Fitch Rates El Paso, TX Wtr & Swr Rev Rfdg Bonds at 'AA+'; Stable Outlook

AUSTIN, Texas--()--Fitch Ratings has assigned an 'AA+' rating to the following City of El Paso, Texas (the city) water and sewer revenue bonds:

--Approximately $69.9 million water and sewer revenue refunding bonds, series 2014.

The bonds are expected to price via negotiation the week of Jan. 13, 2014. Proceeds will be used to refund outstanding commercial paper and the series 2005A bonds for savings.

In addition, Fitch affirms approximately $403.2 million in outstanding water and sewer parity revenue bonds at 'AA+'.

The Rating Outlook is Stable.

SECURITY

The bonds are secured by a senior lien pledge on the net revenues of the city's water and sewer system (the system).

KEY RATING DRIVERS

STRONG FINANCIAL METRICS: The system's debt service coverage (DSC) remained 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 evidence management's commitment to maintain these strong coverage levels.

AMPLE RATE FLEXIBILITY: User rates and charges remain very competitive and affordable providing ample flexibility to further raise rates to maintain strong DSC.

STEADY LIQUIDITY IMPROVEMENT: Liquidity levels have shown improvement over the last five fiscal years but remain below the median level of comparatively rated credits. However, this credit concern is offset by the system'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 predominantly are to be funded with surplus cash.

STRONG FINANCIAL AND RESOURCE PLANNING: Management has demonstrated extensive financial, capital, and water resource planning.

RATING SENSITIVITIES

MAINTENANCE OF STRONG FINANCIAL PROFILE: Maintenance of the system's strong coverage ratios and adequate liquidity are key credit components of the rating.

CREDIT PROFILE

The system serves the city of El Paso (GO bonds rated 'AA' by Fitch), with a current population estimated at around 672,500, plus several outlying residential areas.

IMPROVED COVERAGE SUSTAINED AFTER EXPERIENCING VOLATILITY

The system has typically maintained sound DSC of 1.9x or better, but wet-weather conditions in fiscal years 2007 and 2008 affected sales and reduced annual DSC. Rate hikes in fiscal 2008 and 2009 coupled with drier weather patterns enabled the system to generate DSC closer to historical results, but subsequently dropped again in fiscal 2010 due to rising debt service costs and lack of corresponding rate adjustments.

Annual DSC has been consistently at or slightly above 2.0x in each of the last three audited fiscal years. Management currently projects that DSC for fiscal 2014 will remain at the same level. The system's five-year financial forecast provided by management, and which appears reasonable, projects DSC to hover around 2.0x - 2.1x in fiscal years 2015 - 2019, in line with the city's financial policy. Maintenance of DSC consistent with the city's 2.0x coverage policy target and commensurate at the 'AA+' rating level is a key credit consideration.

AMPLE RATE FLEXIBILITY DESPITE RATE HIKES

The governing body approved rate increases on both water and sewer rates effective for fiscal 2013 (3%) and 2014 (5%). Moreover, additional rate hikes are planned for fiscal 2016 (5%), 2017 (7%), and 2019 (2%) to preserve the system's 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. Positively, the average monthly residential bill is only 1.1% 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.

BELOW AVERAGE LIQUIDITY ALTHOUGH IMPROVED

In addition to rising debt costs, surplus revenues have been used for capital funding efforts, thereby limiting increases to liquidity balances. Overall, system days cash on hand and days of working capital totaled 232 days and 236 days, respectively, for fiscal 2013. 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 effectively provides additional ongoing liquidity. Nevertheless, maintenance of adequate liquidity is an important credit consideration at the existing rating level.

MANAGEABLE CAPITAL PLAN

The system's current CIP for fiscal years 2015 - 2019 totals a manageable $493 million. The planned CIP is comprised primarily of repair and rehabilitation projects, providing ample flexibility in capital spending. 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. A new water reuse project is being piloted to treat wastewater to potable standards. The system has no current or pending regulatory compliance issues.

ECONOMIC BACKGROUND

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 October 2013 is reported at 7.8%, above the state (6%) and national (7%) 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'.

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 3, 2013);

--'U.S. Water and Sewer Revenue Bond Rating Criteria' (Jul. 31, 2013);

--'2014 Water and Sewer Medians' (Dec. 12, 2013);

--'2014 Outlook: Water and Sewer Sector' (Dec. 12, 2013).

Applicable Criteria and Related Research:

Revenue-Supported Rating Criteria

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=709499

U.S. Water and Sewer Revenue Bond Rating Criteria

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=715275

2014 Water and Sewer Medians

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=724358

2014 Outlook: Water and Sewer Sector

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=724357

Additional Disclosure

Solicitation Status

http://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=813022

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Contacts

Fitch Ratings, Inc.
Primary Analyst
Gabriela Gutierrez, CPA, +1-512-215-3731
Director
Fitch Ratings, Inc.
111 Congress Avenue, Suite 2010
Austin, TX 78701
or
Secondary Analyst
Teri Wenck, CPA, +1-512-215-3742
Associate Director
or
Committee Chairperson
Doug Scott, +1-512-215-3725
Managing Director
or
Media Relations
Elizabeth Fogerty, +1-212-908-0526
elizabeth.fogerty@fitchratings.com

Sharing

Contacts

Fitch Ratings, Inc.
Primary Analyst
Gabriela Gutierrez, CPA, +1-512-215-3731
Director
Fitch Ratings, Inc.
111 Congress Avenue, Suite 2010
Austin, TX 78701
or
Secondary Analyst
Teri Wenck, CPA, +1-512-215-3742
Associate Director
or
Committee Chairperson
Doug Scott, +1-512-215-3725
Managing Director
or
Media Relations
Elizabeth Fogerty, +1-212-908-0526
elizabeth.fogerty@fitchratings.com