AUSTIN, Texas--(BUSINESS WIRE)--Fitch Ratings has assigned a 'AA+' rating to the following city of El Paso, Texas (the city) water and sewer revenue bonds:
--Approximately $81.6 million water and sewer revenue improvement and refunding bonds, series 2016.
The bonds are expected to sell via negotiation the week of July 18, 2016. Proceeds will be used to refund a portion of the city's outstanding water and sewer revenue bonds for debt service savings, refinance a portion of the city's outstanding commercial paper (CP) notes, fund improvements to the water and sewer system (the system), and pay costs of issuance.
In addition, Fitch has affirmed the 'AA+' rating on the following outstanding revenue bonds:
--$457 million in senior lien water and sewer revenue bonds;
--$40 million bank note rating corresponding to water and sewer CP notes series A.
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 remains consistent with the city's financial policy and in line with the 'AA+' rating level. Planned rate increases in the system's five-year forecast depict management's commitment to maintain these strong coverage levels.
GROWING CIP/INCREASING LEVERAGE: Debt levels are moderate with rapid amortization. The need to secure additional future water supplies, in response to the persistent drought and to ensure system eligibility for certain state water funding, results in a larger capital improvement plan (CIP) that will require more debt than previously expected.
RATE FLEXIBILITY: User rates and charges remain very competitive and affordable, despite recent rate increases and below-average area wealth levels, providing the system with the flexibility to further raise rates to maintain strong debt service coverage.
STEADY LIQUIDITY IMPROVEMENT: Liquidity levels, while below Fitch's 'AA' rating medians, are adequate and have shown improvement over the last five fiscal years. This credit concern of low reserve balances is mitigated by the financial flexibility offered by the system's robust cash funding of capital and the ability to delay cash-funded capital projects or to finance them with debt.
STRONG FINANCIAL, RESOURCE PLANNING: Management has demonstrated extensive financial, capital, and water resource planning.
RATING SENSITIVITIES
MAINTENANCE OF STRONG FINANCIAL PROFILE: Maintenance of El Paso, TX's water and sewer system's strong coverage ratios and adequate liquidity are key components of the rating given substantial capital needs.
RISING DEBT: Debt metrics in excess of El Paso, TX's water and sewer system forecast leverage ratios could cause negative rating pressure.
CREDIT PROFILE
El Paso (GO bonds rated 'AA' by Fitch with a Stable Outlook) is currently the sixth-largest city in Texas. Its current population estimate of more than 680,000 reflects ongoing growth at an average annual rate of nearly 1.5% since the 2000 Census. The system serves the city plus several outlying residential areas with roughly 225,000 water and 209,500 sewer connections.
IMPROVED COVERAGE SUSTAINED FOLLOWING VOLATILITY
Annual debt service coverage (DSC) has been consistent at or slightly above 2x in each of the last five audited fiscal years after a four-year period of volatility; unaudited fiscal 2016 point to similar results with Fitch-calculated DSC based on the city's financial forecast at 2.5x. Management currently projects that DSC will remain above 2.0x through its financial forecast period ending fiscal 2021, using assumptions Fitch believes are reasonable. Projected coverage is in line with the city's financial policy. Maintenance of DSC consistent with the city's 2x coverage policy target and commensurate at the 'AA+' rating level is a key credit consideration.
AMPLE RATE FLEXIBILITY
Rate adjustments are adopted as needed on an annual basis. Rate increases have not occurred each year but in most years since fiscal 2012. A rate increase of 8% was enacted for both the water and sewer systems in fiscal 2016.
Management is planning for annual rate hikes averaging 8% thereafter for the following four years to support the growing capital plan and preserve the system's strong financial profile. Fitch believes these rate increases will provide needed revenues to preserve financial performance at the current rating. The average monthly residential bill (assuming Fitch's standard usage of 7,500 gallons per month for water and 6,000 gallons per month for sewer) is only 1.3% of the local median household income (MHI), well below Fitch's affordability threshold of 2% of MHI, indicating rates sufficiently flexible to accommodate the planned increases.
ADEQUATE LIQUIDITY; ROBUST CASH FLOW
Revenues after operating expenses have been used for both rising debt costs and pay-go capital funding efforts, thereby limiting increases to liquidity balances. Overall, system cash on hand and working capital totaled 276 days and 285 days, respectively, for unaudited fiscal 2016. Liquidity levels are adequate, albeit below Fitch's sector medians for comparably rated credits. Credit concerns regarding below-average liquidity are mitigated by the system's healthy cash flow, which is designed to fund capital.
A significant share of capital funding (39%) is expected to come from rate revenue, which provides an important degree of financial flexibility and cushion for bondholders. The system has generated from $32 million to over $49 million annually in revenues over the past five fiscal years to contribute towards capital spending. Fitch considers maintenance of the pay-as-you-go portion of capital funding to be a critical component of the system's remaining financial flexibility.
GROWING CAPITAL PLAN
The system's current $987 million CIP for fiscal years 2017 - 2021 increased by 14% from the prior 2016 - 2020 plan, which was at $868 million. The plan forecasts funding 61%, or roughly $601 million with debt, and the remainder with pay-go.
The CIP increase is primarily due to inclusion of a revised 50-year water plan and includes funding to develop future water supplies. Nevertheless, while many of the projects have been included in the five-year CIP, the city is in the process of re-evaluating the need for expanding two of its plants: the Jonathan W. Rogers Water Treatment Plant and Advanced Water Purification Plant with current costs estimated at $95 million and $129 million, respectively. The projects may be completed over a period extending beyond the five-year horizon currently assumed in the CIP.
The system's moderate debt per customer and debt per capita levels at $1,443 and $732 (as of unaudited fiscal 2016), respectively, are now comparable to other utilities in the rating category and are forecast to remain in line with the rating level despite implementation of this plan. The pace of principal amortization is currently rapid, but will likely slow in the near to mid-term.
ECONOMIC BACKGROUND
City unemployment for May 2016 is reported at 4.1%, slightly below the state (4.2%) and below national (4.5%) averages. The area's economy is based on international trade and manufacturing, copper mining, and ore smelting. Stability is 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'.
Applicable Criteria
Revenue-Supported Rating Criteria (pub. 16 Jun 2014)
https://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=750012
U.S. Water and Sewer Revenue Bond Rating Criteria (pub. 03 Sep 2015)
https://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=869223
Additional Disclosures
Dodd-Frank Rating Information Disclosure Form
https://www.fitchratings.com/creditdesk/press_releases/content/ridf_frame.cfm?pr_id=1008821
Solicitation Status
https://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=1008821
Endorsement Policy
https://www.fitchratings.com/jsp/creditdesk/PolicyRegulation.faces?context=2&detail=31
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