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Fitch Ratings assigns an 'A+' rating to Corpus Christi, Texas'
AUSTIN, Texas - (Business Wire) Fitch Ratings assigns an 'A+' rating
to Corpus Christi, Texas' (the city) $96.2 million utility system
revenue improvement bonds, series 2009. The bonds are scheduled to
sell as early as the week of March 2. The bonds are secured by the net
revenues of the city's combined utility system (the utility). Fitch
also downgrades the city's outstanding parity debt, totaling $357.1
million, to 'A+' from 'AA-'. The Rating Outlook is Stable.

The downgrade reflects the city's downward trend in annual debt
service (ADS) coverage, high debt levels, above average rates, and
sizeable capital improvement plan (CIP), balanced against a stable and
growing economy and an ample water supply. Coverage has declined
steadily from a high 4.0 times (x) in fiscal 2000 to 1.45x in fiscal
2008, with additional declines projected over the next three years.
The relatively high cost of service to customers will continue to grow
as additional rate increases are projected to support the utility's
sizable CIP which will be almost entirely debt financed.

The city's combined utility system consists of consolidated gas,
water, storm water (a component of the water system), and wastewater
operations. In addition to city residents, the water system serves
several municipalities, water districts, and industries within a
70-mile radius of Corpus Christi. The customer base continues to
record modest annual growth. Storm water operations have been funded
by water fund revenues. The planned adoption of a new storm water fee
by the city council, scheduled for summer 2009, will reduce current
water rates by 25%, although no net impact is anticipated on
customers' total utility bill.

Water supply is derived from Lake Corpus Christi and Choke Canyon
reservoirs in the Nueces River Basin and a 101-mile pipeline from Lake
Texana, all of which contribute to a firm water supply yield that is
expected to meet requirements through 2050. The gas utility serves all
city residents and a few areas immediately outside the city limits,
while the service area for the wastewater system is primarily within
city limits.

Audited fiscal 2008 results indicate adequate ADS coverage at 1.45x
priority lien debt service, which is level with the fiscal 2007 margin
of 1.44x. ADS coverage has declined annually since fiscal 2000, when
coverage was a high 4.0x. Given the scope of borrowings planned,
coverage is projected to fall further and dip to 1.25x by fiscal 2009.
Fitch is concerned that, despite the city's conservative forecast
assumptions, rate increases beyond those already anticipated or a
reduction in capital spending may be necessary to maintain operations
at adequate levels. Currently, the city expects rate hikes averaging
almost 6% through fiscal 2013, followed by additional annual
adjustments of 4% through fiscal 2018. Because existing residential
charges are approaching 2% of median household income, rate hikes
beyond those already forecast may substantially burden system

The utility's sizable CIP and debt load continue to be a major credit
risk. Including this issuance, the utility will have $453 million in
priority lien bonds. In addition, more than $200 million of debt
incurred by other authorities to provide water supply and transmission
via the pipeline project is treated as a contractual operations and
maintenance (O&M) expense, receiving payment from gross revenues prior
to revenues being made available for system revenue bond debt service.
The utility system also has $66 million in subordinate obligations
outstanding through an agreement with the U.S. Department of the
Interior (Bureau of Reclamation) for the city's remaining share of the
Choke Canyon reservoir project.

As a result, debt ratios are high and are expected to continue to
rise. The utility's three-year CIP covering fiscal years 2009-2013
totals more than $269 million, which is anticipated to be almost
entirely debt financed. Projected CIP costs have stabilized after
rising notably in recent fiscal years, climbing from an estimated $188
million five fiscal years ago. Future CIP totals are expected to
moderate as the utility completes certain major projects. Given the
tightening financial margins of the utility, continued reductions in
CIP costs and projected debt issuances would be viewed favorably by

Fiscal 2008 unrestricted cash and investments in relation to operating
expenditures declined notably to only 51 days, down from the 190 days
in fiscal 2007. Due to market volatility in fiscal 2008, the city
resorted to using its own cash resources for capital projects. The
utility's liquidity will be restored to adequate levels upon
reimbursement of the utility's cash outlays with $75 million of the
current offering.

Corpus Christi is the eighth largest city in Texas, with a population
of about 300,000 in 2008 and a metropolitan population approaching
420,000. The area economy is relatively diverse and stable, and unlike
many large Texas cities, unemployment rates are not spiking during the
current recession. Major components of the economy include
petrochemical, tourism, health care, and agriculture.

Fitch's rating definitions and the terms of use of such ratings are
available on the agency's public site, 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.

Jose Acosta, Gabriela Quiroga, Cindy Stoller - cindy.stoller@fitchratings.com