2009-12-02 21:31:52 -

In the course of routine surveillance, Fitch Ratings affirms the 'A+' rating on Laredo, Texas' (the city) $41.9 million of outstanding waterworks and sewer system revenue bonds (senior bonds). Also, Fitch affirms the 'A+' rating on the city's $650,000 of sewer system revenue bonds outstanding, which are on parity with the waterworks and sewer system revenue bonds. The bonds are special obligations of the city, secured by and payable from an irrevocable first lien on and pledge of net revenues derived from the operation of the city's combined waterworks and sewer system (the system). The Rating Outlook is Stable.

The 'A+' rating reflects the system's favorable credit characteristics in terms of debt service coverage, liquidity, and rate flexibility. The rating also

considers sizable capital needs to accommodate customer growth and the area's low wealth levels and high unemployment. While continued economic softening could pressure the system's overall financial operations, Fitch expects the city will take necessary actions to preserve its good financial metrics.

Financial performance has been sound, with debt service coverage on the senior bonds at 3.7 times (x) in fiscal 2008; all-in annual debt service (ADS) coverage levels were 2.9x. ADS coverage levels are projected to slightly decline due to rising fixed costs from a recently issued $51.4 million combination tax and system revenue certificates of obligation additionally backed by the city's general obligation (rated 'AA-' by Fitch), but coverage should remain adequate for the rating category.
Financial margins have been good, averaging 372 days cash on hand; Fitch expects reserves to remain at comparable levels over the next five years. Leverage ratios are low with debt to plant at 23%. However, debt ratios are expected to rise given that the city is projecting debt issuances totaling $202 million over the next five years.

The city's five-year capital improvement plan (CIP) totals $291 million.
Approximately, 69% is projected to be debt-funded with the remainder to be funded from grants and cash. A good portion of the CIP is dedicated to the construction of a 20 million gallon per day water treatment plant in northwest Laredo. The remainder of the plan is devoted to system improvements and expansions. To meet the costs of infrastructure improvements, water and sewer rate increases were approved by the city council in 2005. The current year's water rate increase totaled 7%, to be followed by an increase of 7% in fiscal 2009, followed by more modest increases through fiscal 2037.

The city is located in Webb County along the border with Mexico. The city has a current estimated population of 237,400. Population growth has averaged a moderate 2.6% over the last five years. Principal economic activities include tourism, oil, manufacturing, international trade and government. Tourism remains an important sector of the city's economic base, while government employment continues to grow and account for a larger portion of the economy. The city's unemployment rate estimated at 8.5% in September 2009 is below county and national levels.

As is the case in Texas border communities, wealth levels are among the lowest in the U.S. However, the area's relatively low cost of living somewhat mitigates this as a credit concern.

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Fitch Ratings, AustinJulie Seebach, 512-215-3740Jose Acosta,
512-215-3726orMedia Relations:Cindy Stoller,
212-908-0526, New YorkEmail: cindy.stoller@fitchratings.com : mailto:cindy.stoller@fitchratings.com