OREANDA-NEWS. Fitch Ratings assigns an 'AA+' rating to the following rating to El Paso, Texas (the city) drainage utility bonds:

--Approximately \$25.37 million municipal drainage utility system revenue bonds, series 2015.

The bonds are expected to sell via negotiation the week of March 8, 2015. Proceeds will be used for construction of infrastructure to improve storm water management and to pay issuance costs.

In addition, Fitch affirms the 'AA+' rating on the following parity debt:

--\$45.85 million municipal drainage utility system revenue bonds, series 2009;
--\$13.2 million municipal drainage utility system revenue bonds, series 2012.

The Rating Outlook is revised to Negative from Stable.

SECURITY

The bonds are payable from a first lien pledge on net revenues derived from the operation of the city's drainage utility system (the system).

KEY RATING DRIVERS

GROWING CAPITAL PRESSURES COVERAGE: The Negative Outlook reflects the system's accelerated capital plan--doubling since Fitch's June 2014 review--and associated debt issuance, which is expected to pressure debt service coverage (DSC) to a level inconsistent with the high rating level. DSC which initially exceeded projections has started to decline and is expected to drop to 1.5x by fiscal 2017 as the system takes on additional debt to finance its extensive drainage master plan. System liquidity for fiscal 2014 of 115 days is also low for the rating category.

EXTENSIVE CAPITAL PLAN: The system is in the midst of an extensive capital plan to address area flooding. The drainage 2015-2019 capital improvement plan (CIP) doubled with the addition of the master plan's next level of priority projects (priority B). While the CIP will be largely debt financed, projected debt ratios in five years are favorable and well below the 'AA' median levels.

VERY STABLE REVENUES: The bonds are secured by a very stable and predictable fixed fee revenue stream. The drainage fee is attached to the water and sewer bill, and nonpayment of any portion of the bill results in termination of water service.

FLEXIBLE RATES DESPITE PLANNED INCREASES: The system is planning a series of multiple year rate increases starting in fiscal 2016 that will increase the current \$3 bill to a still very affordable \$5.

BELOW-AVERAGE ECONOMIC METRICS: Income levels remain weak but have grown 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.

RATING SENSITIVITIES

MAINTENANCE OF SOUND FINANCIAL RATIOS: Declines in DSC over the near term commensurate with projections and without positive offsetting considerations would be expected to result in negative rating action.

CREDIT PROFILE

The drainage system serves the city of El Paso (GO bonds rated 'AA'/Stable Outlook by Fitch), with a current population estimated at around 674,000, which represents roughly 188,000 stormwater customers. The City Council delegated the storm water system responsibilities to the El Paso Water Utility, which is a component unit of the city managed by the Public Service Board (PSB). As with the water and sewer system (revenue bonds rated 'AA+'/Stable Outlook by Fitch), the PSB has complete authority for the management and operation of the drainage utility system.

EXTENSIVE CAPITAL PLAN
El Paso experienced an extreme flood in 2006 despite its location in the Chihuahuan Desert and average annual rainfall of only nine inches. Although the city had an extensive storm water system in place, the flood damage was initially estimated at \$400 million. In response, the city issued \$115 million in tax-backed obligations and used \$100 million in existing funds to repair damage to portions of the system. The city hired an engineering firm to assess the damage to existing infrastructure and created a master plan to protect the city from future flood damage. Master plan projects were arranged in priority level from A to D. The priority A projects are largely complete and the system's updated fiscal 2015-2019 CIP will begin to address the priority B projects.

The revised fiscal 2015-2019 CIP totals over \$182 million, up from \$80 million presented during Fitch's June 2014 review. The plan will be largely debt funded, and including the current offering the system has issued over \$88 million in debt to support the master plan since the system's inception in 2009. The system has approximately \$30 million in the remaining series 2009 and 2012 bonds proceeds, along with over \$7 million set aside for system improvement to fund projects. The system also plans to issue another \$119 million in future debt over the next four years to finance the next priority level of projects. Debt per customer levels of \$345 are favorable compared to the 'AA' median level of \$1,934, but the system's planned issuance will grow the project debt per customer to almost \$1,000 by fiscal 2019.

RATE INCREASES SUPPORT ACCELERATE CAPITAL PLANS
To support the newly added priority B projects, the board plans to increase rates starting in fiscal 2016. Currently, the average monthly fee of \$3 for residential customers and \$53 for non-residential customers is added to the water and sewer bill. Collections effectively mirror those of the water and sewer utility since the city is authorized to disconnect water service for non-payment or partial bill payment. Management anticipates increasing rates from 8% to 17% annually from fiscal 2016 to fiscal 2020 to support the debt used to finance the CIP. These rate adjustments will increase the residential rate from \$3 to a still very affordable \$5.36. The system's stable revenue stream and stable operating profile are considered a credit strength.

WEAKER FINANCIAL PERFORMANCE PROJECTED
Since the system's inception DSC has been strong and has registered above 2x annually, while system liquidity generally averaged a low 120 days of cash on hand (DCOH). With the increasing debt load, DSC has declined as was expected, with fiscal 2014 coverage coming in largely on target at 1.8x. Projected DSC for fiscal 2015 points to similar coverage levels. However, management projections--which include the planned rate increases--point to DSC levels dropping to a weaker 1.5x, lower than Fitch's 1.9x 'AA' median of minimum projected DSC. The system's fiscal 2014 liquidity of 115 days cash on hand (DCOH) is also well below average for the 'AA' rating category. Realization of lower DSC without offsetting credit strengths in other metrics, including DCOH, would be expected to result in negative rating action.

STABLE SERVICE AREA
El Paso is the sixth largest city in Texas. Drainage service is only provided for customers within the city limits, spanning approximately 250 square miles. While income levels are below those of the state and U.S., both the drainage enterprise and the water and sewer system have managed to keep the cost of service low despite expansion projects that led to increased capital expenditures in recent years. Currently, the combined average monthly residential bill is only 1.3% of the local median household income. 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). Area unemployment for December 2014 is favorable at 5.2% but slightly above the state (4.1%) and largely on par with the national (5.2%) averages.