Fitch Rates $34MM San Antonio Water System Junior Lien Revenue Bonds 'A+'.

Business Editors

AUSTIN--(BUSINESS WIRE)--April 29, 2003

Fitch has assigned its 'A+' rating to the $34,000,000 San Antonio Water System (SAWS) junior lien revenue bonds, series 2003. Additionally, the 'AA-' rating on the system's $739,665,000 senior lien, 'A+' rating on the $157,480,000 junior lien bonds, and 'A' rating on the $122,500,000 subordinate lien bonds outstanding is affirmed. It is expected the bonds will be privately placed with the Texas Water Development Board on April 30. Repayment security is provided by a lien and pledge of net revenues of the system remaining after the payment of certain senior lien obligations outstanding. Proceeds of the bonds will finance system capital improvements.

The 'A' rating reflects the financial strength of system operations, sound debt service coverage, and lower priority position in the system's flow of funds. Also considered in the rating is the system's significant capital plan and projected rate increases required to fund the plan. A separate water supply fee has been in place for three years, providing a dedicated funding source for securing additional water resources. However, both water and wastewater rates are expected to increase to fund operational and capital needs stemming from service growth, as well as repair and replacement items. Additionally, successful water conservation efforts are also a factor in the need for rate hikes to offset reduced consumption. Staff has effectively managed expenditures and the capital plan, reducing the previously anticipated level of rate increases. With the steady economic expansion and customer growth, along with favorable financial performance, the Rating Outlook for this credit is Stable.

SAWS is the predominant service provider in Bexar County, serving 306,000 water and 346,000 wastewater retail and wholesale customers. The waterworks system extends about 626 square miles and approximately 91% of customers are residential. The wastewater treatment boundaries cover about 654 square miles and provide service to about 1.1 million people. Given the population projections for San Antonio anticipating a doubling by the year 2050, plus the reliance on groundwater from the Edwards Aquifer, the system's challenge has been to develop supplemental water resources. Compounding the situation has been the mandated limitation on pumping from the Edwards Aquifer. In response, the public and governmental bodies crafted a water resource plan to acquire additional supplies and the San Antonio city council adopted a dedicated water supply fee to fund the requirements associated with the plan.

The capital plan is significant, calling for nearly $1.3 billion over five years and $179 million in fiscal 2003. Water resource projects alone comprise $646 million of the five year plan, with water and wastewater projects requiring $221 million and $401 million, respectively. In the multiyear financing plan, incorporating the planned rate increases results in sound debt service coverage on all bonds annually and allows for 15-18% of the capital plan to be funded on a pay-as-you-go basis. The two months of operating expenditures reserve requirement provides additional comfort, allowing sufficient liquidity to be available to meet unforeseen expenses and/or revenue shortfalls.