OREANDA-NEWS. Fitch Ratings affirms the rating on the following Santa Fe, New Mexico's (the city) outstanding bonds:

--\\$93.2 million in outstanding water utility system/capital outlay gross receipts tax (GRT) revenue bonds at 'AAA'.

The Rating Outlook is Stable.

SECURITY

The bonds are secured by a pledge of net water utility system (the system) revenues and capital outlay GRT revenues. Pledged capital outlay GRT revenues consist of that portion of GRT distribution, which tax is imposed by city ordinance adopted on Nov. 10, 2004 at a rate of 0.25% of gross receipts, and any other GRT revenues received by the city and hereafter pledged to the payment of parity bonds.

KEY RATING DRIVERS

SOLID FINANCIAL METRICS: The system exhibits a solid financial profile, characterized by very good debt service coverage (DSC), strong liquidity, and excess cash flows more than sufficient to ensure ongoing renewal of assets. The system's financial profile and the rating are bolstered by a pledge of a dedicated capital outlay GRT.

DECLINING DEBT BURDEN: Leverage ratios, while very high, will begin to decrease over the next five years as capital needs ramp down with the recent completion of the city's largest capital project, the Buckman Diversion Project.

AMPLE WATER SUPPLY: The city has built out a renewable supply of water, which helps to secure the city's projected water needs for the next 40 years.

LIMITED RATE FLEXIBILITY: City council adopted its first multi-year rate package in fiscal 2008, which was completed in fiscal 2013. Water rates are high, but remain relatively affordable at 1.9% of median household income (MHI) on a combined basis with the wastewater rates.

SOUND ECONOMY: Economic stability is provided by the large state government presence, and unemployment rates remain below state and national averages. Wealth indices are also above the state average.

RATING SENSITIVITIES

DIMINISHED FINANCIAL CUSHION: Deterioration in DSC over the forecast period and/or erosion of system cash balances beyond projected levels would likely pressure the rating.

CREDIT PROFILE

The system currently provides water service to around 29,500 customers within the city and county. Wastewater services are also provided by the city, but these are maintained as separate funds. The wastewater system revenue bonds are rated 'AA' by Fitch. The wastewater system bonds are secured by a first lien on net revenues of the system but only carry a subordinate lien on non-dedicated GRT revenues.

GRT REVENUES ENHANCE FINANCIAL PROFILE

The voters of the city approved a 0.25% municipal capital outlay GRT, which became effective on Nov. 10, 2004. The tax is dedicated for system capital and supply projects and accounts for approximately 16% of total system revenues. Total pledged GRT collections declined by 9% and 5% in fiscal years 2009 and 2010, respectively, but subsequently posted annual gains through fiscal 2014.

The city's economic base and future collections of pledged tax revenues are directly affected by seasonal resort activities and tourism. But based on the strong performance during the economic recession, Fitch believes there are prospects for sound future collections. Nonetheless, GRT receipts could be affected by changes in state law related to the items or rate at which GRTs are assessed.

STRONG FINANCIAL PROFILE

Historical financial performance has been strong, producing annual DSC coverage on senior lien debt ranging from 2.3x to 3.5x between fiscal years 2010 and 2013. Including a \\$20 million loan payable to the city's general fund, all-in DSC ranged from 1.7x to 2.3x during the same time period. For fiscal 2014, senior lien DSC was 2.4x and 2.0x on an all-in basis, excluding a \\$6.7 million write-off of water losses from purchases made in prior years treated as a non-operating expense. Fitch has excluded this write-off from its DSC calculations because the entry is a non-cash accounting item. Including this non-operating expense, DSC was a relatively low 1.7x and 1.4x on a senior and all-in basis, respectively. The system eliminated the practice of purchasing prepaid water in fiscal 2014. However, another \\$5.2 million remain on the water system balance sheet as a prepaid asset, which Fitch expects will eventually be written off.

Unaudited results for fiscal year ended June 30, 2015 point to senior lien DSC at 2.1x and all-in DSC at 1.8x. The all-in DSC includes the final \\$3.5 million payment to the general fund. Additionally, (but not included in the DSC calculation) the system prepaid about \\$3 million in various loans payable to the New Mexico Finance Authority. The system's conservative fiscal 2016-2020 forecast shows projected DSC ranging from 2.1x to 2.3x and assumes no rate increases, very modest increase in water sales, and relatively flat GRT revenues from fiscal 2016 to 2020.

Liquidity is very strong at nearly 1,000 days operating cash as of fiscal 2014. Liquidity is expected to decline due to an entirely cash funded capital improvement plan (CIP). However, Fitch expects liquidity will remain above the category 'AAA' rating medians since free cash to depreciation is typically met at a minimum of 1x.

LIMITED RATE FLEXIBILITY

Individual water rates are high at 1.1% of MHI, but on a combined basis with wastewater charges, utility service is slightly more affordable at 1.9% of MHI. Although no additional water rate increases are planned for the next five years, the wastewater service rates are expected to rise, somewhat limiting overall rate flexibility.

ELEVATED DEBT TO DECLINE

Leverage ratios are high for the rating level with debt to net plant at 57% and debt per customer at \\$3,311 for fiscal 2014. The city's five-year CIP is a manageable \\$73 million. With the Buckman Diversion Project now complete, capital needs are ramping down, averaging about \\$14.5 million annually through fiscal 2020. Given that the city plans to predominantly cash fund its CIP, the system's debt ratios are projected to decline over the medium to long term, which should allow for financial margins to show further improvement over time.

SUFFICIENT LONG-TERM WATER SUPPLY

Water supplies are derived from the Santa Fe Canyon Reservoirs, eight shallow water city wells, and 13 deep water wells adjacent to the Rio Grande River (the Buckman wells). In an effort to reduce its dependency on groundwater, the city increased its reliance on sustainable surface water with the Buckman Diversion Project which diverts, conveys, and treats up to 6,930 acre-feet of water per year from the Rio Grande. With completion of the Buckman Diversion Project, the city is well positioned to meet the long-term water needs of the city over the next 40 years.

SOUND ECONOMIC FUNDAMENTALS

Santa Fe (estimated population at 70,000) serves as the county seat and state capital and is located in north central New Mexico. The local economy is anchored by the large state government presence. Other important sectors include tourism and recreation, retail trade, healthcare, and some industry. The commuter line between Santa Fe and Albuquerque enhances employment and tourism opportunities for the region. The city unemployment rate at 4.5% as of March 2015 is below county (4.9%), state (6%), and national (5.6%) levels for the month and income levels for city residents are about 5% below national averages but are an estimated 12% higher than those of the state.