OREANDA-NEWS. Fitch Ratings assigns an 'A+' rating to the following Corpus Christi, Texas (the city) revenue bonds:

--Approximately \$92.5 million utility system junior lien revenue improvement bonds series 2015A; and
--Approximately \$48.1 million variable rate utility system junior lien revenue improvement bonds series 2015B (term mode).

The bonds are scheduled to sell via negotiated sale the week of March 16. Bond proceeds will be used to finance the construction, improvement, expansion, and repair of the city's combined utility system and pay costs of issuance.

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

--\$343.3 million in outstanding utility system revenue bonds (priority lien) at 'AA-';
--\$306.3 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 the priority lien bonds. Concurrent with this issuance, the city has legally closed the priority lien. The series 2015 bonds will not have a debt service reserve fund.

Series 2015B bonds are being issued in the term mode. Principal and interest payments are secured by a junior lien on utility net revenues but payment of the tender purchase price is payable only from remarketing proceeds.

KEY RATING DRIVERS

ADEQUATE FINANCIAL PROFILE: Debt service coverage (DSC) and liquidity metrics currently are average and consistent with the rating level but liquidity levels are low. The one-notch distinction on the junior lien revenue bonds reflects a position subordinate to the priority lien bonds in the flow of funds.

LIMITED RATE FLEXIBILITY: Additional rate increases will be needed to cover current and future debt service requirements. The city's decision to reduce the 2015 proposed rate increase indicates that rate flexibility may be limited.

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.

HIGH AND INCREASING DEBT BURDEN: The city's water supply investments have resulted in a high debt burden. The projected use of 100% debt financing to fund capital will further increase leverage. Regulatory requirements expected for the wastewater system will likely result in additional debt but uncertainty exists regarding the exact requirements.

ECONOMY EXPANDING: Much of the current commercial/industrial development underway or planned revolves around the large petrochemical industries, refineries, associated oil/gas support industries, and shipping/port activity that have traditionally anchored the Corpus Christi economy.

RATING SENSITIVITIES

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

WEAKER FINANCIAL RESULTS: The weakening of all-in debt service coverage or material changes to liquidity levels below the minimum target could result in negative rating pressure.

CREDIT PROFILE
The system is a combined water, sewer and gas system. The gas, water and wastewater systems accounted for 19%, 53%, and 28% of operating revenues in fiscal 2013. The gas system's revenues can fluctuate based on changes in natural gas commodity prices but the commodity costs are recovered in a monthly pass through in rates.

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. Wholesale activity accounted for 11% of water sales in fiscal 2013. Much of the wholesale activity consists of raw water sales to the San Patricio Municipal Water District (water revenue bonds rated 'A+'/Stable Outlook by Fitch).

The retail customer base exhibits concentration with the top ten water customers accounting for 14% of combined utility operating revenues in fiscal 2013. The top ten customers are primarily industrial customers in the oil and gas sector.

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 a pipeline construction expected to be completed in 2015 that will deliver water originally identified and later purchased by city planning efforts initiated in 1990. As a result of the aforementioned purchases and expected completion of the Mary Rhodes II pipeline in July 2015, the city will have a firm supply of 240,000 acre-feet (af), as compared to average system demand of 115,000 af for treated and untreated water. The city's treated water supply is processed at one water treatment plant with 161 mgd capacity and average flow in 2014 of 74.6 MGD.

HIGH DEBT BURDEN AND POTENTIALLY LARGE FUTURE CAPITAL COSTS

The utility's debt load and future planned debt financing of close to 100% of the capital plan continue to be a credit risk. The utility will have a total debt load of \$904 million in direct debt after issuance of the 2015A&B bonds and the anticipated \$115 million in series 2015C bonds (new money). In addition, \$89 million of the debt component of the unconditional LNRA contract is paid as a contractual operations and maintenance (O&M) expense of the system. Another \$75 million of NRA and LNRA bonds are paid by the city and \$55 million of U.S. Bureau of Reclamation debt is inferior lien debt payable after priority and junior lien obligations. Debt ratios are above average, with debt per customer at over \$3,577 and are expected to increase over the next five years to over \$5,000. Fitch's median for 'A' category water and sewer utilities is \$2,218.

The utility's three-year CIP totals around \$400 million. The utility plans to debt finance all of its capital projects but will offset the borrowing with excess cash flow. The city continues to be engaged in negotiations with the Department of Justice regarding violations of the Clean Water Act at its wastewater treatment plants. Management expects a resolution in 2015 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.

ADEQUATE FINANCIAL MARGINS; LOW LIQUIDITY

Fitch calculated all-in DSC declined to 1.3x in fiscal 2013 from 1.9x the previous year, as expected with increased debt service. Fitch's all-in DSC calculation includes the Lavaca-Navidad River Authority (LNRA) contract payment as an operating expense and the LNRA and Nueces River Authority (NRA) bonds as well as the Bureau of Reclamation contract payment as debt service. Fiscal 2013 priority lien DSC was strong at 2.5x and should continue to improve with the closure of the lien. These coverage calculations are prior to transfers to the city's general fund that are modest at 3%.

Liquidity levels have fluctuated between 73 and 296 days of cash over the past five years, which is low for the ratings, as compared to Fitch's water and sewer median for the 'A' category of 366 days cash on hand. Unrestricted cash had been accumulated in fiscals 2012 and 2013 reaching a high of \$89.5 million in fiscal 2013, or 296 days cash on hand. In fiscal 2014, cash balances were spent down on construction of the Mary Rhodes II pipeline although reimbursement of those funds will occur with this bond issuance. Future liquidity levels in fiscal 2015 and beyond 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 reduce 100% debt funding of the capital plan.

Unaudited results for fiscal 2014 are in the same range as fiscal 2013 although comparisons of some metrics are difficult given the 14-month period covered in fiscal 2014 (the city changed its year-end to Sept. 30 from July 31). In future years, all-in DSC is projected to remain adequate at around 1.2x, even as junior lien debt service is expected to increase significantly to \$47 million in fiscal 2016 from \$15 million in fiscal 2013. 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.

LIMITED RATE FLEXIBILITY A CONCERN; ADDITIONAL INCREASES NEEDED

The city's retail water sales declined in the past two years with successful conservation efforts. However, as with other water and sewer utilities, most costs are fixed. To recover lower revenues and to fund planned capital investments in furtherance of the city's long-range water supply plan, a series of rate increases have been enacted.

Water and sewer rates are currently at 2% of median household income, with additional increases planned to support expected future debt as well. The 2015 rate increase for water was reduced by City Council after concerns were raised in the community. The planned rate increases in the financial forecast could encounter pressure from the customer base.