Fitch Rates El Paso, TX Wtr & Swr Rev Rfdg Bonds 'AA+'; Outlook Stable
--Approximately $50 million water and sewer revenue refunding bonds, series 2015C.
The bonds are expected to sell via negotiation the week of Nov. 2, 2015. Proceeds will be used to refund a portion of the city's outstanding water and sewer revenue bonds for debt service savings, refund a portion of the city's outstanding commercial paper (CP) notes, and pay costs of issuance.
In addition, Fitch has affirmed the 'AA+' rating on the following outstanding revenue bonds:
--$473.6 million in senior lien water and sewer revenue bonds;
--$40 million in bank notes corresponding to water and sewer CP notes series A.
The Rating Outlook is Stable.
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. Commensurate with the larger CIP and increased leverage plans, management's current forecast includes larger rate increases than previously planned.
STEADY LIQUIDITY IMPROVEMENT: Liquidity levels, while still well below-average relative to the category 'AA' rating medians, have shown improvement over the last five fiscal years. This credit concern of low reserve balances is somewhat offset by the system's flexibility to delay cash-funded capital projects or to finance them with debt.
BELOW-AVERAGE ECONOMIC METRICS: Income levels remain weak but have continued to grow at a faster pace than the state and nation over the past five years. Below-average income is somewhat offset by a relatively low cost of living. Unemployment rates continue to exceed those of the state and nation.
STRONG FINANCIAL, RESOURCE PLANNING: Management has demonstrated extensive financial, capital, and water resource planning.
MAINTENANCE OF STRONG FINANCIAL PROFILE: Maintenance of the 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 forecast leverage ratios could have negative rating pressure.
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 685,000 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 221,000 water and 205,500 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. Management currently projects that DSC will remain at similar levels through its financial forecast period ending fiscal 2020, 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 DESPITE RATE HIKES
System rates were increased in both fiscal 2013 (3%) and 2014 (5%), but were held flat in fiscal 2015. A rate increase of 8% has been approved for fiscal 2016, and 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 1.2% 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.
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 266 days and 290 days, respectively, for fiscal 2015. Liquidity levels remain below the medians for comparably rated credits. However, credit concerns regarding below-average liquidity are somewhat offset by the system's solid DSC levels.
GROWING CAPITAL PLAN
The system's current $864 million CIP for fiscal years 2016 - 2020 increased substantially from the prior 2015 - 2019 plan which was just under $500 million. Also, in contrast to the prior plan of funding 40% with debt and 60% pay-go, the updated plan now forecasts funding 60%, or roughly $518 million (a 159% increase from the prior plan), with debt, and the remainder (a 15% increase) with pay-go.
The CIP increase is primarily due to the inclusion of a revised 50-year water plan and needs to address future water supply. Inclusion and development of the long-term plan will enable the city to comply with requirements to access low-cost funds from the Texas Water Development Board's newly created State Water Implementation Fund for Texas (SWIFT) program. Nevertheless, while many of the projects have been included in the five-year CIP, the city retains flexibility in terms of the timing and funding of the projects. The additional projects may be phased and completed over a period extending beyond the five-year horizon.
The system's moderate debt per customer and debt per capita levels at $1,280 and $639, 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.
City unemployment for August 2015 is reported at 4.7%, above the state (4.4%) but below national (5.2%) 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).