OREANDA-NEWS. Fitch Ratings affirms the 'AA' rating on the following San Antonio, TX's (the city) drainage revenue bonds:

--\$67.8 million outstanding municipal drainage utility system revenue refunding bonds series 2013.

The Rating Outlook is Stable.

SECURITY

The bonds are secured by a first lien on gross revenues derived from operation and ownership of the municipal drainage system (the system), including interest income on accounts. Pledged revenues exclude drainage charges specifically provided by ordinance for contribution to the funding of future drainage system construction (fee in lieu of detention pond revenue).

KEY RATING DRIVERS

SOUND FINANCIAL METRICS: Financial metrics historically have been solid featuring strong debt service coverage and ample liquidity. Operating pressures are on the horizon as the city completes large capital projects that are financed by general obligation (GO) bonds, but maintained and operated with the pledged stormwater fees.

RATE FLEXIBILITY: The current stormwater fee is low, lending ample flexibility for future rate increases, as planned.

STABLE REVENUE STREAM: Stormwater fees are collected as part of the water and sewer bill and collections are stable, with limited delinquencies given that non-payment would result in discontinued water service. A change in rate structure may pose some challenges upon inception but should remain stable over the long term.

MANAGEABLE CAPITAL NEEDS: Capital projects currently expected to be funded from stormwater fee revenues are limited. However, operating pressures may ensue as drainage projects which are supported by the system are placed in operation.

STRONG AND DIVERSE SERVICE AREA: The trend of San Antonio's overall economic activity and diversification has been resilient, with the softening in residential building activity partially offset by steady commercial and military construction.

RATING SENSITIVITIES

DETERIORATION OF FINANCIAL METRICS: Material declines in debt service coverage and liquidity given ensuing pressures from operating large capital projects could apply downward pressure to the rating.

CREDIT PROFILE

San Antonio is the second largest city in the state and seventh largest in the U.S., with an estimated population of 1.4 million for 2015. The system was created in 1997 as a public utility to provide the city with a funding source to comply with federal Environmental Protection Agency storm water quality mandates.

HISTORICALLY STRONG FINANCIAL PERFORMANCE

Financial performance for the system has been good with net revenue coverage ranging from 1.8x to 2.4x over the past five fiscal years despite increased spending pressures from placement of large capital projects (financed with GO bonds) into operation. For fiscal 2014, net revenues provided strong 2x coverage on annual debt service (ADS), but liquidity declined due to ongoing capital demands on the system that have been met with system reserves absent rate increases. Liquidity declined to a still adequate three months in fiscal 2014 from six months in fiscal 2012. Management target's net debt service coverage between 1.25x and 1.3, but has consistently outperformed these levels. A significant deviation from historical coverage levels to this target would put pressure on the current 'AA' rating, although Fitch notes these coverage projections are based on conservative revenue and expenditure assumptions.

LARGE CAPITAL IMPROVEMENT PLAN SUPPORTED BY GO BONDS

The city is a partner in an interlocal agreement for a regional flood control program, along with Bexar County and the San Antonio River Authority (SARA), to provide regional management of a unified flood control, drainage, and stormwater quality program. Under these agreements, the county and SARA are responsible for funding regional capital projects with the city taking responsibility for operations and maintenance of these assets.

Local drainage projects have been funded with proceeds from the previously issued revenue bonds and with city GO bonds. The city's fiscal 2015 - 2020 capital improvement plan (CIP) identifies \$128 million in drainage projects to be funded primarily with GO bond proceeds and roughly \$3.7 million remaining unspent revenue bond proceeds from the series 2003 and 2005 bonds.

The city does not plan to further leverage the stormwater system revenues at this time. Instead, the city voters approved a total of \$128 million in drainage and flood control projects at the May 2012 election. This was a part of a larger GO bond authorization request for a total of \$596 million. To date, the city has issued \$73 million and plans to issue the remaining authorization over the next two years.

While funding for both local and regional drainage projects is expected to be derived from non-pledged revenue sources, the stormwater fee revenues are used to maintain and operate the capital projects. As projects are completed and placed in operation, operating costs are rising and beginning to pressure the system absent rate increases since 2007. However, Fitch expects the system's solid financial profile will continue given the ample rate flexibility and current plans to revise rates in fiscal 2016.

LOW RATES LEND FLEXIBILITY FOR FUTURE RATE HIKES

Through an interlocal contract, the San Antonio Water System (senior and second lien revenue bonds rated 'AA+'/'AA', Stable) bills and collects the stormwater fee on behalf of the city. Each property that receives water service and sewer bill also receives a stormwater bill. Partial or non-payment results in service disconnection leading to very strong collection rates. Residential customers pay either \$39 or \$51 annually for stormwater service, depending upon lot size.

Given this low annual charge, rate flexibility for future needs is a positive rating factor, although rates have remained unchanged since 2007 and management's proposed rate increase during the fiscal 2013 budget process was turned down due to city council's concerns about rate equity. The city embarked on a comprehensive rate study that proposes to change the rate structure to an impervious cover based fee instead of the current land use and parcel size basis in order to improve rate equity. Management will propose rates on this revised structure, during the fiscal 2016 budget process, with a target of about a ten percent increase in revenues to cover increasing cost of service.