OREANDA-NEWS. Fitch Ratings affirms the following city of Eagle Pass, Texas (the city) outstanding bonds at 'A':

--\$20 million waterworks and sewer system revenue bonds.

The Rating Outlook is Stable.

SECURITY

The bonds are secured by a senior lien on net revenues of the city's combined water and sewer system (the system).

KEY RATING DRIVERS

ABOVE AVERAGE COVERAGE/ADEQUATE LIQUIDITY: Debt service coverage (DSC) remains strong and above average for the rating category at 2.7x in fiscal 2014 but is expected to weaken with anticipated future issuances absent an offsetting rate adjustment. Liquidity, including system reserves, has averaged a weaker six months of operating expenses for the last three fiscal years.

EXPANDING DEBT PROFILE: The system's capital program will necessitate additional borrowing, increasing the system's currently favorable debt burden to more moderate levels.

ADEQUATE WATER SUPPLY: Water supplies are adequate for the system's current demand. However, a material ramp up in water demand in the near term would necessitate acquisition of additional supplies.

LIMITED BORDER ECONOMY: The service area, located on the Texas-Mexico border, is characterized by below average wealth levels that fall 40% below the state and national averages and high unemployment that registers at 2x the state's level.

RATING SENSITIVITIES

DETERIORATION OF FINANCIAL POSITION: Maintenance of sound financial metrics will be key to maintaining the rating given the area's weak economic base and growing debt profile.

CREDIT PROFILE

The system provides retail water and sewer service to over 15,900 customers in the city and Maverick County, serving 97% of the county population.

REGIONAL SERVICE PROVIDER
In an effort to provide adequate supply and treatment to unincorporated areas in the county, the city's waterworks and sewer system in 2003 merged with a rural water supply corporation to form a regional system. The new regional service area added the reservation of the Traditional Kickapoo Tribe of Texas and other unincorporated areas of the county which lacked basic infrastructure.

To accommodate the additional service area, the city completed an over \$100 million regional project, with water now treated at a new 15 million gallon per day (mgd) water treatment plant designed to provide sufficient treatment capacity for 20 years. Additional wastewater treatment capacity was added with the construction of a new 2 mgd wastewater treatment plant and collection lines in the former service area plus collection lines in the added area. Construction on the new regional plant was completed and came on line in 2009.

RAPID GROWTH WOULD PRESSURE WATER SUPPLY
Water supplies are drawn for the Rio Grande River and water demand in 2014 totaled just over 7,000 acre feet (af), comfortably under the district's supply of 12,000 af. Management estimates that with water demand growing by approximately 2% per year the current water supply is sufficient for at least the next 20 years. However, if growth were to escalate additional water supplies would be needed. Management has reserves of over \$1.1 million set aside for the purchase of water rights as needed on a year-by-year basis but has no long-term contract in place for additional rights.

DEBT SUPPORTED CAPITAL PLANS
The city's 2015-2020 capital improvement plan (CIP) totals \$70 million and largely focuses on system water line and meter replacement and system expansion. The city is installing automatic read meters and replacing aging cast iron pipes at an estimated total cost of \$22.3 million. In the out-years of the plan, the city anticipates expanding the treatment capacity at a cost of \$34 million. System expansion is primary demand driven and could likely be delayed for a period if demand does not materialize. The CIP will be funded from grant revenues and low-interest state revolving fund (SRF) loans, with a \$40 million SRF loan planned for fiscal 2017.

In 2013, the system issued \$5 million in revenue supported debt through the SRF program to support capital investment. The debt profile is average with debt per capita for fiscal 2014 at \$509, which aligns closely to the to the 'A' rating category median of \$473. However, debt ratios are anticipated to grow to with the planned SRF issuance to \$1,102 per capita in five years, compared to the 'A' median of \$741.

FUTURE DEBT PRESSURES COVERAGE
Since 2011, DSC has averaged a very healthy 2.7x, well above average for the 'A' rating category. Liquidity has been weaker, averaging 180 days of operating expense for the last three fiscal years. The liquidity calculation includes amounts held in reserve for water and sewer system improvements. Management has no formal policies in place pertaining to coverage or liquidity but does manage toward maintaining 1.25x senior lien coverage and reserves sufficient to cover at least 45 days of operating expenses. The rate covenant is liberal, allowing for sum-sufficient coverage.

Management does not compile multi-year forecast. However, Fitch produced a base case scenario assuming flat operating revenues, no rate increases, 2% inflationary increases in expenses and additional annual debt service costs of \$1.33 million (starting in fiscal 2017) relating to the SRF loan. DSC based on these assumptions weakens to 1.3x starting in fiscal 2017 and drops to 1.2x by 2019. Assuming annual 2.5% rate increases starting in fiscal 2016, DSC points to a slightly higher 1.5x through fiscal 2019.

SUBPAR SOCIO-ECONOMIC PROFILE
Located along the U.S.-Mexico border, the city (general obligation debt rated 'A+' with a Stable Outlook by Fitch) serves as the county seat of Maverick County. It also serves as the port of entry into Mexico at Piedras Negras and benefits substantially from tourism and trade with northern Mexico. The county's economy is based on agriculture and mineral production. The city is seeing some additional development with a \$40 million expansion to the Kickapoo Resort and Casino and a \$10 million expansion to the local junior college campus. The county's 2013 population estimate of 55,932 is up 5% from the 2010 census. The system has some customer concentration, with the top 10 system users making up 14% of total system revenues.

Typical of many border communities, county wealth levels are very low as evidenced by median household income equal to only 60% and 59% of state and national averages, respectively. County poverty rates are high and are double that of the nation. Unemployment levels are also high at over 9.4% as of December 2014 compared to the state's 4.1% and the nation's 5.4%. Elevated unemployment is due in part to the substantial presence of seasonal migrant farm workers who remain unemployed after returning from jobs in other parts of the country.