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 October 16, 2015 - 2:26 PM EDT
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Fitch Rates San Antonio, TX's Electric & Gas System Revenue Bonds 'AA+'; Outlook Stable

Fitch Ratings has assigned an 'AA+' rating to the following revenue bonds issued by the city of San Antonio, TX:

--Approximately $235 million electric and gas systems revenue bonds, new series 2015;

--Approximately $100 million electric and gas systems variable rate junior lien revenue bonds, series 2015C;

--Approximately $100 million electric and gas systems variable rate junior lien revenue bonds, series 2015D.

Bond proceeds will be used to fund a portion of San Antonio City Public Service Energy's (CPS Energy) capital plan and pay costs of issuance. Bonds are expected to price the week of Nov. 2, 2015 via negotiated sale.

In addition, Fitch affirms the following outstanding San Antonio electric and gas system revenue bond ratings:

--$3.39 billion senior lien obligations at 'AA+';

--$1.73 billion outstanding junior lien obligations at 'AA+';

--$47.8 million in outstanding junior lien 2012B term bonds at 'AA+/F1+';

--$360 million outstanding commercial paper (CP) notes at 'F1+' and a corresponding bank note rating of 'AA+' on each series of CP.

Fitch has withdrawn the 'AA+' rating on San Antonio's new series 2010 electric and gas system revenue bonds as the bonds were not sold.

The Rating Outlook is Stable.

SECURITY

Senior lien bonds are secured by net revenues of the combined electric and gas system, operating as CPS Energy. The junior lien bonds are secured by CPS Energy net revenues after the payment of debt service on the senior lien bonds. CP repayment is secured by a third lien on net revenues.

KEY RATING DRIVERS

COMBINED ELECTRIC AND GAS SYSTEM: CPS Energy provides retail electric and natural gas services to the city of San Antonio. The service area continues to enjoy modest but consistent growth.

STRONG FINANCIAL METRICS: Financial margins for bondholders were strong in fiscal 2015 with 2.47x Fitch-calculated debt service coverage of revenue bonds and 1.71x all-in coverage after the large transfer made annually to the city's general fund. Liquidity remained healthy with 206 days of operating cash.

COMPETITIVE RATES: Electric rates are low for the region. Both electric and gas rates have automatic adjustment mechanisms that management employs routinely to recover fuel costs.

DIVERSE, LONG GENERATION PORTFOLIO: CPS Energy enjoys a competitively priced generation portfolio and is in a long resource position, resulting in the need for some amount of wholesale activity to balance assets with demand. CPS Energy continues to add renewable purchase power agreements to achieve its self-elected renewable portfolio standard.

MODERATE CAPITAL DEMANDS: The utility's debt burden and equity position are average for the rating. Additional capital projects estimated at approximately $2.75 billion over the next five years are expected, although debt levels and rate increases should remain manageable.

RATING SENSITIVITIES

WEAKER FINANCIAL MARGINS: The Stable Outlook reflects San Antonio City Public Service's (CPS Energy's) consistently strong financial metrics. However, a sustained decline in financial margins as a result of increased operating costs and/or a reluctance to increase rates could result in rating pressure.

CREDIT PROFILE

CPS Energy provides exclusive electric service to over 760,000 primarily residential electric customers and to around 335,000 primarily residential gas customers. CPS Energy is the sole supplier of electricity in its service area and is not subject to retail competition introduced in Texas in 2000. Municipal utilities in the state have the option to offer retail competition in their services areas and CPS Energy has given no indication of its intent to do so.

The customer base is large and diverse, and San Antonio continues to attract new industry to the service area. CPS Energy owns sufficient generation totaling 6,355 MW to serve its own native load with a system all-time peak of 4,911 MW. Coal is still the predominant fuel type (42% of energy in 2015) but this is expected to decline in 2018 with the deactivation of its oldest coal plant in favor of greater natural gas-fired and renewable resources. Remaining coal-fired resources are compliant with existing environmental regulations. The planned closure of the older Deely coal plant should reduce CPS Energy's exposure to potentially stricter future regulations.

TERM BONDS

The 2015C, 2015D junior lien variable rate bonds are being issued in the term mode. Repayment of purchase price on the mandatory tender date at the end of the interest period is payable solely from remarketing proceeds. CPS Energy is not required and has no intent to purchase the bonds on the mandatory tender date. To the extent there is a failed remarketing on an mandatory tender date, the bonds are retained by the holders and CPS Energy pays a penalty rate to be determined at pricing. Bondholders are required to hold the bonds until maturity, although the penalty rate provides an incentive for CPS to refund the debt, as soon as possible.

