Fitch Affirms Greensboro, NC Combined Enterprise System Revs at 'AAA'; Outlook Stable

NEW YORK--()--Fitch Ratings affirms its 'AAA' rating on the following city of Greensboro, NC's (the city) revenue bonds:

--Approximately $228 million in outstanding combined enterprise system (the system) revenue bonds.

The Rating Outlook is Stable.

SECURITY

The bonds are secured by a senior lien pledge of the net revenues of the system.

KEY RATING DRIVERS

STRONG FINANCIAL MANAGEMENT: System finances are well managed evidenced by consistently strong financial results including robust operating margins, high debt service coverage (DSC), and solid liquidity.

AFFORDABLE RATES: Rates for the majority of customers are amongst the lowest in the state, providing management with some financial flexibility. Projected rate increases appear necessary to provide adequate funding to meet long-term capital needs.

SYSTEM LEVERAGE TO RISE: The debt profile is manageable but projected to rise slightly over the next several years as roughly half of the capital plan is expected to be debt financed. Elevated reliance on variable rate and short-term debt is mitigated by conservative budgeting of debt service costs, rate setting flexibility and solid liquidity.

SIZABLE CAPITAL PROGRAM: Capital needs are large but affordable and include routine upkeep and maintenance and upgrades and expansion to one of the system's wastewater treatment facilities to include biological nutrient removal.

STABLE ECONOMIC BASE: The economy continues to transition; although manufacturing remains a dominant employment sector. Prospects for economic development and diversification are buoyed by Greensboro's university presence, educated workforce and transportation infrastructure anchored by Piedmont Triad International Airport (PTIA).

RATING SENSITIVITIES

MAINTENANCE OF SOLID FINANCIAL PROFILE: The rating is sensitive to shifts in various credit fundamentals including maintenance of strong financial metrics. Lower financial margins and/or liquidity coupled with emerging rate sensitivity could pressure the rating.

MANAGEMENT OF ADDITIONAL DEBT: Fitch does not expect the projected additional debt to adversely impact the system's strong credit profile. Maintenance of the rating also assumes the city will continue to capably manage its variable rate debt exposure.

CREDIT PROFILE

Greensboro is the county seat of Guilford County (GO bonds rated 'AAA', Outlook Stable by Fitch) and the third largest city in the state with a current population of about 280,000.

STABLE RESIDENTIAL CUSTOMER BASE, TRANSITIONING ECONOMY

The combined water and sewer utility system provides service to approximately 103,000 water and 99,000 sewer accounts in and around Greensboro (Fitch rates the city's GO bonds 'AAA' with a Stable Outlook), which is geographically located in the northern and central portion of the state known as the Piedmont region.

About 90% of customer accounts are located in Greensboro, while the balance resides just outside of city limits in unincorporated parts of Guilford County. The customer base is diverse and primarily residential with the 10 leading customers accounting for just over 6% of total system revenues. Customer growth trends have averaged a manageable 0.4% annually over the past several years.

Over 1 million people live in the Piedmont region. The economy continues to grow and diversify with economic activity buoyed by a highly educated workforce and solid transportation infrastructure provided by major interstate highway access and PTIA. The economy has diversified away from textile and related manufacturing, with investment from industries including technology, life sciences, pharmaceuticals, warehousing and distribution, and machinery products. Development of these sectors should continue to add diversity and stability to the economy.

The Greensboro-High Point metropolitan statistical area (MSA) unemployment rate of 7.2% in November 2013 is below the previous November's rate of 9.5%. The decline results from a combination of employment growth and a slightly smaller labor force. Income levels are about average compared to regional figures, but below average compared to the nation.

STRONG FINANCIAL MARGINS UNDERPIN THE 'AAA' RATING

The system's financial profile is sound, resulting from strong fiscal management and adherence to various financial policies. The system continues to generate strong operating margins (40% in fiscal 2013) and robust cash balances that are used to fund a sizable portion of the capital program.

Coverage of senior lien and all-in debt service has historically been above 2.0x, which is the city's policy target. Fiscal 2013 DSC was 2.1x for the third year in a row, excluding a large one-time payment received as part of the termination of a service contract with Guilford County and reserved for capital spending.

Pro forma financials provided by the city show results similar to historical trends. DSC is expected to remain above the 2.0x policy goal while providing strong excess cash flows. Fitch believes this will help mitigate an expected rise in debt burden over time.

System liquidity is sound. Unrestricted cash on hand coupled with unrestricted capital reserves and renewal and replacement funds provided the system with over 400 days of cash on hand as of fiscal 2013 (median for 'AAA' is 671 days). Liquidity, while below the median level for similarly rated systems is sufficient given the routinely strong financial margins and flexibility provided by an affordable rate structure.

Liquidity is expected to remain sound with the help of projected rate increases ranging between 3.5% and 11% per year over the next several years. Additional assumptions that are built into the financial forecast include reasonable customer and population growth rates, 5% annual growth in operating expenses and increased debt service from the expected issuance of additional bonds.

RATES TO RISE, LOWERING LONG-TERM FINANCIAL FLEXIBILITY

The city raised rates annually from 2004 through 2010 before implementing a slight rollback in rates in 2011 after receiving a $16.3 million settlement related to one of its wastewater treatment facilities. Rates were increased by 3.5% in fiscal 2013.

