OREANDA-NEWS. Fitch Ratings assigns an 'A+' rating to the following bonds issued by the city of Corpus Christi, TX (the city):

--Approximately $84.7 million utility system junior lien revenue refunding bonds, series 2016.

Bond proceeds will refund outstanding bonds for present value savings. The bonds are scheduled to sell via negotiation the week of July 25.

In addition, Fitch affirms the rating on the following bonds:

--$269.6 million in outstanding utility system revenue bonds (priority lien) at 'AA-';

--$587.8 million in outstanding junior lien utility system revenue bonds at 'A+'.

The Rating Outlook is Stable.

SECURITY

The junior lien bonds are payable from net revenues of the city's combined waterworks, wastewater and gas system (the utility) after payment of operating and maintenance (O&M) expenses and the priority lien bonds. The city has legally closed the priority lien. The bonds will not have a debt service reserve fund although the junior lien ordinance has a springing reserve requirement.

KEY RATING DRIVERS

ADEQUATE FINANCIAL PROFILE: Fiscal 2015 finished with all-in debt service coverage (DSC) at 1.5x and days cash at 332 versus Fitch's 'A' medians of 1.7x and 221, respectively. Both DSC and liquidity exhibit some volatility although each, on average, typically hovers near the equivalent rating category medians.

HIGH AND INCREASING DEBT BURDEN: The city's water supply investments have resulted in a high debt burden. Debt-per-customer finished at a high $4,718 in fiscal 2015 and is expected to climb as the city intends to fund much of its capital improvement plan (CIP) with revenue debt.

LIMITED RATE FLEXIBILITY: Additional rate increases will be needed to cover future debt service requirements. However, at 2.4% of median household income (MHI), current rates are already considered to be elevated.

STRONG WATER SUPPLY INVESTMENTS: The city has proactively secured long-term water supplies from multiple surface water sources as part of its long-range water supply planning over multiple decades.

HEALTHY ECONOMY: Situated on the Gulf Coast, Corpus Christi is the eighth largest city in Texas and serves as the regional economic hub for a 12-county area. Prominent industries include petrochemical companies, refineries, associated oil/gas support services, and shipping/port activity. The city's unemployment rate has ticked up over the last year but remains below the national average.

RATING SENSITIVITIES

SIGNIFICANT CAPITAL: Regulatory mandates to address sanitary sewer overflows (SSOs) are still being negotiated between Corpus Christi and the U. S. Department of Justice but could be significant. Depending on the magnitude of additional capital needs and timing of the costs, including costs related to additional water supplies, downward rating action could occur.

WEAKER FINANCIAL RESULTS: The weakening of all-in DSC or material changes to liquidity levels below the city's minimum target could result in negative rating pressure.

CREDIT PROFILE

The system is a combined water, sewer and gas system. The water, wastewater and gas systems accounted for 55%, 31% and 14% of operating revenues, respectively, in fiscal 2015.

The city's water system serves not only the city of Corpus Christi, but also provides water to several municipalities, water districts, and industries within a 70-mile radius of the city. The retail customer base exhibits some concentration, with the top 10 water customers accounting for 17% of combined utility operating revenues in fiscal 2015. The top 10 customers include four wholesale providers and six industrial customers focused in the oil and gas sector. The gas system's revenues fluctuate annually based on changes in natural gas commodity prices but the similarly variable commodity costs are recovered in a monthly pass-through in rates.

HIGH DEBT BURDEN AND POTENTIALLY LARGE FUTURE CAPITAL COSTS

Regulatory requirements expected for the wastewater system will likely result in additional debt but uncertainty exists regarding the exact requirements. The utility had a total debt load of approximately $1.1 billion at fiscal year-end 2015. In addition to the utility revenue bonds, the system's debt obligations included an $86 million liability related to an unconditional Lavaca-Navidad River Authority water-rights contract (payable as an O&M expense) and $52 million of U. S. Bureau of Reclamation debt (also for water rights) which is subordinate to the junior lien obligations.

Related debt ratios are above average, with fiscal year-end 2015 debt per customer levels at over $4,700 projecting to rise to around $5,000 over the next five years. In comparison, Fitch's median for 'A' category water and sewer utilities is $2,350. The utility's high debt load and future planned debt financing of approximately 85%-90% of the city's capital plan continue to be a credit risk.

The utility's three-year CIP totals around $428 million - somewhat higher than what was shown in the city's previous CIP. Most projects relate to pipeline expansion and other general system improvements. Additionally, the city continues to be engaged in negotiations with the Department of Justice regarding violations of the Clean Water Act regarding SSOs. Management expects a resolution soon that will provide clarity regarding the scope and timeline of required improvements.

While the current capital plan includes some projects that will likely be required, the capital plan will likely expand once the full extent of the regulatory requirements are settled. Escalation in capital needs that result in continued increases in debt levels for the foreseeable future would be viewed negatively and could ultimately result in negative rating action.

ADEQUATE FINANCIAL MARGINS

All-in DSC, inclusive of the Bureau of Reclamation contract payment, has ranged from 1.5x to 1.9x over the past several years. These levels are in line with Fitch's 'A' median of 1.7x. The city's senior lien, which is now closed, finished fiscal 2015 at a healthy 2.8x.

In future years, the city projects all-in DSC to decrease to a below-average yet adequate 1.3x as junior lien debt service increases significantly over the next several years to fund the city's CIP. While DSC levels are forecast to decline, actual results have historically exceeded projections. Thus, the rating reflects Fitch's expectation that coverage margins will likely outperform the forecast. Consistent performance at materially lower coverage levels would likely put pressure on the ratings.

Liquidity levels have fluctuated between 127 and 332 days cash over the past five years which, on average, aligns with Fitch's 'A' category median. Future liquidity levels beyond 2016 are expected to be in range of the city's minimum policy of 90 days of operations, with excess cash amounts transferred to the city's capital fund to help finance the city's capital plan.

LIMITED RATE FLEXIBILITY A CONCERN; ADDITIONAL INCREASES NEEDED

Conservation efforts effective over the prior two years have resulted in somewhat lower sales, requiring rate increases to offset some of the lost revenue. The increases were also necessary to fund the utility's debt service related to its capital plan. As a result, at 2.4% of MHI, combined water and sewer rates are high. Future increases will also likely be necessary to continue to fund the utility's debt-heavy capital plan, which will put increasing pressure on the customer base.

STRONG WATER SUPPLY INVESTMENT

The city has made long-term water supply planning and acquisition a priority for decades. As a result, the city continues to expand its available water supply with completion of the Mary Rhodes II pipeline in August 2016. With completion of this project, the city will have a firm supply of 240,000 acre-feet (af), as compared to average system demand of 118,000 af for treated and untreated water. The city's treated water supply is processed at one water treatment plant with 162 million gallons per day (MGD) capacity, well above the average flow in 2015 of 57.9 MGD.