
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' water and wastewater system (the system). The junior lien revenue bonds are paid subsequent to the senior lien bonds. The series 2016C bonds will be issued without a reserve fund.
KEY RATING DRIVERS
SUSTAINED FINANCIAL PERFORMANCE: Although audited 2015 results posted a modest decline to 1.5x DSC, as expected due to the extreme wet weather, all-in debt service coverage (DSC) ranged from 1.6x to 1.7x over the last four years despite severe drought conditions. Fitch expects that SAWS' strong financial planning, as well as recent and future rate increases, will continue to support adequate coverage levels 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.
HIGH DEBT / SUBSTANTIAL CIP: The system is expected to remain highly leveraged for the rating category given its large capital plan. The system's $1.6 billion capital improvement program (CIP) over the next five years (2017 - 2021) is driven by wastewater needs to comply with regulatory standards, as well as requirements to secure future diverse water supplies.
COSTLY SUPPLY DIVERSIFICATION EFFORTS: SAWS' water supply diversification efforts continue to introduce new non-Edwards aquifer sources to its water supply inventory but at a materially higher cost.
COMPETITIVE RATES: The system's rates are competitive compared with area and state wide peer systems. A comprehensive rate study was recently completed and, despite planned rate hikes to support the system's substantial capital needs, Fitch believes rates will remain competitive and affordable relative to area wealth levels.
STRONG AND DIVERSE SERVICE AREA: San Antonio is the second largest city in the state and seventh largest in the U.S. Prominent sectors include military and government, domestic and international trade, convention and tourism, medical and healthcare, and telecommunications.
RATING SENSITIVITIES
ABILITY TO SUSTAIN FINANCIAL PROFILE: Given San Antonio Water System's substantial capital needs and growing leverage, failure to increase rates as planned and correspondingly generate solid debt service coverage as forecast, would result in financial metrics inconsistent with the current ratings and could result in downward rating pressure.
CREDIT PROFILE
SAWS is the predominant service provider to about 1.6 million residents of Bexar County, serving about 482,000 water and 429,000 wastewater retail and wholesale customers. SAWS is governed by a seven-member board of trustees and rate changes are approved by the city council. SAWS' main challenges continue 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.
In 2012, SAWS took over operations of the former Bexar Metropolitan Water District (BMWD), operating the system as a separate component unit, District Special Project (DSP). The acquisition of the former BMWD was a legislative mandate that required SAWS to fully integrate the BMWD into SAWS' system. Earlier this year, SAWS refunded all of the outstanding debt of the DSP, which resulted in the financial dissolution of the DSP and financial integration to SAWS. The financial operations will be consolidated into SAWS financial statements beginning with the Dec. 31, 2016 financial report. The consolidated DSC and liquidity are expected to remain in line with SAWS metrics prior to consolidation. Now included in SAWS customer base are approximately 102,000 water connections that were under the DSP.
IMPROVED COVERAGE SUSTAINED
All-in DSC ranged from 1.6 to 1.7x from 2011 to 2014 despite the prolonged drought. The audited results for 2015 posted a modest decline to 1.5x DSC, but the weaker results reflect the extreme wet weather that brought an end to the four year drought. Preliminary results for 2016 should benefit from water sales closer to budgeted levels, and a 7.5% rate increase, which are projected to yield 1.7x DSC.
SAWS has developed and annually updates a multiyear financing plan that includes expected capital and operational costs and incorporates its planned rate increases. The projections for fiscal years 2017 to 2020 suggest all-in coverage ranging from 1.7x to 1.8x. Moreover, SAWS has recently revised its all-in DSC target to 1.75x from the previous 1.5x. Fitch views the higher DSC target favorably, given the high leverage position of the system and expected debt issuance over the next five years.
HIGHLY LEVERAGED WITH LARGE CAPITAL NEEDS
Outstanding long term debt per customer is high at over $3,300 compared with the 'AA' category median of nearly $2,000. This has been largely driven by the system's need to reduce sanitary sewer overflows in compliance with a U.S. Environmental Protection Agency consent decree, and invest in capital projects necessary to secure future water sources.
