AUSTIN, Texas--(BUSINESS WIRE)--Fitch Ratings assigns an 'AA+' rating to the following Orange Water and Sewer Authority, North Carolina (OWASA or the authority) bonds:
--Approximately $15.7 million water and sewer revenue system revenue refunding bonds, series 2014.
The bonds are scheduled to sell via negotiation the week of November 20. Proceeds will be used to refund a portion of the authority's series 2006 water and sewer system (the system) revenue bonds.
At this time, Fitch also affirms the 'AA+' rating on the following bonds:
--$35.7 million outstanding water and sewer revenues refunding bonds, series 2003, 2005 and 2010;
--$20 million outstanding variable rate water and sewer revenue bonds, series 2004B;
--$17.9 million outstanding water and sewer revenue bonds, series 2006 (pre-refunding).
The Rating Outlook is Stable.
SECURITY
The bonds are secured by a senior lien pledge of the net revenues of the authority's water and sewer system. Each issue has a separately secured debt service reserve fund except the series 2004, series 2010 and series 2014 bonds.
KEY RATING DRIVERS
STRONG FINANCIAL PROFILE: The system continues to post strong financial results with debt service coverage (DSC) at 2x or more for the last five fiscal years and healthy liquidity of over 330 days of cash on hand (DCOH).
SHRINKING RATE FLEXIBILITY: User bills are above average compared to surrounding communities, but still fall below Fitch's affordability threshold. While rate raising flexibility may be diminishing, future rate adjustments are expected to be modest and track inflationary increases.
SOLID SERVICE AREA ECONOMY: The service area benefits from the presence of the University of North Carolina, Chapel Hill (the university) as well as its proximity to the growing Research Triangle Park and the state capital of Raleigh.
AVERAGE DEBT BURDEN: The system's debt per customer of $1,937 is only slightly elevated compared to the 'AA' rating category average of $1,812. Fitch expects debt will decline over time with a manageable and mostly pay-go funded capital plan and rapid retirement of existing debt.
AMPLE CAPACITY: Ample water supply and significant excess treatment capacity help keep capital needs manageable.
RATING SENSITIVITIES
STABILITY EXPECTED: The rating is sensitive to fluctuations in various credit fundamentals including financial and operating performance, capital needs and debt levels. The Stable Outlook reflects Fitch's opinion that such changes are not anticipated at this time.
CREDIT PROFILE
The authority operates in southeastern Orange County (general obligation bonds rated 'AAA'; Stable Outlook by Fitch), about 10 miles southwest of Durham and 25 miles northwest of Raleigh. The service area includes the towns of Chapel Hill and Carrboro, with the system serving an estimated population of 80,000 (most of whom reside in Chapel Hill).
STRONG SERVICE AREA CHARACTERISTICS
The service area benefits considerably from the presence of the university (rated 'AAA'; Stable Outlook) and its proximity to the Research Triangle Park and Raleigh. The university remains the state's flagship school and anchor to the region's employment base. The university's fall 2013 enrollment exceeded 26,000.
Chapel Hill's August 2014 unemployment rate is favorable at 5.3%, below that of the county (5.4%), the Durham metropolitan statistical area (5.7%), the state (7.0%) and the nation (6.3%). Chapel Hill's income levels are 29% and 13% above the state and national averages, respectively.
The authority serves approximately 21,000 water and sewer customers. The customer base is mostly residential and stable. However, more than 22% of water sales in 2014 were derived from the university, which remains the single largest customer. This large customer concentration is offset by the university's importance within the state higher education system and its role as a large regional employer. In addition, no other user accounts for more than 1% of system sales.
AMPLE SYSTEM CAPACITY LIMITS FUTURE CAPITAL NEEDS
OWASA's raw water supply is drawn from two surface reservoirs and University Lake, and supplies reportedly are sufficient to meet projected demand for at least the next 30 years. For emergency purposes, the authority also maintains an allocation from Jordan Lake and has supplementary finished water connections to other neighboring utilities.
Treatment capacity at the authority's water treatment facility totals 20 million gallons per day (mgd), which is well in excess of the 6.2 mgd average daily demand. There is also significant capacity at OWASA's wastewater treatment plant, with design capacity at roughly 2x the current average daily flow. With minimal growth projected and ample supply and treatment capacity, the authority's capital needs through 2019 total a reasonable $72 million. The program is expected to be largely cash funded with a possible issuance of approximately $20 million in 2018.
SOLID FINANCIAL RESULTS AIDED BY RATE INCREASES
Despite ongoing declines in consumption that have persisted over the past decade, OWASA's financial performance trends remain strong. Severe drought conditions in 2002 and again in 2007 through 2008, coupled with the implementation of a conservation-based rate structure and increased usage of reclaimed water by the university, led to a significant drop in demand of about 30% from 2002 to present. The corresponding decline in operating revenues prompted the implementation of sizeable rate hikes to boost operating margins and increase DSC.
DSC since 2010 has consistently registered at or above 2x. Management forecasts, which appear reasonable and relatively conservative, indicate continued coverage at historical norms through fiscal 2019. Unrestricted cash and cash equivalents for fiscal 2014 was healthy at over $18 million, providing a sizable cushion of more than 336 DCOH. The projections include conservative estimates for future energy, chemical and health insurance costs while anticipating inflationary rate adjustments of approximately 3%. A modest amount of debt - $20 million - is anticipated for the forecast period as well.
RELATIVELY HIGH RATES
The average monthly residential bill for combined service is a somewhat high $112 or about 2.5% of median household income (MHI), assuming an industry monthly consumption average of 7,500 gallons. The level of charges follows multiple years of significant rate hikes. Rates have been held flat for three budget cycles, and anticipated customer charge increases should be limited to a very reasonable 3% annually and essentially keep pace with inflation. According to the authority, demand for the average residential user continues to decline and now is closer to 3,900 gallons per month. This low monthly consumption results in a much more affordable monthly bill of about 1.5% of MHI.
AVERAGE DEBT BURDEN TO IMPROVE
The current offering will refund most of the system's series 2006 bonds and in early December the authority is also entering into a private placement bank loan to forward refund its series 2005 bonds. The refunding transactions provide approximately 9% net present value savings. Prior to the refinancing debt per customer is $1,937. Following the transactions debt per customer will drop to $1,848 per customer and align closer to the 'AA' median of $1,812.
Total debt outstanding as of fiscal end 2014 of $78.7 million is a moderate 27% of net assets and a manageable 23% of gross revenues. Subsequent to the end of fiscal 2014, the system was awarded a $6.5 million interest free loan (subordinate to the system's revenue bonds) from the state's revolving fund (SRF) loan program to finance a wastewater treatment project.
Approximately 25% of the system debt profile is made up of unhedged variable rate bonds. Fitch considers this level of variable rate exposure manageable. Debt ratios are projected to continue to improve over the next several years given the rapid pay-out of existing debt (65% of principal is retired in 10 years and 100% is retired in 20 years) and manageable capital program.
Additional information is available at 'www.fitchratings.com'
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 and UNC Environmental Finance Center.
Applicable Criteria and Related Research:
--'Revenue-Supported Rating Criteria' (June 2014);
--'U.S. Water and Sewer Revenue Bond Rating Criteria' (July 2013);
--'2014 Water and Sewer Medians' (December 2013);
--'2014 Outlook: Water and Sewer Sector' (December 2013).
Applicable Criteria and Related Research:
Revenue-Supported Rating Criteria
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=750012
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=915175
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