OREANDA-NEWS. Fitch Ratings assigns an 'AA+' rating on the following Santa Fe, New Mexico (the city) water revenue bonds:

--Approximately $49.9 million water utility system refunding revenue bonds, series 2016.

The bonds are scheduled to sell via negotiation the week of May 9. Proceeds will be used to refund outstanding debt for debt service savings and to restructure debt under a new bond indenture.

The Rating Outlook is Stable.

SECURITY

The bonds are secured by a pledge of net water utility system (the system) revenues.

KEY RATING DRIVERS

SOLID FINANCIAL METRICS: The system has exhibited a solid financial profile that historically was bolstered by capital outlay gross receipts taxes (GRT) that contributed to strong debt service coverage (DSC) and robust liquidity that is enabling the city to cash defease almost one-half of the outstanding water enterprise debt. DSC is expected to remain robust with the reduced debt service requirements. Liquidity will decline, but is expected to remain strong and consistent with 'AA' category credits.

DECLINING DEBT BURDEN: Existing leverage ratios are very high. Despite the near term defeasance of outstanding obligations, debt per customer and debt per capita levels are consistent with 'AA' category credits. These are expected to decrease over time as capital needs ramp down with the recent completion of the city's largest capital project, the Buckman Diversion Project, and plans to fully fund capital projects on a pay-go basis.

AMPLE WATER SUPPLY: The city has built out a renewable supply of water, which helps to secure the city's projected water needs for the next 40 years.

REDUCED RATE FLEXIBILITY: City council adopted its first multi-year rate package in fiscal 2008, which was completed in fiscal 2013. Water rates are high, but remain relatively affordable at 1.9% of median household income (MHI) on a combined basis with the wastewater rates.

SOUND ECONOMY: Economic stability is provided by the large state government presence, and unemployment rates remain below state and national averages. Wealth indices are also above the state average.

RATING SENSITIVITIES

CONTINUED STRONG CREDIT FUNDAMENTALS: The rating is sensitive to shifts in various credit fundamentals. The Stable Outlook is based on Fitch's expectation that the water system's positive financial, leverage and operational trends and stable economy are likely to continue. Positive credit development could occur over time with demonstrated incremental improvement in financial results coupled with limited capital pressures.

CREDIT PROFILE

The system currently provides water service to around 29,500 customers within the city and county. Wastewater services are also provided by the city, but these are maintained as separate funds. The wastewater system revenue bonds are rated 'AA'/Stable Outlook by Fitch. The wastewater system bonds are secured by a first lien on net revenues of the system and carry a subordinate lien on non-dedicated GRT revenues.

STRONG FINANCIAL PROFILE

Historical financial performance was enhanced materially by a dedicated capital outlay gross revenue tax that has been collected since 2005. Over the last five fiscal years, the tax generated an average of 16% of the water utility enterprise total revenue, producing annual DSC coverage on senior lien debt ranging from 1.7x to 2.3x between fiscal years 2010 and 2015 on an all-in basis excluding asset write-offs. Similar results are expected for fiscal 2016.

The current refunding and financial plan beyond fiscal 2016 will effectively rescind the dedicated GRT tax that is pledged to existing bondholders. However, the plan also calls for the defeasance of approximately $48 million in outstanding debt with available unrestricted cash. The current refunding and defeasance of existing debt are expected to result in all-in debt service coverage that will range from 3.6x to 4x from fiscal 2017 to 2020. The revised forecast assumes no rate increases, very modest increase in water sales, and no GRT revenues from fiscal 2017 to 2020.

Liquidity is very strong at nearly 1,250 days operating cash as of the end of fiscal 2015. However, reserve balances are expected to decline significantly due to the debt defeasance and an entirely cash funded capital improvement plan (CIP). Nevertheless, Fitch expects liquidity will remain at the category 'AA' rating medians throughout the forecast period.

REDUCED RATE FLEXIBILITY

Individual water rates are high at 1.1% of MHI, but on a combined basis with wastewater charges, utility service is slightly more affordable at 1.9% of MHI. Although no additional water rate increases are planned for the next five years, the wastewater service rates are expected to rise in the near term, limiting overall rate flexibility.

ELEVATED DEBT TO DECLINE

Existing leverage ratios are very high at $3,125 per customer and $1,509 per capita for fiscal 2015. However, with the cash defeasance of the series 2006D bonds effective on June 1, 2016, and the current refunding plan inclusive of another $17 million cash contribution, system debt will effectively be cut in half. The projected per customer and per capita debt levels for fiscal 2017 are expected at $1,459 and $696, respectively. These debt levels are consistent with similarly rated credits. Moreover, the city's five-year CIP is a manageable $75 million. With the Buckman Diversion Project now complete, capital needs are ramping down, averaging about $14.5 million annually through fiscal 2020. Given that the city plans to entirely cash fund its CIP, the system's debt ratios are projected to decline over the fiscal 2020 CIP period.

SUFFICIENT LONG-TERM WATER SUPPLY

Water supplies are derived from the Santa Fe Canyon Reservoirs, eight shallow water city wells, and 13 deep water wells adjacent to the Rio Grande River (the Buckman wells). In an effort to reduce its dependency on groundwater, the city increased its reliance on sustainable surface water with the Buckman Diversion Project which diverts, conveys, and treats up to 6,930 acre-feet of water per year from the Rio Grande. With completion of the Buckman Diversion Project, the city is well positioned to meet the long-term water needs of the city over the next 40 years.

SOUND ECONOMIC FUNDAMENTALS

Santa Fe (estimated population at 70,000) serves as the county seat and state capital and is located in north central New Mexico. The local economy is anchored by the large state government presence. Other important sectors include tourism and recreation, retail trade, healthcare, and some industry. The commuter line between Santa Fe and Albuquerque enhances employment and tourism opportunities for the region. The city unemployment rate at 5% as of February 2016 is below the state (6.3%), and national (5.2%) levels for the month and income levels for city residents are about 5% below national averages but are an estimated 12% higher than those of the state.