Fitch Rates Metro Sewerage District of Buncombe County, NC's Sewer Revs 'AA+'; Outlook Stable

NEW YORK--()--Fitch Ratings assigns an 'AA+' rating to the following Metropolitan Sewerage District of Buncombe County, North Carolina (the district) bonds:

--Approximately $26.2 million, series 2014.

The bonds are scheduled to sell via negotiated sale the week of May 7. Bond proceeds will be used to fund certain projects as well as pay for the cost of issuance.

In addition, Fitch affirms the rating on the district's outstanding parity bonds as follows:

--$80.5 million in sewer system 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). Management is sound, highlighted by prudent financial policies and comprehensive long-term capital planning.

MODERATE DEBT BURDEN: Debt ratios are expected to rise from current and future planned borrowings but are projected to remain comparable to the category 'AA' rating medians.

DECLINING VARIABLE RATE DEBT EXPOSURE: Variable rate debt will be reduced from a previous 40% to a still high 30% of total debt after the current issuance. Liquidity agreements supporting the remaining variable rate bonds extend through 2017, and the district's strong operating margins, healthy cash position, and swap agreements mitigate potential interest rate volatility.

EFFECTIVE CAPITAL PROGRAM: The district's aggressive funding of renewal and replacement projects maintains the system in a state of good repair and minimizes the risk of regulatory intervention. The district is an essential regional service provider and has ample treatment capacity.

SOMEWHAT LIMITED RATE FLEXIBILITY: When applying national average usage to the district's rate structure, user charges approach Fitch's affordability threshold. However, charges reflecting actual customer consumption compare favorably to other regional providers.

RATING SENSITIVITIES

MAINTENANCE OF HEALTHY FINANCIAL METRICS: The rating is sensitive to various credit fundamentals including financial performance and debt management as well as operational and economic stability. The Stable Outlook reflects Fitch's expectation that the district will continue posting strong financial performance and maintain stable operations in line with historical results.

CREDIT PROFILE

SOLID FINANCIAL PERFORMANCE EXPECTED

The district continues to generate robust operating margins, good DSC and high cash balances. The district ended fiscal year (FY) 2013 with approximately $33 million of unrestricted and available restricted cash on hand, equal to nearly 730 days of operating expenses. Financial projections through FY 2023 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 1.68x and 1.9x over the next five years.

MANAGEABLE DEBT BURDEN

In FY 2013 debt per customer and per capita metrics approximated the 'AA' medians at $1,702 and $368 respectively. Debt as a percent of net plant was low at 24% and carrying costs comprised a moderate 28% of gross revenues. The pay-out of existing debt is above average, with about 43% and 88% retired (including 2014 issuance) in 10 and 20 years respectively. Though debt is expected to increase slightly over the next five years, to approximately $1,986 by 2018, debt levels are projected to remain comparable to similarly 'AA' rated credits.

The district's series 2008A bonds are variable rate demand obligations backed by a standby purchase agreement (SBPA) provided by Wells Fargo Bank, N.A. (rated 'AA-/F1+' with a Stable Outlook). Liquidity facility provisions include a stepped-up rate and three-year term out of bank bonds. The series 2008A bonds comprise 30.1% of the county's total indebtedness, including this issuance. Fitch considers this amount elevated.

The district also has a floating-to-fixed rate swap outstanding with Bank of America (rated 'A/F1' with a Negative Outlook). The swap can be terminated at the district's option if the counterparty's credit rating falls below Baa3/BBB-. The swap carries a manageable mark-to-market valuation of negative $4.1 million as of March 18, 2014 (liquidity remains high at 613 days' cash on hand even after adjusting for this exposure).

STRONG CAPITAL PROGRAM AND AMPLE CAPACITY

The district updates its 10-year capital improvement plan annually. Projects focus primarily on rehabilitation of sewer mains, including interceptors, collection lines, and private sewers. Projected capital spending appears manageable, totaling approximately $85.8 million through fiscal 2018. Approximately 61% of this capital plan will be financed by the current 2014 debt issuance as well as an additional similar-sized borrowing planned for fiscal 2018. The balance of capital funding will come from existing cash reserves and annual surplus revenues.

The district's only wastewater treatment plant maintains treatment capacity of 40 million gallons per day (mgd). Average daily flows in FY 2013 totaled 22 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 consent orders or regulatory mandates of concern are being imposed or considered at this time.

MODERATE RATE PRESSURE

Based on the national average of wastewater charges for 6,000 gallons per month (gpm), the district's average monthly retail bill is high at Fitch's affordability threshold of 1% of MHI. However, the typical district customer produces less than the national average, closer to 4,000 gpm and thus the monthly bill at approximately $28 is slightly more affordable at .8% of MHI. This moderate degree of flexibility, assuming the actual customer usage, is not expected to impede the district's plan to implement annual increases that approximate the rate of inflation, or about 2.5% annually. Moreover, according to the National Association of Clean Water Agencies, the district's rates are regionally very competitive and fall below the U.S. Environmental Protection Agency's Region IV average annual wastewater charges. Positively, the current rate structure includes a relatively high 31% fixed base charge, mitigating potential fluctuation in flows based on variable weather or consumption patterns.

SOUND ECONOMIC FUNDAMENTALS

The district provides sewerage conveyance and treatment to over 53,000 customer accounts in the city of Asheville and surrounding communities, including certain unincorporated areas of Buncombe 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 77% of the district'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. Buncombe County's unemployment rate as of January 2014 was low at 5.2%. Following the closure of several textile manufacturing firms over the past decade, the local economy still maintains a strong manufacturing sector and is steadily diversifying with the expansion of its health care, small business, tourism, retail, and arts and culture industries.

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:

--'U.S. Water and Sewer Revenue Bond Rating Criteria' (July 31, 2013);

--'2013 Water and Sewer Medians' (Dec. 5, 2012);

--'2013 Outlook: Water and Sewer Sector' (Dec. 5, 2012).

Applicable Criteria and Related Research:

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=826645

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Contacts

Fitch Ratings
Media Relations
Elizabeth Fogerty, New York
Tel: +1 212-908-0526
Email: elizabeth.fogerty@fitchratings.com
or
Primary Analyst
Eva D. Rippeteau
Associate Director
+1-212-908-9105
Fitch Ratings, Inc.
One State Street Plaza
New York, NY 10004
or
Secondary Analyst
Julie G. Seebach
Director
+1-512-215-3740
or
Committee Chairperson
Amy Laskey
Managing Director
+1-212-908-0568

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Contacts

Fitch Ratings
Media Relations
Elizabeth Fogerty, New York
Tel: +1 212-908-0526
Email: elizabeth.fogerty@fitchratings.com
or
Primary Analyst
Eva D. Rippeteau
Associate Director
+1-212-908-9105
Fitch Ratings, Inc.
One State Street Plaza
New York, NY 10004
or
Secondary Analyst
Julie G. Seebach
Director
+1-512-215-3740
or
Committee Chairperson
Amy Laskey
Managing Director
+1-212-908-0568