The average monthly residential bill for combined service for customers living within city limits remains affordable at just under $60 for 7,500 gallons, which is equal to about 1.7% of median household income (MHI). Customers living outside of the city, which comprise about 10% of the customer base, pay a premium for service. Greensboro's rates are competitive compared to peer systems, ranking third lowest throughout the state.

Additional rate increases are projected to fund the capital plan. Fitch believes the currently below average rates provide adequate cushion to absorb the projected increases without significantly altering rate competitiveness over the next several years. However, the projected rate increases will slowly push rates above the affordability threshold within the next few years. Fitch believes rate pressures rise as rates near (or exceed) 2% of MHI.

REASONABLE DEBT BURDEN; VARIABLE RATE EXPOSURE

The system's debt burden remains manageable. Debt to net fixed assets, at 40% in fiscal 2013, is almost twice the median for 'AAA' rated systems. However, debt per customer is just $1,197, which is close to the 'AAA' median. In addition, annual debt service, which peaks at $23 million in fiscal 2016, is budgeted to be a relatively affordable 20% of gross revenues in fiscal 2014.

Principal amortization is accelerated with 58% of outstanding debt retired in the next 10 years, and 98% in 20 years, which Fitch views favorably. The debt burden is expected to rise slightly due to anticipated borrowings over the next few years but remain manageable with most debt metrics remaining near the medians for similarly rated systems.

The system has roughly $230 million in total debt outstanding. Approximately $70 million, or a somewhat above average 30% of total debt consists of unhedged variable rate demand obligations (VRDOs). There are six separate series of VRDOs, all of which are supported by liquidity facilities provided by Bank of America Corporation (long-term Issuer Default rating of 'A' with a Stable Outlook by Fitch). Five of six facilities have been issued under one master agreement. After a couple of one-year extensions, all six facilities will expire on May 22, 2014. Management is currently negotiating for additional extensions.

The city budgets conservatively for variable debt service by assuming 200 basis points above the current market rate. Concentration in a single counterparty for liquidity support raises some additional risks in the debt profile. However, strong annual financial margins, healthy existing unrestricted liquidity, and rate raising flexibility coupled with presumed strong market access as a 'AAA' rated entity help mitigate the varied risks associated with a large variable rate portfolio.

MANAGEABLE CAPITAL PROGRAM FUNDS UPKEEP AND NUTRIENT REMOVAL

The system's updated five-year capital improvement program (CIP) totals $286 million through 2018 and is similar in size and scope to the previous plan. The city will continue to invest in its distribution and collection system assets with roughly 1/3 of CIP spending dedicated to water and sewer line expansion and repairs. Approximately $96 million is included in the CIP to upgrade and expand the system's treatment facilities in order to comply with expected biological nutrient removal (BNR) requirements. Longer term capital planning includes an additional roughly $300 million in projects through 2025.

The financial forecast continues to show the city's commitment to funding a significant amount of the CIP with pay-as-you-go sources. The city expects to close on a roughly $30 million privately placed bond anticipation note (BAN) later this month with subsequent BANs issued in 2015 and 2017 totaling about $150 million in aggregate. The city anticipates refinancing the BANs prior to their maturity with fixed-rate long term bonds. The 'AAA' long-term rating reflects Fitch's expectation that the city will be able to roll over the short term BANs prior to their maturity. In addition, the current rating anticipates the additional debt will not compromise the city's strong financial metrics and rate raising flexibility.

Additional information is available at 'www.fitchratings.com'.

In addition to the sources of information identified in Fitch's 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 2013);

--'U.S. Water and Sewer Revenue Bond Rating Criteria' (July 2013);

--'2014 Water and Sewer Medians' (December 2013);

--'2014 Sector Outlook: Water and Sewer' (December 2013).

Applicable Criteria and Related Research:

Revenue-Supported Rating Criteria

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=709499

U.S. Water and Sewer Revenue Bond Rating Criteria

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=715275

2014 Water and Sewer Medians

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=724358

2014 Outlook: Water and Sewer Sector

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=724357

Additional Disclosure

Solicitation Status

http://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=823533

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Contacts

Fitch Ratings
Primary Analyst
Andrew DeStefano
Director
+1-212-908-0284
Fitch Ratings, Inc.
One State Street Plaza,
New York, NY 10004
or
Secondary Analyst
Eva D. Rippeteau
Associate Director
+1-212-908-9105
or
Committee Chairperson
Arlene Bohner
Senior Director
+1-212-908-0554
or
Media Relations:
Elizabeth Fogerty, +1-212-908-0526 (New York)
elizabeth.fogerty@fitchratings.com

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Contacts

Fitch Ratings
Primary Analyst
Andrew DeStefano
Director
+1-212-908-0284
Fitch Ratings, Inc.
One State Street Plaza,
New York, NY 10004
or
Secondary Analyst
Eva D. Rippeteau
Associate Director
+1-212-908-9105
or
Committee Chairperson
Arlene Bohner
Senior Director
+1-212-908-0554
or
Media Relations:
Elizabeth Fogerty, +1-212-908-0526 (New York)
elizabeth.fogerty@fitchratings.com