Fitch Rates El Paso, TX $22.8MM Wtr & Swr Rev Rfdg Bonds 'AA'; Outlook Stable
Source: Business Wire
The bonds are expected to sell via negotiation the week of Jan. 18, 2010.
In addition, Fitch affirms approximately $506.8 million in outstanding water and sewer revenue bonds at 'AA'.
The Rating Outlook is Stable.
RATING RATIONALE:
--Management has demonstrated extensive financial, capital, and water resource planning.
--Typically very strong debt service coverage recovered to near the city's 2 times (x) policy level in fiscal 2009 after some weakening in recent years.
--Although liquidity has declined due to sizeable cash outlays for capital projects, the city maintains flexibility to delay cash outlays for capital projects or finance projects with debt if necessary.
--Rates and charges should remain competitive and affordable, given moderate capital needs.
--The service area is diverse and growing, fueled by growth in military personnel.
RATING DRIVERS:
--Maintenance of the rating will depend on continued management of adequate cash reserves and debt service coverage remaining at or near the city's 2x financial policy.
SECURITY:
The bonds are secured by net revenues of the city's water and sewer system.
CREDIT SUMMARY:
Extensive financial, capital and water resource planning has enabled the city to secure an ample and diverse water supply in 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. However, these long term water management efforts have been costly and the system's ongoing use of cash reserves for capital funding efforts has reduced liquidity levels well below average for the rating category. An offsetting consideration is the financial flexibility the system maintains by using ongoing annual revenues that could otherwise add to reserves for pay-go capital. Two consecutive rainy years contributed to dips in annual debt service (ADS) coverage that were reversed in fiscal 2009, when results were better than anticipated.
System operating reserves and working capital totaled 69 days and 94 days, respectively for fiscal 2009. These levels are much lower than average for the rating level and than the 229 days cash on hand (DCOH) and 248 days of working capital in fiscal 2006, reflecting the drawdown of funds over the last few years for capital projects. Reserve levels are expected to experience only limited annual improvement through fiscal 2015 as the utility expects to continue its practice of funding a significant amount of capital with ongoing revenues. This equity funding is a significant offset to the low levels of operating reserves. Currently, the system expects to utilize $17 million-$32 million in cash annually for capital expenditures during fiscal years 2011-2015 (leaving about 80-130 DCOH in each fiscal year). These funds could provide an immediate boost to reserves if projects were deferred, demonstrating the strength of the system's cash flow and its ability to respond to critical needs that could arise.
The system has typically maintained strong debt service coverage, but wet-weather conditions in fiscal years 2007 and 2008 affected sales and reduced ADS coverage to 1.7x each of those years. However, rate increases in fiscal 2008 (4%) and fiscal 2009 (7%) coupled with drier weather enabled the system to generate better than anticipated debt service coverage of 1.9x for fiscal 2009. For fiscal 2010, management expects to increase operating reserves as a result of capital improvement plan (CIP) delays and interim operating results point to debt service coverage of 1.8x, better than the 1.6x that was previously budgeted. Through fiscal 2015, ADS coverage is forecast to remain below the city's 2.0x minimum policy level as debt service costs continue to rise, but management budgets conservatively and actual results are typically better than projections. Fitch considers maintenance of a coverage level of about 2.0x to be adequate, given the system's limited other fixed-cost obligations and only moderate expected debt issuances.
The system's current CIP for fiscal 2011 to 2015 totals a manageable $330 million, the majority of which focuses on repair and replacement. Funding of the CIP from ongoing revenues is estimated at approximately 35%. 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.
The system's service area consists of the city (GO bonds rated 'AA-' by Fitch) with a current population estimated at around 645,000 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 relatively low despite the growth projects that have led to increased capital expenditures in recent years. Currently, the average monthly residential bill is only 1.4% of the median household income, and given the relatively modest amount of anticipated rate hikes through fiscal 2015, hikes that are expected to approximate inflationary adjustments, it is expected that the system will preserve a good deal of rate flexibility. 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).
Applicable criteria available on Fitch's website at www.fitchratings.com:
--'Revenue-Supported Rating Criteria,' (Dec. 29, 2009).
--'Water and Sewer Revenue Bond Rating Guidelines', (Aug. 6, 2008).
Additional information is available at 'www.fitchratings.com'.
Contact:
Fitch Ratings
Gabriela Gutierrez, +1-512-215-3731, Austin
Douglas Scott, +1-512-215-3725, Austin
Media Relations:
Cindy Stoller, +1-212-908-0526, New York
cindy.stoller@fitchratings.com