STABLE RETAIL SERVICE AREA; INCREASING WHOLESALE ACTIVITY

Retail sales growth has averaged 1.8% over the past decade. CPS Energy management projects annual retail energy and gas sales growth to average around 1.5% and 0.9%, respectively as a result of extensive investments in energy efficiency programs and industry-wide technology changes that offset customer and load growth in the service area.

In addition to its retail customer base, CPS Energy sells energy under firm contracts to a number of regional cities and cooperatives under fixed-price contracts with termination dates ranging from 2016-2023. Short-term economic energy sales within the Electric Reliability Council of Texas (ERCOT) are also utilized.

Wholesale sales, including the firm contracts, increased to 33% of total sales in fiscal 2015, up from 13% in 2010, reflecting the long generation position of the utility. Fitch views the potential revenue fluctuation that may result from the short-term energy sales as a risk that CPS Energy should continue to adequately manage even though spot market prices in ERCOT have been soft in the past couple of years.

COMPETITIVE RATES; SOME RATE PRESSURE

Rates are competitive, and regular rate increases have occurred historically approximately every two years. CPS Energy rates must be approved by the San Antonio City Council. The last base rate increase occurred in February 2014 at 4.25% for both the electric and gas system, which was slightly below the amount requested by CPS Energy of 4.75%. Prior to 2014, the last rate increase had not occurred since 2010.

CPS Energy does not expect to need an additional base rate increase for either system in the next few years. While overall financial performance has been healthy, management's decision to forgo rate action may also reflect some rate sensitivity in the service area, despite the utility's comparatively low rates. Both electric and gas rates have automatic fuel adjustment factors that help recover variable fuel costs in a timely manner.

CONSISTENTLY STRONG FINANCIAL PERFORMANCE

CPS Energy's financial performance has remained strong for a number of years. With the rate increase implemented in fiscal 2015, Fitch-calculated annual debt service coverage improved to 2.47x on the senior and junior lien revenue bonds and to 1.71x with general fund transfers factored in. CPS Energy's consistent financial performance is supported by sound financial policies and rate setting that target minimum all-in debt service coverage of 1.5x. Although CPS Energy makes a large annual transfer to the city's general fund equal up to 14% of gross revenues, consistent financial margins for bondholders and competitive rates mitigate concerns about this practice.

Management's financial and rate model indicates continued strong financial margins without electric or gas system base rate increases over the next few years. Fuel adjustment rate clauses in the retail rates for both systems will continue to be adjusted to recover fluctuations in commodity prices.

Unrestricted cash of $895 million at the end of fiscal 2015 includes the general operating fund and the repair and replacement fund. CPS Energy deposits 6% of gross revenues annually into the repair and replacement fund. Liquidity is healthy at 206 days cash on hand.

Debt levels are above average at $7,550 debt per electric customer. Free cash flow is typically only around 50% of annual depreciation although improved to 79% in fiscal 2015. Reinvestment in the system, as well as new asset investment, has been funded primarily via debt, although CPS Energy forecasts a decreasing reliance on debt funding as a percentage of overall capital spending over the next decade. CPS Energy targets maintaining an acceptable debt to equity ratio below 65%.

Additional information is available at 'www.fitchratings.com'.

Applicable Criteria

Rating U.S. Public Finance Short-Term Debt (pub. 07 Jan 2015)

https://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=846969

Revenue-Supported Rating Criteria (pub. 16 Jun 2014)

https://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=750012

U.S. Public Power Rating Criteria (pub. 18 May 2015)

https://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=864007

Additional Disclosures

Dodd-Frank Rating Information Disclosure Form

https://www.fitchratings.com/creditdesk/press_releases/content/ridf_frame.cfm?pr_id=992457

Solicitation Status

https://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=992457

Endorsement Policy

https://www.fitchratings.com/jsp/creditdesk/PolicyRegulation.faces?context=2&detail=31

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. FITCH MAY HAVE PROVIDED ANOTHER PERMISSIBLE SERVICE TO THE RATED ENTITY OR ITS RELATED THIRD PARTIES. DETAILS OF THIS SERVICE FOR RATINGS FOR WHICH THE LEAD ANALYST IS BASED IN AN EU-REGISTERED ENTITY CAN BE FOUND ON THE ENTITY SUMMARY PAGE FOR THIS ISSUER ON THE FITCH WEBSITE.

Fitch Ratings
Primary Analyst
Kathy Masterson
Senior Director
+1-512-215-3730
Fitch Ratings, Inc.
111 Congress Avenue, Suite 2010
Austin, TX 78701
or
Secondary Analyst
Dennis Pidherny
Managing Director
+1-212-908-0738
or
Committee Chairperson
Christopher Hessenthaler
Senior Director
+1-212-908-0773
or
Media Relations:
Sandro Scenga, New York, +1 212-908-0278
Email: sandro.scenga@fitchratings.com


Source: Business Wire (October 16, 2015 - 2:26 PM EDT)

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