Fitch Rates Edinburg, TX Utility System Revenue Bonds 'A'.
The bonds are special obligations of the city payable solely from and secured by a first lien on and pledge of the net revenues of the city's combined waterworks and sewer system. Proceeds will be used to finance water and sewer system improvements and to pay costs of issuance.
The 'A' rating reflects the water and sewer system's solid financial operations, strong debt service coverage, rapidly growing customer base, and competitive rates. The rating also incorporates Edinburg's low but improving wealth levels, large capital improvement plan (CIP), and uncertainty in its long-term water supply. The city's plan to lease or acquire additional water rights from local irrigation districts hinges on the successful conversion of existing agricultural water allocations to municipal use. Ongoing negotiations are reportedly favorable. Once secured, the additional water rights will provide the city sufficient water through the mid-term before additional supplies are needed.
Located 20 miles from the U.S.-Mexico border, Edinburg (general obligation bonds rated 'A+' by Fitch) is the seat of Hidalgo County in southern Texas. Edinburg's population, currently about 67,700, grew 40% during the latest census period and grew another 40% from 2000-2005. The McAllen-Edinburg-Mission area was the fourth fastest growing metropolitan statistical area (MSA) in the U.S. from 1990-2000, growing by 48.5%. Energy production, health care, higher education, and tourism are components of the local economy that have developed in recent years to complement the distribution, trade, and agricultural sectors that have been historically present. As a result, the city's unemployment rate has steadily trended downward, declining below 5% in 2005, despite rapid labor force growth of 5%-6%. However, resident wealth levels remain substantially lower than that of the remainder of the state and nation, although the below-average cost of living somewhat offsets these conditions.
Most of the current offering will fund construction of a new water treatment plant. The city's five-year CIP, including the current offering, totals $39 million, almost two-thirds of which will be debt financed. The bond ordinance requires debt service coverage on the priority lien bonds to equal 1.25 times (x) or greater; however, the city maintains an internal goal of 1.50x, which it has exceeded in recent years. Solid financial management has enabled solid debt service coverage for its prior lien bonds, equal to 3.6x based on fiscal 2005 net revenues. Coverage of maximum annual debt service (MADS), including the current offering, is 2.2x. All-in coverage of junior lien debt and certificate of obligation debt still results in satisfactory coverage of MADS by 1.6x. Liquidity levels are also sound, totaling 265 days cash on hand in fiscal 2005. Principal amortization for senior lien debt, previously very rapid, has declined with the current offering but is still solid at almost 50% in 10 years.
Edinburg serves almost 20,000 water customers with a city-owned and operated water treatment plant and distribution system. The city purchases raw water on a wholesale basis from two Hidalgo County irrigation districts, which are supplied by reservoirs on the Rio Grande, for the bulk of its water needs. In addition, treated potable water is purchased from two area private water supply corporations and the City of McAllen. To gradually eliminate its reliance on wholesale providers, the city's water master plan calls for almost doubling its water rights for raw water from the irrigation districts which the city would treat with the new facility to be financed by the current offering. As agricultural land is developed for residential use, the irrigation districts are poised to allow the associated water rights to convert to municipal use. Once secured, either by long-term lease or purchase, the city believes that its water supply will be sufficient to meet its mid-term needs through 2014, requiring the city to further develop its future water resources.
The city's customer base has grown by a rapid annual average of 8.5% over the past five years for water customers and 9.5% for wastewater customers, enabling the city to minimize rate increases. The city's monthly residential water and sewer charge of $40.55 for 10,000 gallons of water and 10,000 gallons of wastewater is below the state median and very competitive with surrounding municipalities. Modest 5% water and sewer rate increases are planned every 3 years, starting in fiscal 2008. The customer base of the combined system is well diversified, with the top 10 largest customers, mostly stable institutions, accounting for 18.4% of fiscal 2005 revenues.