OREANDA-NEWS. Fitch Ratings has assigned an 'AA+' rating to the following El Paso, TX revenue bonds:

--Approximately $23.8 million municipal drainage utility system revenue bonds, series 2016.

The bonds are expected to sell via negotiation the week of April 4. Proceeds will be used for construction of infrastructure to improve storm water management and pay issuance costs.

In addition, Fitch affirms the following ratings:

--$81.3 million in outstanding municipal drainage utility system revenue bonds at 'AA+'.

The Rating Outlook is Negative.

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: Maintenance of the Negative Outlook reflects the system's extensive capital improvement plan (CIP) and associated debt issuance, which is expected to pressure debt service coverage (DSC) to a level inconsistent with the rating level. DSC has declined slightly as the system takes on additional debt to finance the CIP. System liquidity for fiscal 2015 of 263 days cash on hand (DCOH) is also low for the rating category.

STABLE REVENUE SOURCE: The bonds are secured by a very stable and predictable revenue stream with the fixed drainage fee comprising a nominal 7% of the total utility bill. The drainage fee is attached to the water and sewer bill, and nonpayment of any portion of it results in termination of service.

FLEXIBLE RATES DESPITE PLANNED INCREASES: The system has implemented the second of a series of planned annual rate increases that will raise rates by an average of 11% annually over fiscal 2017 to 2020 to support the debt issued to finance the CIP. Despite the planned increases, the projected monthly residential bill in 2020 should remain affordable at $5.50.

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

LOWER DEBT COVERAGE: The El Paso, TX municipal drainage utility's capital plan and related borrowings will challenge the system's ability to maintain its solid coverage of debt service. Realization of lower DSC as a result of insufficient rate increases or absent offsetting credit strengths in other metrics, including DCOH, could result in negative rating action. Conversely, stronger than projected net revenues and DSC could stabilize the Outlook.

CREDIT PROFILE
The drainage system serves the city of El Paso (GO bonds rated 'AA'/Stable Outlook), with a current population estimated at around 679,000, representing roughly 188,000 storm water 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), 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 more than $250 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.

The current fiscal 2016-2020 CIP totals over $189 million, up from $80 million presented during Fitch's June 2014 review. The five-year plan is anticipated to be largely debt funded at 65%, with $121 million planned to be issued over the next five years. To date the city has spent approximately $100 million of $650 million (in 2008 dollars) in long-term system needs, but management reports that needs will be re-evaluated within the next two years to reassess priority of projects, timing and costs.

The original master plan is aggressive over the next five years, but ramps down considerably from $189 million over fiscal 2016 to 2020 to $91 million over the fiscal 2021 to 2025 timeframe. Debt per customer levels at $328 as of fiscal 2015 are favorable compared to the 'AA' median level of $2,050, but the system's preliminary planned issuance will grow the projected debt per customer to over $950 by fiscal 2020.

RATE INCREASES SUPPORT ACCELERATED CAPITAL PLAN
To support the aggressive CIP and the associated additional debt, at the start of fiscal 2016 the board enacted the second rate increase of a series of annual rate increases. Currently, the average monthly drainage utility bill of $3.21 for residential customers is added to the $47.50 average 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 by an average of 11% annually over the fiscal 2017 to 2020 period to support the debt issued to finance the CIP. These rate adjustments will increase the residential bill from $3.21 to a still very affordable $5.50. The system's stable revenue stream and stable operating profile are considered credit strengths.

WEAKER FINANCIAL PERFORMANCE PROJECTED
Since the system's inception, DSC been strong and has registered above 2x annually, while system liquidity generally averaged a low 200 DCOH. With the increasing debt load, DSC has declined as expected, with fiscal 2014 and fiscal 2015 coverage coming in largely on target at 1.8x and 1.9x, respectively.

Management projections - which include the planned rate increases - point to DSC levels dropping to a weaker 1.7x in fiscal 2017, lower than Fitch's 2x 'AA' median DSC. The system's fiscal 2015 liquidity of 263 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 2015 is favorable at 4.4% but slightly above the state (4.2%) and below the national (4.8%) averages.