Fitch Affirms Union County, NC's Enterprise System Revs at 'AA'; Outlook Stable
Fitch Ratings has affirmed the 'AA' rating on the following Union County, NC (the county) bonds:
--Approximately $47.2 million outstanding enterprise system revenue bonds.
The Rating Outlook is Stable.
The bonds are secured by a pledge of net operating revenues of the combined water and sewer system (the system), including tap, capacity and impact fees.
KEY RATING DRIVERS
HEALTHY FINANCIAL METRICS: Debt service coverage (DSC) levels are strong, although declines are expected with the issuance of additional bonds over the next few years. A robust liquidity position at 1,245 days cash on hand as of fiscal 2014 provides financial flexibility and an offset to anticipated declines in future DSC.
RELIANCE ON CONNECTION FEES: Given the rapidly growing service area, fiscal 2014 all-in annual DSC drops slightly below Fitch's 'AA' median when connection fees are excluded from the calculation.
RISING DEBT BURDEN: Debt levels are low for the 'AA' rating category, but are expected to increase significantly over the next five years as the county's sizeable capital improvement plan, which is expected to be primarily debt-funded, is implemented to meet system growth needs.
INCREASING RATES TO REMAIN AFFORDABLE: Rates are very affordable compared to regional facilities at 1.1% of median household income (MHI). Even with projected annual rate increases averaging just over 7% over the next five years, rates are anticipated to remain affordable.
STRONG ECONOMIC PROFILE: Fitch expects the area's role as a regional center for trade, transportation, health care and financial services, among other sectors, will contribute to a general trend of economic stability.
LOWER LIQUIDITY AND DEBT COVERAGE: Increasing capital needs will challenge the system's ability to maintain its strong cash position and solid coverage of debt service. If all-in DSC from recurring revenues drops to very low levels, or if liquidity declines materially, downward rating pressure could result.
Union County, NC (general obligations rated 'AA+' by Fitch) is a rapidly growing, primarily residential, suburb of the city of Charlotte, NC. The county's population, estimated at 218,568 in 2014, grew a substantial 63% since the 2000 census and is projected to grow another 25% over the next 10 years.
FINANCIAL PERFORMANCE SOUND, LIQUIDITY SUBSTANTIAL
Financial operations have been healthy, supported by the annual incremental rate increases that have helped to offset rising operating expenses and capital costs. Senior lien and all-in DSC levels were strong at 4.2x and 2.0x, respectively, in fiscal 2014. The county levies connection and tap fees to fund growth related costs; excluding the fees, senior and all-in coverage was still adequate at 2.3x and 1.6x, respectively, in fiscal 2014. These levels are near to slightly below the current 'AA' rating category median.
All-in coverage levels are projected to decline to 1.3x by fiscal 2019 with the issuance of additional bonds over the next five years. Projected levels are low for the rating, but are somewhat offset by the strong liquidity position and rate raising flexibility.
The utility maintains a strong balance sheet, with fiscal 2014 unrestricted cash balances totaling an exceptional $65.1 million or 1,245 days of operating expenses. This is in excess of the county's policy of 365 days, which Fitch views favorably.
COSTLY CAPITAL PROJECTS NEEDED TO MEET GROWTH DEMANDS
The proposed $388.8 million six-year 2016-2021 capital program addresses the water and wastewater system needs for improvement, expansion, and renewal and rehabilitation (R&R). System improvements and expansion projects (totaling approximately $361.4 million) focus on meeting the future capacity needs of the system based on current population growth trends. The remainder of the program ($27.4 million) is for system R&R.
Some of the more noteworthy projects include the expansion of the Catawba River Water Treatment Plant at an expected cost of $44 million, Twelve Mile Creek Wastewater Treatment Plant improvements at an estimated cost of $64 million, and the Yadkin Water Supply Project (YWSP) at an expected cost of $162 million. Although current capacity is sufficient for the intermediate term, system expansion will be needed to meet the county's growing population. Once the YWSP is completed (within ten years), water supply needs are anticipated to be sufficient to meet the county's 50-year projected population growth.
DEBT BURDEN TO RISE
The system's total outstanding debt as of fiscal 2014 was approximately $59 million. Debt ratios are solid with debt per customer at around $780 and debt per capita at $270. The additional borrowing (approximately $323 million) will increase debt ratios considerably to about $4,190 per customer in five years, above 'AA' category rating median level. On a positive note, beyond the five- to six-year horizon, the system capital plan is anticipated to significantly decline to under $100 million from $389 million, currently.
The system's debt portfolio includes approximately $25 million (approximately 43% of total outstanding debt) in variable rate bonds which are hedged through floating-to-fixed swaps. Fitch views the county's exposure to the current negative mark-to-market valuations of the swaps as manageable given the county's strong fiscal 2014 unrestricted cash balance. However, Fitch will monitor such exposure going forward as the capital plan is implemented and new debt is issued.
USER CHARGES TO REMAIN AFFORDABLE
At $60 in fiscal 2014, the average residential monthly bill (assuming Fitch's standard water usage of 7,500 gallons per month, and wastewater usage of 6,000 gallons per month) is low, equal to just 1.1% of MHI. The most recent rate ordinance that went into effect on July 1, 2015, set rate increases for fiscals 2015 through 2017, with rates increasing by an average of 6.8% annually over the three-year period. Despite the adopted rate increases, the county retains ample rate-raising flexibility.
FAVORABLE ECONOMIC INDICATORS
The county's economic indicators are generally positive. Labor statistics show that unemployment declined by 1% year-over-year in March 2015 to 4.5% while the labor force increased by 2% over the same period. Wealth indicators are positive, with the county's MHI at 142% of the state and 124% of the nation.
Additional information is available at 'www.fitchratings.com'.
In addition to the sources of information identified in Fitch's Revenue-Supported Rating Criteria, this action was additionally informed by information from Creditscope.
Revenue-Supported Rating Criteria (pub. 16 Jun 2014)
U.S. Water and Sewer Revenue Bond Rating Criteria (pub. 31 Jul 2013)
Dodd-Frank Rating Information Disclosure Form
Julie G. Seebach
Fitch Ratings, Inc.
111 Congress Avenue
Austin, TX 78701
+1 512 215-3725
Sandro Scenga, +1-212-908-0278