Fitch Affirms Laredo, TX's Waterworks and Sewer System Revs at 'AA-'; Outlook Stable
Fitch Ratings has affirmed the following Laredo, Texas' (the city)
waterworks and sewer system (the system) revenue bonds outstanding as
--Approximately $188.7 million waterworks and sewer system revenue bonds.
The Rating Outlook is Stable.
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.
MAINTENANCE OF STABLE FINANCIAL PERFORMANCE: Maintenance of a stable
financial profile -- characterized by satisfactory DSC and sound
liquidity -- is a key rating consideration.
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
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
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
Additional information is available at 'www.fitchratings.com'.
In addition to the sources of information identified in Fitch's
Revenue-Supported Rating Criteria and Tax-Supported Rating Criteria,
this action was additionally informed by information from Creditscope.
Revenue-Supported Rating Criteria (pub. 16 Jun 2014)
U.S. Water and Sewer Revenue Bond Rating Criteria (pub. 03 Sep 2015)
Dodd-Frank Rating Information Disclosure Form
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