Fitch Rates San Antonio, Texas' Sr Lien Water Revs 'AA'& Jr Lien 'AA-'; Outlook Stable.

AUSTIN, Texas -- Fitch Ratings has assigned ratings to San Antonio, Texas' water system revenue bonds as follows:

--$36.1 million water system revenue bonds, series 2009A 'AA';

--$68.9 million water system revenue bonds, taxable series 2009B (direct subsidy Build America Bonds) 'AA';

--$54.3 million water system junior lien revenue and refunding bonds, series 2009 'AA-';

--$35 million water system junior lien revenue and refunding bonds, series 2009A 'AA-'.

Additionally, Fitch affirms its 'AA' rating on the city's approximately $1.3 billion water system revenue bonds outstanding and its 'AA-' rating on approximately $275 million water system junior lien revenue bonds outstanding. The Rating Outlook for all the bonds is Stable.

The senior lien bonds are scheduled to price the week of Nov. 16, 2009 via negotiated sale and the junior lien bonds will be privately placed with the Texas Water Development Board on Nov. 24, 2009.

Repayment security of the water system revenue bonds is provided by a senior lien and pledge of net revenues of San Antonio Water System's (SAWS) water and wastewater system. Also secured by the net revenues of the system, the junior lien bonds have a second priority position in the system's flow of funds. Proceeds of the bonds will be used to fund water and wastewater improvement projects, water supply projects, refund a portion of the system's outstanding commercial paper, and pay issuance costs.

The 'AA' rating on the senior lien bonds reflects the system's strong financial position; competitive rates, aided by lower than previously projected rate increases; significant cash funding for its capital plan; and steady economic expansion of its service area. Also considered in the rating is the system's sizable capital improvement plan (CIP) comprised of large and complex water supply projects requiring substantial development periods. The 'AA-' rating on the junior lien bonds reflects the lower priority position in the system's flow of funds.

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. Given the doubling of population projections for the San Antonio area by the year 2050 plus the reliance on groundwater from the Edwards Aquifer, the system's challenge continues to be to develop supplemental water resources.

Starting in 2002, the system 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, the city adopted a separate water supply fee in 2000. The fee generated $87.4 million or 23% of system operating revenues in 2008. Although the budget proposal for 2010 is not anticipated to include service rate increases, 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.

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. Historically, the system has generated actual debt service coverage on an all-in basis ranging from 1.7 times (x) to 2.3x over the last five years. 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, the system typically outperforms its projections and exceeds its target of 1.5x due to conservative assumptions.

Additional information is available at www.fitchratings.com.

ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: HTTP://FITCHRATINGS.COM/UNDERSTANDINGCREDITRATINGS. IN ADDITION, RATING DEFINITIONS AND THE TERMS OF USE OF SUCH RATINGS ARE AVAILABLE ON THE AGENCY'S PUBLIC WEBSITE 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.