SAWS 2017-2021 five-year CIP totals a large $1.6 billion. About 56% of the CIP will address wastewater infrastructure improvements, with the remainder addressing long-term supply and delivery projects. Moreover, roughly two thirds of the CIP is currently planned to be debt funded, and the remainder will be derived from service revenue and impact fees.
SUPPLY DIVERSIFICATION
Historically SAWS has relied on the Edwards Aquifer for the vast majority of water supply. Environmental concerns with the aquifer habitat and recharge resulted in pumping restrictions and led to substantial efforts to diversify the area's water supplies. SAWS began adding several modest non-Edwards Aquifer water sources to its portfolio in 2002. The water supply projects included in the CIP are expected to increase the composition of non-Edwards Aquifer water over time. Fitch believes that water diversification will be a long-term positive to the system despite the significant cost, which is expected to be incrementally absorbed through rate adjustments.
OFF BALANCE SHEET WATER SUPPLY PROJECT
In addition to the CIP, SAWS has entered into a contract to construct a 140 mile pipeline that will deliver 50,000 acre feet (AF) annually to SAWS' intake point from the Carrizo and Simsboro aquifers by 2020. This is projected to be the largest non-Edwards Aquifer water source in its supply portfolio. The pipeline project will be treated as an operating expense (prior to all debt service per the flow of funds) at an estimated cost of $1,600 per AF plus operating expenses. This will result in an increase of an estimated 20% in operating expenditures in 2020 when the project is expected to begin water deliveries. The term of the contract is for 30 years (from completion of the project), at which time the pipeline is turned over to SAWS and is expected to have a useful life of 30-50 years remaining.
The project is currently in the development phase. Certain contract provisions protect SAWS from significant financial exposure during the development phase.
AFFORDABILITY SOMEWHAT MITIGATES COST PRESSURES
SAWS has recently completed a rate study and adopted a new rate structure geared to recover a higher percentage of cost at base service tiers, while maintaining a low life line rate for water use under 3,000 gallons per month. The new rate structure also has eight water tiers instead of four enabling SAWS to recoup base cost at lower tiers and sending conservation signals sooner than the previous rate structure. A 7.5% rate increase for the average residential connection took effect January 2016. Planned rate hikes for total water and wastewater service from 2017-2020 average about 9.1% annually. The average monthly residential bill currently totals $59 (including pass through fees), which is lower than all other Texas urban systems except El Paso, affording the system significant rate flexibility, an important credit strength.
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
Revenue-Supported Rating Criteria (pub. 16 Jun 2014)
https://www.fitchratings.com/site/re/750012
U.S. Water and Sewer Revenue Bond Rating Criteria (pub. 03 Sep 2015)
https://www.fitchratings.com/site/re/869223
Additional Disclosures
Dodd-Frank Rating Information Disclosure Form
https://www.fitchratings.com/creditdesk/press_releases/content/ridf_frame.cfm?pr_id=1012239
Solicitation Status
https://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=1012239
Endorsement Policy
https://www.fitchratings.com/jsp/creditdesk/PolicyRegulation.faces?context=2&detail=31
ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: HTTPS://WWW.FITCHRATINGS.COM/UNDERSTANDINGCREDITRATINGS. IN ADDITION, RATING DEFINITIONS AND THE TERMS OF USE OF SUCH RATINGS ARE AVAILABLE ON THE AGENCY'S PUBLIC WEB SITE AT 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.
