OREANDA-NEWS. Fitch Ratings has affirmed the following Laredo, Texas' (the city) waterworks and sewer system (the system) revenue bonds outstanding as follows:

--Approximately \\$188.7 million waterworks and sewer system revenue bonds.

The Rating Outlook is Stable.

SECURITY

The bonds are secured by an irrevocable first lien on and pledge of the net revenues of the system, including any additional revenues, income, receipts, and other resources.

KEY RATING DRIVERS

LOW COVERAGE BUT SOLID LIQUIDITY: Coverage levels on an all-in basis remain low at 1.3x compared to comparably-rated credits. However the system's very high cash position (677 days in fiscal 2014) continues to provide ample financial cushion should the system encounter a short term decline in revenues.

HIGHLY LEVERAGED WITH INCREASED NEEDS: The system is highly leveraged and expected to remain so due to the current capital improvement plan (CIP) that doubled with the inclusion of projects in the system's 50-year master plan. Implementation of the CIP may apply some pressure to the rating absent improvement in debt service coverage (DSC).

MULTI-YEAR RATE INCREASES: The city adopted a 30-year rate package that extends through 2037, with larger rate hikes through the first seven years and much more modest annual rate increases from 2014 and beyond. While Fitch views favorably the city's long term commitment to raise rates, the recent escalation of CIP costs will likely require larger than planned rate hikes in the near term to maintain DSC levels in line with the rating.

AFFORDABLE RATES: The city's current combined water and sewer rates are low, providing ample flexibility for future rate hikes.

STABLE ECONOMY: The service area economy is sound and diverse with transportation, warehousing, and distribution sectors historically driving the city's core economic growth.

RATING SENSITIVITIES

MAINTENANCE OF STABLE FINANCIAL PERFORMANCE: Maintenance of a stable financial profile -- characterized by satisfactory DSC and sound liquidity -- is a key rating consideration.

CREDIT PROFILE

The city is located in Webb County, along the U.S.-Mexico border. The city has an estimated population of 251,552. The retail system serves over 68,000 water and 64,000 sewer residential and commercial customers primarily inside the city limits with a few users also residing outside of the city area.

SUBSTANTIAL CAPITAL DEMANDS PRESSURE COVERAGE

The system was privatized from 2002 to 2005, a period of rapid population growth, which resulted in deferral of major capital improvements and system maintenance needs. When the city took back the system, plans began for a major capital improvement program to address a backlog of maintenance needs as well as growth-related needs.

In 2006, the city increased service rates and adopted a multi-year rate increase plan in preparation for the major capital program. The rapid pace of debt issuance beginning in 2009, combined with artificially high DSC from 2006 - 2008 (initial rate increases without the corresponding debt issuance), resulted in what appeared to be a precipitous decline in DSC from 2.6x to 1.3x.

Although the DSC ratios remain relatively low at under 1.3x, these ratios have remained stable despite the rapid pace of debt issuance associated with the large CIP. The city provided forecast reflects DSC levels that will drop somewhat to under 1.2x in the mid-term. The city's liquidity position of \\$741 million in unrestricted cash at the close of fiscal 2014 is equivalent to 677 days of cash on hand, remaining among the highest of its peer credits, somewhat mitigating the lower coverage levels. Nevertheless, preservation of DSC in the 1.3x range will be critical to maintenance of the rating, particularly given the recent escalation in capital costs.

AFFORDABLE RATES DESPITE RECENT HIKES
The city adopted a large 25% rate increase in 2006 along with multi-year rate increases beginning in fiscal 2007 for both water and wastewater service in preparation for the large capital outlays. These increases have resulted in increased operating revenues sufficient to yield adequate coverage levels and boost system liquidity, but with thin margins relative to rising fixed costs.

The water and sewer rates increased annually by an average of 5% and 6%, respectively through 2014. But beyond fiscal 2014, adopted rates are increasing at a much lower 2% annual rate. While these rate hikes have been approved by the city council, Fitch notes that additional rate hikes may be needed to continue to produce adequate financial margins consistent with the rating. Remaining rate flexibility is considered ample, with the current combined monthly bill at just 1.2% of median household income (MHI), comfortably below Fitch's 2% of MHI affordability threshold.

Fitch notes that management took prudent measures to prepare for the additional fixed cost demands well before the first debt issuance by increasing service charges and adopting a multi-year rate hike schedule. Fitch expects that prudent fiscal management to continue, producing adequate financial metrics consistent with the system's rating.

HIGHLY LEVERAGED SYSTEM WITH MANAGEABLE CAPITAL NEEDS

The city's debt ratios are high, with debt per capita twice that of the 'AA' category median. Levels are projected to remain high with the remaining bond issuances for the system CIP. The city's five-year CIP totals \\$209 million. The CIP is double the size of the \\$103 million 2012 - 2016 CIP due to projects added based on the 50-year master plan.

The most notable projects added for which the city has requested and been awarded commitment for low interest financing from the Texas Water Development Board's (TWDB) State Revolving Fund (SRF) programs include construction of an elevated storage tank, a new wastewater treatment plant (WWTP), and expansion of an existing WWTP. In aggregate the SRF loans are about \\$42 million, with the city also expecting to sell annually about \\$14 million in revenue bonds on parity with the senior lien bonds. The remaining \\$97 million in CIP funding will come from a combination of additional TWDB financings, pay-go, and developer contributions.

STABLE ECONOMY
As the nation's largest inland port, Laredo's international trade sector is a key component of the local economy. In recent years, economic activity has been further boosted by substantial oil and natural gas exploration and production in the nearby Eagle Ford formation. However, the 2014 plunge in oil prices has stalled new drilling activity and reduced the number of active wells within Webb County by over 50% according to the Texas Railroad Commission.

Although the MSA's mining sector employment declined by 4% over the 12 months ending July 2015, all other sectors grew or remained flat, allowing the city's unemployment rate to decline to 4.5% from 5.4% a year prior. Strong sector growth was led by leisure and hospitality, transportation, warehousing and utilities, and retail trade. The city's unemployment rate compares favorably with state (4.6%) and national (5.6%) averages for the same period.

Despite surging economic activity, the city's market value per capita remains low at \\$49,000. Income levels are also low but are growing faster than state or national averages. Additionally, the city's lower cost of living partially mitigates the low wealth levels as a credit concern.