Fitch Rates Albuquerque Bernalillo County Water Util Auth (NM) $55M Revs 'AA'.

AUSTIN, Texas -- Fitch assigns its 'AA' rating to the Albuquerque Bernalillo County Water Utility Authority (the authority) $55.5 million joint water and sewer system improvement revenue bonds, series 2008A. In addition, Fitch affirms its rating on the authority's outstanding $460.3 million (including accreted values) joint water and sewer revenue bonds and New Mexico Finance Authority public power revolving fund loan (2004) at 'AA'. Bond proceeds will be used for system capital improvements, including funding a portion of the authority's San Juan-Chama drinking water project (SJC), and paying costs of issuance. The bonds are expected to be sold via negotiation the week of March 17. The Rating Outlook is Positive.

The 'AA' rating reflects the system's favorable operating performance, rapid debt amortization, healthy service area, and the availability of adequate water supply through at least the next 40 years. ABCWUA is nearing completion of its sizeable water supply projects, including SJC, with ongoing capital costs expected to decline significantly within the next couple of years. This, coupled with the authority's rapid debt amortization, should bring leverage ratios down quickly over the near-term. Continued improvement in the authority's financial profile is expected, particularly as housing starts resume their historical steady growth and connection fees are collected, making upward revision in the rating possible in the near-term.

The authority currently provides water and wastewater service to around 530,600 residents within the city and county. Water supplies traditionally have been obtained through extraction of resources from the Rio Grande basin aquifer underlying the city. However, in an effort to reduce depletion of the aquifer, the authority is implementing a strategic plan (the water resource management strategy, or WRMS), initially adopted in 1997, to provide a sustainable water supply through conservation, the use of surface water, reclaimed water, and shallow and deep groundwater. There are four major projects identified in WRMS - SJC and three water reclamation and reuse projects - all of which are operational or will be nearing completion over the next calendar year. SJC is the cornerstone of the WRMS and is expected to provide up to 70% of the service area's water needs through at least the next 40 years when completed in July 2008.

As major projects associated with the WRMS have progressed, the authority's six-year CIP has steadily declined to the current $453 million for fiscal years (FY) 2008-2013. With the completion of the WRMS, capital needs are anticipated to fall to just $52 million annually beginning in fiscal 2010 for rehabilitation and replacement. Because of the recent borrowings associated with the WRMS, leveraging of net plant assets has increased from 31% in FY 2004 to a more moderate 45% for FY 2007. Likewise, debt per customer rose during this period from a modest $710 to a relatively high $1,532. However, over the near-term leverage ratios should diminish and be more in line with similarly rated credits given ongoing debt issuance associated with basic system needs - projected at just $23 million annually - will fall below the yearly amortization of principal on existing debt by FY 2010.

Historical financial performance has been good, producing satisfactory debt service coverage. Annual debt service (ADS) coverage on parity bonds, based on pledged revenues, has ranged between 1.8 times (x) to 2.3x from FYs 2003-2006, while ADS coverage on all debt was between 1.7x-2.1x during the same period. ADS coverage in FY 2007 (unaudited) was at the lower end of historical results, posting a 1.8x and 1.6x for senior and subordinate obligations, respectively, due in large part to the slowdown in housing starts and resulting decline in collection of connection fees as well as rising operating costs related to power and chemicals. Given the lack of anticipated rate increases over the next several years, the authority is projecting similar, and even slightly reduced, coverage results through FY 2012, with organic growth offsetting rising operating and maintenance (O&M) costs and connection charges stabilizing at FY 2007 levels through FY 2009 before gradually increasing thereafter. While the authority maintains a target all-in ADS coverage of 1.5x, improvement to levels commensurate with historical highs would be viewed favorably.

Other financial metrics are sound, including high operating margins that have regularly exceeded 50% and rapidly increasing liquidity reserves that fell in recent years primarily from substantial pay-as-you-go capital funding. For FY 2007, unaudited results point to 162 days cash on hand and 215 days of working capital, with further improvement expected through FY 2012 based on cash flows provided by the authority. To provide additional operating flexibility, ABCWUA recently created a rate reserve fund - initially funded at $1 million - at the beginning of FY 2008. Designed to provide an offset to future rate hikes or meet unforeseen contingencies, the rate reserve fund may be increased annually up to the current cap of $5 million if the working capital balance exceeds $10 million. Concurrently with the creation of the rate reserve fund, ABCWUA also instituted a water supply charge of $1,250 for new residential customers. The charge will be adjusted annually and is anticipated to allow for cash funding of new water sources in the future like SJC.

The system primarily serves the city, which constitutes almost 90% of county residents. The city is the largest in the state and accounts for about one-quarter of its population. The national economic slowdown has had some affect on the area to date with employment slowing to modest levels through the fourth quarter 2007 and the area experiencing some lost jobs from certain key employers including Intel and AOL. Nevertheless, unemployment year-over-year in Dec. 2007 was down by 0.1% to a low 3.1%, compared to the national unemployment rate, which experienced a 0.5% increase year-over-year and was at 4.8% for the period. Income levels for city residents are on par with the national average and 10%-20% higher than those of the state.

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