S&P: Laredo, TX's Water And Sewer Bonds Raised To 'AA-'

Standard & Poor's Ratings Services raised its underlying rating (SPUR) on Laredo , Texas ' waterworks and sewer system revenue bonds to 'AA-' from 'A'. The upgrade reflects management's willingness to increase service rates to maintain strong debt service coverage (DSC) while funding the system's aggressive, but well defined, capital improvement plan (CIP). The outlook is stable.

Additional rating factors include the system's growing service area economy; below-average water and sewer rates, despite ongoing increases; strong DSC and liquidity; and relatively high debt load, combined with the likely issuance of additional debt.

"Management's adoption of water rate adjustments supports the implementation of the system's sizable capital improvement plan, allowing the city to maintain its sound financial performance and debt service coverage levels," said Standard & Poor's credit analyst Hilary Sutton. "The stable outlook depends on the city's ability to provide an adequate water supply without adverse effects on operations and finances."

Laredo 's utility system continues to exhibit steady growth. Between fiscals 2003 and 2007, water and sewer connections increased by approximately 15% to 59,409 and 56,065, respectively. The city recently implemented a 20-year plan of incremental water rate increases, and sewer system rates are currently under review. Nevertheless, the combined water and sewer bill is well below the state average, at $27.55 per 7,500 gallons consumed.

System liquidity is very strong; the system had 450 days' unrestricted cash on hand at fiscal year-end 2007, up from 278 days at fiscal year-end 2006. Annual DSC is also very strong; fiscal 2007 pledged revenues provided 4.4x DSC. After transfers to the debt service fund that support about 19% of the city's general obligation (GO) debt outstanding, DSC drops to a still-good 2.8x. The system is highly leveraged; it has roughly $47 million of revenue debt outstanding and supports about $56 million of GO debt. As a result, the debt-to-plant ratio is elevated, at approximately 58%.

The rating action affects roughly $47 million of outstanding debt.