Fitch Affirms El Paso, TX Drainage Utility Revs at 'AA+'; Outlook Stable

AUSTIN, Texas--(BUSINESS WIRE)--During the course of routine surveillance, Fitch Ratings affirms the following El Paso, Texas (the city) drainage utility (the system) bonds:

--$53 million municipal drainage utility system revenue bonds (taxable), series 2009 (direct subsidy - Build American Bonds) affirmed at 'AA+'.

The Rating Outlook is Stable.

RATING RATIONALE:

--The bonds are secured by a very stable and predictable fixed fee revenue stream. The drainage fee is attached to the water and sewer bill, and nonpayment of any portion of the bill results in termination of service.

--The drainage capital improvement plan is manageable with ample flexibility for future improvements.

--The system management team is established, operating the water and sewer utilities, with prudent fiscal stewardship recognized by Fitch in the rating process for the water and sewer revenue bonds.

--The system has inherent flexibility in operations as reasonable deferral of capital and maintenance is possible to generate savings if necessary.

--The system's service area is broad and diverse with positive growth prospects.

--Legal covenants are adequate, but are weaker than the city's water and sewer system revenue bonds.

KEY RATING DRIVER:

--Maintenance of conservative stewardship and strong coverage ratios commensurate with the rating level is essential to the rating.

SECURITY:

The bonds are secured by a pledge and first lien on net revenues derived from the operation of the drainage utility system.

CREDIT SUMMARY:

Despite its location in the Chihuahuan Desert and average rainfall of only nine inches annually, El Paso experienced an extreme flood in 2006. Although the city had an extensive stormwater system in place, the flood damage was initially estimated at $400 million. In response, the city issued $115 million in bonds and used $100 million in existing funds to repair damage to portions of the system. The city hired an engineering firm to assess the damage to existing infrastructure and created a master plan to protect the city from future flood damage.

The City Council delegated the stormwater system responsibilities to the El Paso Water Utility, which is a component unit of the city managed by the Public Service Board (PSB). As with the water and sewer system, the PSB has complete authority for the management and operation of the drainage utility system. The City Council also mandated that 10% of the revenue from stormwater fees be used to acquire open space that had a connection to proposed flood control projects or would enhance flood control or provide additional water supply to the city. In March 2008 (fiscal 2009), the stormwater utility began assessing a fee based on the area of impervious surfaces and budgeted roughly $75 million to fund capital projects during the first three years.

The series 2009 financings in the aggregate of $55 million were estimated to resolve approximately 60% of the drainage related safety issues. The system's updated five-year forecast also includes future borrowings of an average annual $8.5 million through fiscal 2016. Legal covenants are adequate with a rate covenant of 1.25 times (x) average annual debt service (AADS), an additional bonds test of 1.25x AADS, and a reserve requirement of 1.0x AADS that will be funded over 60 months.

Fiscal 2011 was the third year of operations. Fee collections totaled $15.3 million and debt service coverage was a strong 3.7x, which is better than previously projected due to the timing of the initial debt service payment. Liquidity at the close of fiscal 2011 was low at $2.1 million, or 114 days due primarily to cash outlays for capital improvements during the year.

The utility's customer base is very diverse with the top 10 drainage customers accounting for less than 2% of total revenues. The average monthly fee of $3.00 for residential customers and $53 for non-residential customers is added to the water and sewer bill. Collections effectively mirror the water and sewer utility, since the city is authorized to disconnect water service for non-payment or partial bill payment.

The utility's current target coverage of 1.25x and 45 days of working capital are deemed low by Fitch's criteria; however, its five-year financial plan assumes no rate increases and assumes ongoing cash outlays of $2.2 million - $4.7 million annually for system capital investment. Under these assumptions, debt service coverage between 2012 and 2014 is estimated to range between 1.7x and 2.1x, but drops to 1.5x in fiscal 2015, and 1.4x in fiscal 2016. Fitch recognizes that the capital plan for this enterprise is flexible and projects and debt issuance may be deferred beyond the current planned period as has already been demonstrated from the initial fiscal 2009-2014 forecast. However, Fitch cautions that maintenance of debt service coverage commensurate with the rating is essential to maintain the current high rating level.

The system's service area consists of the city (general obligation bonds rated 'AA' by Fitch) with a current population estimated at around 751,000 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. Currently, the average monthly residential bill is only 1.3% of the local median household income. 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'.

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 and the Municipal Advisory Council of Texas.

Applicable Criteria and Related Research:

--'Revenue-Supported Rating Criteria' (Jun. 20, 2011);

--'Water and Sewer Revenue Bond Rating Guidelines' (Aug. 6, 2008);

--'2011 Water and Wastewater Medians' (Jan. 18, 2011);

--'2011 Outlook: Water and Wastewater Sector' (Jan. 18, 2011).

For information on Build America Bonds, visit www.fitchratings.com/BABs.

Applicable Criteria and Related Research:

Revenue-Supported Rating Criteria

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=637130

Water and Sewer Revenue Bond Rating Guidelines

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=395918

2011 Water and Wastewater Medians

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=593285

2011 Outlook: Water and Wastewater Sector

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=593286

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