NEW YORK--(BUSINESS WIRE)--Fitch Ratings assigns the following rating to the Metropolitan Sewerage District of Buncombe County, North Carolina (MSD, or the district) bonds:
--Approximately $30.5 million sewerage system revenue refunding bonds, series 2013 'AA+'.
The bonds are scheduled to sell via negotiated sale the week of April 1. Bond proceeds will be used to refund certain outstanding bonds of the district for interest savings without extension of maturity.
In addition, Fitch affirms the rating on the district's outstanding bonds as follows:
--$90 million in outstanding sewer system parity bonds at 'AA+'.
The Rating Outlook is Stable.
SECURITY
The bonds are secured by a pledge of net revenues of the district's sewer system.
KEY RATING DRIVERS
SOLID FINANCIAL PROFILE: Financial performance is consistently strong with healthy cash balances and good debt service coverage (DSC).
DEBT TO DECLINE: Debt ratios are moderate but are expected to decline through 2017 even with a planned borrowing in 2014. Pay-out of existing debt is above average.
STRONG MANAGEMENT: Management is sound, highlighted by prudent financial policies and comprehensive long-term capital planning.
LIMITED RATE FLEXIBILITY: User charges are at Fitch's affordability threshold, although system rates compare favorably to other regional providers.
VARIABLE RATE DEBT EXPOSURE: Variable rate debt exposure will be reduced from 58% to a still high 40% with the current refunding. However, liquidity agreements supporting the remaining variable rate bonds extend through 2015 and the district's strong operating margins, healthy cash position, and swap agreements somewhat mitigate potential interest rate volatility.
ESSENTIAL SERVICE PROVIDER: The district is a regional provider of an essential service with ample treatment capacity.
RATING SENSITIVITIES
CONTINUED HEALTHY FINANCIAL METRICS: Maintenance of current financial margins is key to retaining the existing rating level.
CREDIT PROFILE
SOLID FINANCIAL PERFORMANCE EXPECTED
MSD continues to generate robust operating margins, good DSC and high cash balances. The district ended fiscal 2012 with approximately $32 million of unrestricted and available restricted cash on hand, equal to nearly 846 days of operating expenses. Financial projections through fiscal 2022 appear conservative given assumptions that include moderate yearly rate increases of 2.5%, growth in both customer accounts and system demand of 0.75%, 3% annual growth in operating expenses, and 5% annual interest costs on variable rate bonds. DSC is projected to range between 1.7x and 2.0x over the next five years.
Financial policies are strong, requiring no less than one year's worth of unrestricted cash and a minimum DSC ratio of 1.5x excluding facility and tap fees. The financial forecast is structured to ensure adherence to these targets.
SOME RATE PRESSURE
Assuming usage of 6,000 gallons per month, the district's average monthly bill is at Fitch's affordability threshold of 1.0%. However, Fitch notes that average consumption within the district is lower than the national average and utility rates are very competitive when compared to other regional providers.
SLIGHTLY REDUCED DEBT BURDEN
The district updates its ten-year capital improvement program (CIP) annually. Projects planned over the next ten years focus primarily on rehabilitation of sewer mains, including interceptors, collection lines, and private sewers. Projected capital spending appears manageable, totaling approximately $83 million through fiscal 2017. Approximately 34% of capital financing will come from a planned debt issuance in 2014. The balance is expected to be done on a pay-go basis from existing cash reserves and annual surplus revenues. Fitch expects debt levels will slightly lower in spite of borrowing plans, which include a $28 million revenue bond issue in fiscal 2014, followed by a similar-sized borrowing in fiscal 2019.
AMPLE TREATMENT CAPACITY REMAINING
The district's only wastewater treatment plant maintains treatment capacity of 40 million gallons per day (mgd). Average daily flows in fiscal 2012 totaled 18.1 mgd, leaving a substantial amount of excess treatment capacity available for future growth. The district's National Pollutant Discharge Elimination System permit is current through 2015, and no regulatory mandates are being imposed or considered at this time.
SOUND ECONOMIC FUNDAMENTALS
MSD provides sewerage conveyance and treatment to about 53,000 customer accounts in the city of Asheville and surrounding communities, including certain unincorporated areas of Buncombe County (the county). Through separate contractual arrangements, the district also serves customers in the Cane Creek Water and Sewer District in northern Henderson County and in the Avery Creek Sanitary Sewer District in the southern portion of the county.
Approximately 65% of MSD's customers are located within the city of Asheville, which serves as the economic and employment center for western North Carolina. Income levels are on par with the state but are around 15% lower than the nation. The county's unemployment rate, measured at 7.2% in December 2012, compares favorably to both the state and nation. The district's 10 largest users accounted for a limited 6% of fiscal 2012 total charges, compared to almost 14% in 2001. The favorable reduction in concentration reflects the closure of several textile manufacturing firms during the prior decade. No additional closures among the district's largest users are currently anticipated.
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 the U.S. Municipal Revenue-Supported Rating Criteria, this action was additionally informed by information from Creditscope.
Applicable Criteria and Related Research:
--'Revenue-Supported Rating Criteria', June 12, 2012;
--'U.S. Water and Sewer Revenue Bond Rating Criteria', August 3, 2012;
--'2013 Water and Sewer Medians', dated Dec. 5, 2012;
--'2013 Outlook: Water and Sewer Sector', dated Dec. 5, 2012.
Applicable Criteria and Related Research
Revenue-Supported Rating Criteria
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=681015
U.S. Water and Sewer Revenue Bond Rating Criteria
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=684901
2013 Water and Sewer Medians
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=695756
2013 Outlook: Water and Sewer Sector
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=695755
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