OREANDA-NEWS. Fitch Ratings affirms its 'AA-' rating on the following city of Victoria, Texas (the city) bonds:

--$27.4 million utility system revenue refunding bonds, series 2007 and 2009;
--$31.5 million utility system revenue bonds, series 2008, 2010 and 2014.

The Rating Outlook is Stable.

SECURITY

The bonds are secured by a senior lien on net revenues of the system.

KEY RATING DRIVERS

COVERAGE DECLINES; LIQUIDITY STABLE: System actual annual debt service coverage continues a downward trend dropping slightly to 1.6x for fiscal 2015, but remains adequate for the rating level. Liquidity remains stable at over 300 days of cash on hand for the last four fiscal years.

MIXED DEBT PROFILE: System debt levels on a per customer basis compares favorably to the 'AA' rating category median, while debt to net plant and debt on a per capita basis are weaker compared to similarly rated credits. The existing debt profile benefits from rapid amortization with a significant portion of system debt paid off in 10 years. Additional debt is expected in 2021.

EXPANDED CAPACITY: The city is expanding its wastewater treatment capacity with the construction of a new plant, which will increase treatment capacity by almost 20% when it comes online in late summer 2016.

AMPLE WATER SUPPLY: The system has an ample water supply, and Victoria has aggressively pursued additional supplies in recent years to provide supply diversity.

STABLE SERVICE AREA ECONOMY: Victoria is a regional retail, commercial and industrial hub, and historically has exhibited a steady economic profile.

RATING SENSITIVITIES

MAINTENANCE OF FINANCIAL PROFILE: Failure of the city of Victoria's water and sewer system to maintain stable debt service coverage in light of planned additional debt issuance could apply downward pressure to the rating.

CREDIT PROFILE

The system provides retail service to more than 23,000 water and 21,000 sewer customer accounts within the city, with most customers residential in nature. The city's water is drawn from the Guadalupe River and system water supplies are estimated to be sufficient to meet city demand for 50 years. Water is treated at the city's 25.2 million gallons per day (mgd) water treatment plant. Wastewater flows are treated at one of two city-owned and operated wastewater treatment plants (WWTPs).

EXPANDING WASTEWATER TREATMENT CAPACITY
Construction of the city's new 4.4 mgd capacity WWTP is substantially complete and should come online in summer 2016. The new WWTP will increase total system capacity by 2 mgd and replace the system's smaller WWTP that was built in the 1950s. The new WWTP will also be capable of handling up to 35 mgd of peak flows. The current combined system capacity of 12 mgd is more than sufficient to treat the 5.9 mgd of flows the system has averaged since 2011. With the additional capacity, the system should be capable of handling customer flows through 2030. The utility system is in compliance with all state and federal regulations and has received a superior rating from the state's regulatory agency.

AMPLE WATER RIGHTS
The city is permitted to draw up to 20,000 acre feet (af) of water from the Guadalupe River, or about twice its annual pumpage. The water rights are junior in nature so the city has acquired an additional 7,000 af of senior Guadalupe River water rights in recent years to boost available supplies. The city also has about a four month supply of surface water and shallow alluvial ground water stored in off-channel reservoirs. For emergency purposes, the city maintains 10 wells that supply ground water from the Gulf Coast Aquifer.

STABLE FINANCIAL METRICS
Financial operations are sound, characterized by sound DSC levels and solid liquidity. Senior lien annual debt service coverage (DSC) for fiscal 2015 was 1.6x, falling slightly from the prior year's 1.7x, with an 18% increase in annual debt service (ADS) costs. Coverage since 2011 has on a slight downward trend pressured by growing ADS and declines in water consumption due to the Texas drought. The declining DSC is a concern, but the reduced DSC should be relatively temporary as debt costs remain elevated through fiscal 2020 and then decline rapidly thereafter. Credit concerns could arise if DSC continues to drop beyond these expectations. Fiscal year 2015 liquidity has remained stable at over 300 days of cash on hand since fiscal 2012.

RATE RAISING FLEXIBILITY REMAINS
Prior to the water and sewer rate increases of 2.7% and 4% in fiscal 2015, respectively, rates hadn't been adjusted since fiscal 2012. There are currently no additional rate increases planned through fiscal 2020. System rates include a substantial fixed charge component (over 50% to the combined bill) and volumetric rates, which are tiered to encourage conservation. Fitch views favorably the use of a large fixed charge component as it adds stability to the revenue stream. While the city has imposed regular rate increases to offset increasing operating costs and to fund capital projects, rates remain comparable to similarly sized cities in the state. Monthly residential user charges average $61.33 (7,500 gallons of usage) or 1.7% of median household income and under Fitch's affordability threshold of 2%.

DEBT PROFILE TO IMPROVE
Debt per customer of $1,823 is stronger than the 'AA' rating category median of $2,050, but debt to net plant of 64% is weaker than the 'AA' median of 47%. Debt levels have remained relatively constant over the last five fiscal years from periodic borrowings. Amortization is rapid as debt levels decline by more than 9% annually for the next five years, and 70% of principal amortizes over the next 10 years. This allows for future debt capacity to support the system's $25 million 2016-2021 capital improvement plan (CIP) which is anticipated to be at least partially (58%) debt financed.

INLAND PORT CITY WITH DIVERSE ECONOMY
Victoria (general obligation bonds rated 'AA' by Fitch) has an estimated population of about 66,000 and is located between Houston and Corpus Christi, 30 miles inland from the Gulf of Mexico. A barge canal connects the city to the Gulf Intracoastal Waterway, allowing access to ports on the Gulf and Atlantic coasts, as well as destinations on the Mississippi River. The city has emerged as a regional service and supply center for heavy industry, including petrochemical and plastics manufacturing. The development of the service and retail sectors has complemented the industrial base and added a measure of diversity and stability to the local economy. Additionally, the labor force of the city has shown continued growth over the past five years, and the local unemployment rate has consistently been below both state and national averages over the past several years.