DALLAS - Fitch Ratings has downgraded the water and sewer debt of Corpus Christi, Tex., from AA-minus to A-plus based on declining debt service coverage on rising debt loads.

The downgrade comes as the coastal city prepares to issue $96 million of utility system revenue bonds as part of its three-year, $269 million capital improvement program that runs through 2013.

Standard & Poor's has not yet rated the upcoming issue but in September raised the city's general obligation debt rating to AA-minus from A-plus. The new rating was also applied to Corpus Christi's tax and revenue-backed certificates of obligation for the water and sewer system.

Moody's Investors Service rated the 2008 certificates of obligation A1 but has not yet reported its rating on the upcoming issue.

Corpus Christi has $357 million of debt on parity with the upcoming issue that is secured by revenues to the city's combined utility system.

Although the city of 300,000 people enjoys a relatively stable and growing economy, debt service ratios have declined from revenues of 4 times debt service in 2000 to 1.45 times last year, Fitch notes.

"Given the scope of borrowings planned, coverage is projected to fall further and dip to 1.25x by fiscal 2009," analysts wrote. "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."

Complicating the issue is the city's already higher-than-average utility rates, Fitch said. A new storm water fee by the city council, scheduled this summer, will reduce current water rates by 25%, although no net impact is anticipated on customers' total utility bills, analysts said.

"Currently, the city expects rate hikes averaging almost 6% through fiscal 2013, followed by additional annual adjustments of 4% through fiscal 2018," Fitch analysts observed. "Because existing residential charges are approaching 2% of median household income, rate hikes beyond those already forecast may substantially burden system customers."

Corpus Christi's combined utility system consists of consolidated gas, water, storm water and wastewater operations. In addition to city residents, the water system serves several municipalities, water districts, and industries within a 70-mile radius of the city.

The utility's $269 million capital improvement program is expected to be almost entirely debt financed. Projected costs have eased recently after rising sharply from an estimated $188 million five years ago.

"Future CIP totals are expected to moderate as the utility completes certain major projects," analysts wrote. "Given the tightening financial margins of the utility, continued reductions in CIP costs and projected debt issuances would be viewed favorably by Fitch."

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