Copyright© 2016 by Fitch Ratings, Inc., Fitch Ratings Ltd. and its subsidiaries. 33 Whitehall Street, NY, NY 10004. Telephone: 1-800-753-4824, (212) 908-0500. Fax: (212) 480-4435. Reproduction or retransmission in whole or in part is prohibited except by permission. All rights reserved. In issuing and maintaining its ratings and in making other reports (including forecast information), Fitch relies on factual information it receives from issuers and underwriters and from other sources Fitch believes to be credible. Fitch conducts a reasonable investigation of the factual information relied upon by it in accordance with its ratings methodology, and obtains reasonable verification of that information from independent sources, to the extent such sources are available for a given security or in a given jurisdiction. The manner of Fitch's factual investigation and the scope of the third-party verification it obtains will vary depending on the nature of the rated security and its issuer, the requirements and practices in the jurisdiction in which the rated security is offered and sold and/or the issuer is located, the availability and nature of relevant public information, access to the management of the issuer and its advisers, the availability of pre-existing third-party verifications such as audit reports, agreed-upon procedures letters, appraisals, actuarial reports, engineering reports, legal opinions and other reports provided by third parties, the availability of independent and competent third- party verification sources with respect to the particular security or in the particular jurisdiction of the issuer, and a variety of other factors. Users of Fitch's ratings and reports should understand that neither an enhanced factual investigation nor any third-party verification can ensure that all of the information Fitch relies on in connection with a rating or a report will be accurate and complete. Ultimately, the issuer and its advisers are responsible for the accuracy of the information they provide to Fitch and to the market in offering documents and other reports. In issuing its ratings and its reports, Fitch must rely on the work of experts, including independent auditors with respect to financial statements and attorneys with respect to legal and tax matters. Further, ratings and forecasts of financial and other information are inherently forward-looking and embody assumptions and predictions about future events that by their nature cannot be verified as facts. As a result, despite any verification of current facts, ratings and forecasts can be affected by future events or conditions that were not anticipated at the time a rating or forecast was issued or affirmed.
The information in this report is provided "as is" without any representation or warranty of any kind, and Fitch does not represent or warrant that the report or any of its contents will meet any of the requirements of a recipient of the report. A Fitch rating is an opinion as to the creditworthiness of a security. This opinion and reports made by Fitch are based on established criteria and methodologies that Fitch is continuously evaluating and updating. Therefore, ratings and reports are the collective work product of Fitch and no individual, or group of individuals, is solely responsible for a rating or a report. The rating does not address the risk of loss due to risks other than credit risk, unless such risk is specifically mentioned. Fitch is not engaged in the offer or sale of any security. All Fitch reports have shared authorship. Individuals identified in a Fitch report were involved in, but are not solely responsible for, the opinions stated therein. The individuals are named for contact purposes only. A report providing a Fitch rating is neither a prospectus nor a substitute for the information assembled, verified and presented to investors by the issuer and its agents in connection with the sale of the securities. Ratings may be changed or withdrawn at any time for any reason in the sole discretion of Fitch. Fitch does not provide investment advice of any sort. Ratings are not a recommendation to buy, sell, or hold any security. Ratings do not comment on the adequacy of market price, the suitability of any security for a particular investor, or the tax-exempt nature or taxability of payments made in respect to any security. Fitch receives fees from issuers, insurers, guarantors, other obligors, and underwriters for rating securities. Such fees generally vary from US$1,000 to US$750,000 (or the applicable currency equivalent) per issue. In certain cases, Fitch will rate all or a number of issues issued by a particular issuer, or insured or guaranteed by a particular insurer or guarantor, for a single annual fee. Such fees are expected to vary from US$10,000 to US$1,500,000 (or the applicable currency equivalent). The assignment, publication, or dissemination of a rating by Fitch shall not constitute a consent by Fitch to use its name as an expert in connection with any registration statement filed under the United States securities laws, the Financial Services and Markets Act of 2000 of the United Kingdom, or the securities laws of any particular jurisdiction. Due to the relative efficiency of electronic publishing and distribution, Fitch research may be available to electronic subscribers up to three days earlier than to print subscribers.
For Australia, New Zealand, Taiwan and South Korea only: Fitch Australia Pty Ltd holds an Australian financial services license (AFS license no. 337123) which authorizes it to provide credit ratings to wholesale clients only. Credit ratings information published by Fitch is not intended to be used by persons who are retail clients within the meaning of the Corporations Act 2001