Fitch Rates El Paso, Texas $30.7MM Water & Sewer Revs 'AA'; Outlook Stable
Source: Business Wire
The 'AA' rating reflects the city of El Paso's water and sewer system (the system) adequate financial flexibility, strong legal provisions, competitive rate structure, and extensive financial, capital, and water resource planning. Offsetting risks include the below-average income levels of its customer base, coupled with a moderate capital improvement program (CIP) that will require additional, albeit modest, rate increases. An emerging credit concern is financial performance, which has shown some weakening in recent years due in large part to recent wet-weather events and large annual pay-as-you-go funding efforts. These factors have contributed to declines in reserves and dips in debt service coverage. However, the city maintains financial flexibility in that ongoing annual revenues currently utilized for pay-go purposes could be diverted into reserves. Additionally, the city will benefit from cash infusion from land sales over the next couple of years, proceeds of which will be utilized primarily for capital improvement projects. Maintenance of the existing rating will depend on improvement in cash reserves and debt service coverage at or near the city's 2 times (x) financial policy.
The system has typically maintained strong debt service coverage. Recent large outlays for capital projects have led to the planned reduction of coverage in fiscal years 2001-2004 to less than management's goal of 2.0x annual debt service (ADS) coverage. Results rebounded in fiscal 2005 and improved further in fiscal 2006 to 2.3x, but wet-weather conditions for the most recently completed fiscal year have reduced ADS coverage to 1.7x. Through fiscal 2012, ADS coverage is expected to remain slightly below the city's policy level as debt service costs continue to rise. However, maintenance of a coverage level of about 2.0x is considered adequate, given limited other fixed-cost obligations and only moderate expected future debt issuances.
Liquidity levels are well below average for the rating category, with the system's cash position declining to just 37 days of operating expenditures for fiscal 2007, below the system's 45-day policy. Working capital for the same period was marginally better at 53 days but still below comparably rated credits. The city maintains financial flexibility with its ability to boost reserves in any given year by reducing its planned pay-as-you-go capital expenditures from excess system revenues, which are expected to range from $17 million-$44 million annually through fiscal 2013; the system's fiscal 2007 unrestricted cash balance totaled $8 million. Also, the system is a major landholder in the area and is expected to sell a portion of its holdings throughout the forecast period. The estimated receipts from such sales are anticipated to generate a sizable amount of additional non-recurring revenues, which could be held as reserves and boost liquidity levels to those commensurate with other comparably rated credits. Because land sale proceeds are also expected to be applied toward the CIP, any diversion in such sources toward reserves, or any reduction in planned pay-as-you-go funding to the CIP, would likely result in a corresponding increase in debt financing. Nevertheless, Fitch Ratings is more concerned with restoration of reserves to levels more fitting of an 'AA' credit than with the moderate amount of additional borrowing required to offset such reduction in planned pay-as-you-go capital contributions.
The system's service area consists of the city (current population estimated at around 650,000) plus several outlying residential areas that are serviced via wholesale water customers of the system. 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).
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Contact:
Gabriela Quiroga
512-215-3731
Steve Murray
512-215-3729
Cindy Stoller
212-908-0526
