Fitch Rates Charleston, SC's $112MM Waterworks and Sewer Rfdg Revs 'AA+'; Outlook Stable

AUSTIN, Texas--(BUSINESS WIRE)--

Fitch Ratings assigns an 'AA+' rating to the following Charleston, South Carolina (the city) revenue bonds:

--Approximately $111.7 million waterworks and sewer system refunding revenue bonds, series 2012.

The bonds are expected to sell via negotiated sale the week of April 23, 2012. Proceeds will be used to refund a portion or all of the city's outstanding waterworks and sewer system capital improvement revenue and refunding bonds, series 2003A and series 2006A for interest savings and pay costs of issuance.

In addition, Fitch affirms its 'AA+' rating on the following outstanding revenue bonds:

--$541 million waterworks and sewer system capital improvement revenue bonds.

The Rating Outlook is Stable.

SECURITY

The bonds are secured and payable from a pledge of net system revenues.

KEY RATING DRIVERS

SOLID FINANCIAL PROFILE: The Charleston Water System (CWS) consistently maintains a strong financial position characterized by exceptional liquidity at over 4.0 times (x) category 'AA' rating median levels and good debt service coverage.

SOUND PLANNING EFFORTS: Management engages in extensive capital planning efforts and also budgets very conservatively.

RATE PRESSURE: User charges are moderate, but will require additional increases to fund capital and fixed costs, potentially reducing affordability in the medium- to long-term.

HIGH CAPITAL AND LEVERAGE RATIOS: Capital needs are sizable and debt ratios are high with debt per customer levels at over 2.0x the category 'AA' rating medians; CWS' debt burden is projected to remain elevated over the next five years.

AMPLE WATER SUPPLY: CWS' plentiful long-term water supply coupled with a diverse service area provides stability.

CREDIT PROFILE

SOLID FINANCIAL METRICS

Financial operations are sound, generating strong operating margins leading to good debt service coverage and ample liquidity. CWS ended fiscal 2010 with over $160 million in unrestricted cash, equal to a very high 1,284 days of cash on hand. Even though CWS anticipates funding approximately 52% of its capital needs with cash, liquidity should remain very strong going forward.

Annual debt service coverage declined and has remained below 2.0x since fiscal 2008 due to decreased impact and tap fees resulting from the housing market collapse and reduced investment earnings. Impact and tap fees accounted for 17% of total revenues in fiscal 2006 and represented only 3% of total revenues in fiscal 2010. Nevertheless, debt service coverage at 1.7x in fiscal 2010 still exceeded the system's internal coverage target of 1.4x as well as the rate covenant requirement of 1.2x coverage from net revenues and impact fees. Unaudited fiscal 2011 results point to improved debt service coverage estimates of 1.9x. CWS projections show coverage over the next five years hovering just above its internal target of 1.4x, but given its history of exceeding projections by a wide margin, debt service coverage is likely to come in higher.

DIMINISHING RATE FLEXIBILITY

Based on water usage of 5,236 gallons per month (gpm) and wastewater usage of 4,488 gpm (city average monthly household consumption), the average monthly in-city retail bill is moderate at 1.6% of median household income (MHI). CWS has some room to raise rates, though additional rate increases needed to support capital costs and increased debt service payments could reduce affordability over the medium- to long-term.

ABOVE-AVERAGE DEBT BURDEN

CWS' five-year capital improvement plan (CIP) through 2014 totals $324 million with the majority of the plan devoted to rehabilitation projects. The five-year plan is linked to four comprehensive 25-year master plans that cover wastewater treatment, wastewater collection, water treatment and water distribution. Overall, approximately 48% of the CIP is anticipated to be debt-funded with the remainder to be funded from operations. Leverage of system assets is relatively high compared with similarly rated credits, both in relation to net system assets and end users. With two planned debt issuances totaling $157 million scheduled for fiscal 2013 and 2014, the system's leverage position is expected to remain well above-average over the next five years, particularly since principal amortization is slow; only 33% of all debt is amortized within 10 years. Nevertheless, with a young age of plant of 10 years, the system is positioned to last for many years. A sizable percentage of system assets are new and have a life of between 50 and 100 years. With relatively new infrastructure requiring minimal routine maintenance costs, capital and debt ratios are expected to decline over the long term.

STABLE SERVICE AREA

Charleston Water's service area includes the city of Charleston as well as portions of Charleston, Dorchester and Berkeley Counties. The water system's service area encompasses 455 square miles, serving 106,000 accounts, about 41% of which are located within the city of Charleston. The water system has long-term retail service area agreements in place with several area municipalities, the largest of which is North Charleston, representing about one-fourth of the system's accounts. The wastewater system's service area is smaller, as many area residents are served by publicly owned sewer districts. About 88% of Charleston Water's 48,000 sewer customer accounts are located within the city of Charleston. The system has an ample raw water supply to meet ongoing demands as well as sufficient water and wastewater treatment capacity to meet medium-term needs.

The Charleston metropolitan statistical area (MSA) encompasses Charleston, Dorchester, and Berkeley counties. The area is a popular tourist destination given its desirable location close to area beaches and the historic nature of the city of Charleston. Driven primarily by the city and its strong military and higher education presence, the MSA continues to grow at a somewhat rapid pace as population has increased by about 10% since the 2000 U.S. Census. Income levels for the MSA rank slightly higher than the state and just below the national level. The MSA unemployment rate estimate at 7.9% for December 2011 is below the state (9.5%) and the national (8.3%) averages for the month.

Additional information is available at 'www.fitchratings.com'. The ratings above were solicited by, or on behalf of, the issuer, and therefore, Fitch has been compensated for the provision of the ratings.

In addition to the sources of information identified in Fitch's Revenue-Supported Rating Criteria, this action was informed by information from CreditScope.

Applicable Criteria and Related Research:

--'Revenue-Supported Rating Criteria' (June 20, 2011);

--'U.S. Water and Sewer Revenue Bond Rating Criteria' (Aug. 10, 2011);

--'2012 Water and Wastewater Medians' (Dec. 8, 2011);

--'2012 Outlook: Water and Sewer Sector' (Dec. 8, 2011).

Applicable Criteria and Related Research:

Revenue-Supported Rating Criteria

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=637130

U.S. Water and Sewer Revenue Bond Rating Criteria

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=647331

2012 Water and Sewer Medians

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=657111

2012 Outlook: Water and Sewer Sector

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=657110

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