November 15, 2012 / 5:16 PM / 5 years ago

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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