TEXT-Fitch rates El Paso, Texas water, sewer revs 'AA+'
Nov 15 - Fitch Ratings has assigned an 'AA+' rating to the following City of El Paso, Texas (the city) water and sewer revenue bonds: --Approximately $87.4 million water and sewer revenue refunding and improvement bonds, series 2012A. The bonds are expected to price via negotiation the week of Nov. 26, 2012. Proceeds will be used for capital improvements, to refund certain outstanding obligations, and pay costs of issuance. In addition, Fitch affirms approximately $414 million in outstanding water and sewer parity revenue bonds at 'AA+'. The Rating Outlook is revised to Stable from Negative. SECURITY The bonds are secured by a senior lien pledge on the net revenues of the water and sewer system (the system). KEY RATING DRIVERS IMPROVED FINANCIAL METRICS: The revision of the Outlook to Stable from Negative reflects an improved trend of debt service coverage consistent with the city's financial policy and in line with the 'AA+' rating level. Moreover, a recent rate increase and planned rate hikes in the system's five-year forecast depict management's commitment to maintain strong coverage levels. AMPLE RATE FLEXIBILITY: User rates and charges remain competitive and affordable providing flexibility to further raise rates to maintain strong debt service coverage. STEADY LIQUIDITY IMPROVEMENT: Liquidity levels have shown improvement over the last five fiscal years while remaining below average at nearly two-thirds that of the 'AA+' rating level. This credit concern is offset by the city's flexibility to delay largely cash-funded capital projects or finance them with debt. DECLINING DEBT LEVELS: Debt levels are moderate with rapid amortization. Capital needs are manageable and are predominantly funded with cash reserves. STRONG FINANCIAL and RESOURCE PLANNING: Management has demonstrated extensive financial, capital, and water resource planning. CREDIT PROFILE IMPROVED COVERAGE SUSTAINED AFTER VOLATILITY The system has typically maintained sound debt service coverage of 1.9x or better from fiscal years 2002 to 2006. Wet-weather conditions in fiscal years 2007 and 2008 affected sales and reduced annual debt service (ADS) coverage to 1.7x each of those years. Rate hikes in fiscal 2008 (4%) and fiscal 2009 (7%) coupled with drier weather patterns enabled the system to generate debt service coverage closer to historical results. However, fiscal 2010 debt service coverage declined to 1.6x due to rising debt service costs and lack of corresponding rate adjustments. Annual debt service (ADS) coverage rebounded to 2.0x in both fiscal years 2011 and 2012 due to increased water sales (resulting from dry weather) combined with operating expenditure savings. Management currently projects that debt service coverage for fiscal 2013 will remain at the same level. The system's five-year financial forecast provided by management, and which appears reasonable, projects ADS coverage to range from 2.1x to 2.3x in fiscal years 2014-2018, in line with the city's financial policy. Maintenance of coverage consistent with the city's 2.0x coverage policy target and commensurate at the 'AA+' rating level is a key credit consideration. RATE INCREASE APPROVED The governing body approved a modest 3% rate increase on both water and sewer rates effective March 1, 2012. This rate hike was adopted earlier than previously planned as management recognized the need to boost revenues. Moreover, another two rate hikes are planned for fiscal 2014 (5%) and 2015 (6%) to preserve its strong financial profile and ability to continue funding roughly 60% of its capital plan with cash reserves. Fitch believes these rate increases will provide needed revenues to preserve financial performance and Fitch will continue to monitor future coverage levels. Positively, the average monthly residential bill is only 1.3% of the local median household income (MHI); well below Fitch's affordability threshold of 2% of MHI, indicating rates are flexible and could be raised to generate future revenue, if necessary. MODEST, BUT STEADY IMPROVEMENT IN LIQUIDITY LEVELS In addition to rising debt costs, cash reserves have been used for capital funding efforts, thereby limiting liquidity levels. Overall, system days cash on hand and days of working capital totaled 201 days and 215 days, respectively, for fiscal 2012. Although these levels have improved over the last five fiscal years, they remain below average for the 'AA+' rating level. However, credit concerns regarding below-average liquidity is somewhat offset by the significant amount of ongoing pay-go funding built into the capital improvement program (CIP), which at 63% is above average for the rating level. Diversion of reserves from the capital plan in any given year, should the need arise, would more than double the system's cash balance. Nevertheless, maintenance of adequate liquidity is also a credit consideration for maintenance of the rating. MANAGEABLE CAPITAL PLAN The system's current CIP for fiscal years 2014-2018 totals a manageable $433 million. The planned CIP is comprised primarily of repair and rehabilitation projects and provides ample flexibility to defer projects, if necessary. The system's moderate debt per customer level is comparable to other utilities in the rating category and its rapid pace of principal amortization is favorable. Extensive financial, capital and water resource planning has enabled the city to secure an ample and diverse water supply despite its arid climate while maintaining adequate financial flexibility and a very competitive rate structure. Major projects completed in recent years include a water reuse system for irrigation and a desalination plant to treat brackish water from the Hueco Bolson aquifer. The system has no current or pending regulatory compliance issues. ECONOMIC BACKGROUND The system's service area consists of the city (GO bonds rated 'AA' by Fitch), with a current population estimated at around 665,600, plus several outlying residential areas. While income levels are below those of the state and U.S., the system has managed to keep the cost of service low despite expansion projects that led to increased capital expenditures in recent years. Area unemployment for September 2012 is reported at 8.7%, above the state (6.3%) and national (7.6%) averages. The area's economy is based on international trade and manufacturing, copper mining, and ore smelting. Stability is also provided by the large military presence (Fort Bliss and Biggs Army Airfield) and educational institutions (the University of Texas at El Paso). Additional information is available at 'www.fitchratings.com'. The ratings above were solicited by, or on behalf of, the issuer, and therefore, Fitch has been compensated for the provision of the ratings. In addition to the sources of information identified in the U.S. Municipal Revenue-Supported Rating Criteria, this action was additionally informed by information from Creditscope. Applicable Criteria and Related Research: --'Revenue-Supported Rating Criteria' (June 12, 2012; --'Water and Sewer Revenue Bond Rating Guidelines' (Aug. 3, 2012); --'2012 Water and Sewer Medians' (Dec. 8, 2011); --'2012 Outlook: Water and Sewer Sector' (Dec. 8, 2011). Applicable Criteria and Related Research: 2012 Outlook: Water and Sewer Sector 2012 Water and Sewer Medians U.S. Water and Sewer Revenue Bond Rating Criteria
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