Fitch Rates Albuquerque Bernalillo County WUA $118MM NMFA Loan 'AA'.

AUSTIN, Texas -- Fitch assigns its 'AA' rating to the Albuquerque Bernalillo County Water Utility Authority's (ABCWUA, or the authority) $118.4 million public project revolving fund loan (2004). The loan is expected to be placed with the New Mexico Finance Authority on Oct. 13. In addition, Fitch affirms its 'AA' rating on $185.7 million of outstanding City of Albuquerque, New Mexico (the city) joint water and sewer system revenue bonds that are on parity with the loan. The Rating Outlook is Stable.

The 'AA' rating reflects the system's continued strong operating performance, rapid debt amortization, and healthy service area. Rates should remain stable over the next few years, despite substantial cash funding for portions of the capital improvement plan (CIP). The ABCWUA was created in 2003 by state statute to assume ownership of the individual city and Bernalillo County (the county) water and wastewater systems to ensure a regional focus to water planning in the county; however, the new combined system is essentially the former water and sewer system of the city as county assets were limited. Bondholders of system debt previously issued by the city are protected and the authority, city, and county have entered into agreements to ensure a stable environment as operation of the systems transition to the authority.

The authority board is composed of seven voting members -- three city councilors, the city mayor, and three county commissioners -- and an ex-officio member with no voting privileges representing the Village of Los Ranchos. Legislation enacted by the New Mexico Legislature creating the authority provides for all functions, appropriations, records, and property of the city and county water and wastewater system to be transferred to the authority. The legislation also required the authority to assume all debt of the city in connection with the city system and to refrain from impairing bondholders' rights to pledged revenues associated with those debts. To ensure continued strong system operations, the authority, city, and county have entered into a joint powers agreement denoting the authority as the administering agency in the issuance of future system debt. The parties also executed a memorandum of understanding (MOU) that provides for day-to-day management of the system to remain with the city through 2006. Under the MOU the city will recover all costs of operating the system on behalf of the authority and continue to receive 4% of gross system revenues in the form of a franchise fee.

The water system currently serves almost 505,000 residents through extraction of water resources from the Rio Grande basin aquifer underlying the city. In an effort to reduce depletion of the aquifer, the authority is implementing a strategic plan to provide a sustainable water supply through conservation, the use of surface water (including the San Juan Chama diversion project and other water rights), reclaimed water, and shallow and deep groundwater.

Current cost estimates of the authority's CIP, which include most of the strategic plan, are $555 million through fiscal 2012. Approximately 40% of the CIP is expected to be funded from pay-as-you-go sources with the balance coming from debt proceeds. Despite the additional debt, the CIP appears manageable, and principal amortization on parity debt after this issue is a rapid 80% in ten years.

Historical operating performance is sound and the city maintains an internal policy of budgeting parity bond debt service coverage at 1.5 times (x) when connection fees are included in available revenue. Including connection fees, unaudited fiscal 2004 figures point toward a coverage margin on parity debt of 1.9x. Coverage through fiscal 2008 should remain adequate at a minimum of 1.5x coverage, based on planned debt issuances through that period.

The system serves primarily the city, which constitutes 88% of county residents. The city is the largest in the state and accounts for about one-quarter of the population as well as about 48% of non-agricultural employment of the state. The national economic downturn has affected the area, but recent employment growth has reached pre-Sept. 11 levels, indicating signs of recovery. Income levels for city residents are on par with the national average and 10%-20% higher than the state.