AUSTIN, Texas--(BUSINESS WIRE)--Fitch Ratings assigns an 'AAA' rating to the following revenue bonds of Cary, North Carolina (the town):
--Approximately $53.6 million combined enterprise system revenue and refunding bonds, series 2015.
Also, Fitch affirms the 'AAA' rating on the following bonds:
--Approximately $129 million combined enterprise system revenue bonds series 2007 (pre-refunding) and series 2013.
The Rating Outlook is Stable.
SECURITY
The bonds are payable from a first lien pledge on net revenues of the town's combined water and sewer system (the system). The series 2007 bonds are also secured by a debt service reserve fund provided by a surety policy, equal to maximum annual debt service. A debt service reserve was not funded for the series 2013 bonds, and will not be funded for the series 2015 bonds.
KEY RATING DRIVERS
ROBUST LIQUIDITY AND HEALTHY COVERAGE: Liquidity remains very high at 4x the 'AAA' median for days cash on hand (DCOH). All-in debt service coverage (DSC) has averaged a very solid 2.5x over the last five years. However, the system's growing debt carrying costs are expected to begin to pressure all-in DSC.
LARGE AND GROWING DEBT BURDEN: Debt ratios have grown considerably over the last two years and are now well above the 'AAA' rating level due to necessary system expansion to address discharge requirements.
STRONG MANAGEMENT: The town benefits from finance and utility management teams that practice conservative budgeting and long-range planning.
AMPLE RATE FLEXIBILITY: Over the last several years management has instituted a series of rate increases, particularly on the sewer side, to fund construction of a third treatment plant. Additional modest annual rate increases are anticipated over the next five years. User charges remain well below Fitch's affordability threshold despite the recent hikes and future planned adjustments.
HEALTHY ECONOMIC BASE: The service area economy is strong, characterized by high wealth levels and low unemployment. Fitch believes the service territory has long-term potential for continued growth and development given its location in the Raleigh-Durham metropolitan area.
RATING SENSITIVITIES
DETERIORATION OF FINANCIAL POSITION: Failure to preserve the system's strong financial profile despite significant ongoing capital pressures and increasing debt load could pressure the rating. In particular, healthy liquidity and robust all-in DSC will be key to supporting the 'AAA' rating given the growing debt burden.
CREDIT PROFILE
The Town of Cary (general obligation [GO] bonds rated 'AAA' by Fitch) provides water and sewer service to an area with approximately 57,000 customers in and around the communities of Cary and Morrisville in central North Carolina, with a service area population estimated at approximately 175,000. Cary also provides utility service to the Raleigh-Durham Airport.
COMPLETED AND PLANNED EXPANSION PROVIDE AMPLE CAPACITY
Water supply is drawn from Jordan Lake. Even with the service area's recent growth, this supply still provides almost twice the system's average water demand. Treatment is provided by the Cary/Apex water treatment plant. The current offering will provide over $37 million in new money to finance the 16 million gallon daily (mgd) expansion of the system's Cary-Apex water treatment plan, which will increase total treatment capacity by 40%. It is expected this expansion will service the areas through at least 2032 and likely longer given the area's declining water demand. Cary owns 77% of the treatment plant and operates the facility. Expansion of the current treatment plant is on track for completion by 2016. As part of the town's long-term planning, Cary is requesting additional water allocations from Jordan Lake, enough to meet demand until 2045.
Cary recently completed construction on a third wastewater treatment facility, the Western Wake Regional Wastewater Management Facility. The expansion brings total wastewater treatment capacity to just over 42 mgd, which will extend total system capacity until at least 2060. The facility was built in cooperation with Apex (shares 34% of total wastewater treatment capacity) and was necessary to meet Cary's obligation to begin discharging reclaimed water back to the Cape Fear water basin, the basin from which it draws its water supply.
AMPLE RATE FLEXIBILITY REMAINS
Debt levels have increased significantly and are forecast to continue to grow based on capital needs, but Cary has been phasing in rate increases to support the planned capital spending. Additional annual rate hikes averaging approximately 4% are anticipated through fiscal 2019. Most recently management has adjusted its volumetric rates, although the town now anticipates future adjustments will primarily increase the fixed base rate. Despite sizable past increases, user charges remain affordable with a combined bill at 1.1% of median household income (MHI). This amount is well below Fitch's affordability threshold of 2% of MHI and provides the system with ample rate flexibility going forward.
STRONG FINANCIAL MANAGEMENT AND RESULTS
Financial performance remains robust but is anticipated to soften as additional debt is absorbed into the system's costs structure. DSC on all system-related debt has averaged 2.6x for the last five fiscal years. Audited results for fiscal 2014 report a drop in DSC to 2.1x but coverage was also impacted by the inclusion of a one-time $5 million additional operating expense. Fitch's analysis focuses on all-in DSC given the city's intent and practice to repay utility-related GO bonds from water and sewer net revenues, although the revenues are not legally pledged.
Financial management is very strong, as evidenced by healthy liquidity, stringent fiscal policies and conservative budgeting. Management-provided projections only take into account recurring revenues and show coverage of all system debt dropping to 1.3x in fiscal 2015 from 1.5x in fiscal 2014 and stay near that level through the fiscal 2019 forecast period. The forecast coverage levels include currently anticipated debt issuances, which could ultimately be postponed if increased demand does not materialize. Fitch-calculated coverage, which takes into account system impact fees, points to healthier levels of 1.7x to 2x through the forecast period. Given management's history of conservative budgeting practices, Fitch expects actual results to outpace system projections. The utility's operating fund cash position of over $63 million at the end of fiscal 2014 equates to a strong 509 days of operations. Including the system's substantial unrestricted funds dedicated to capital, reserves totaled over $200 million, equal to almost 1,700 days of operations.
CAPITAL NEEDS ADD TO DEBT BURDEN
With the completion of the Western Wake Facility, the focus of the capital improvement plan (CIP) shifts to the expansion of the water treatment plant. This plant expansion will be partly funded with a portion of the current offering and is expected to come online in 2016. The fiscal 2015-2019 CIP totals just over $220 million with just over 50% of it to be debt financed. Projects slated for fiscals 2018-2019 are estimated to cost $88 million and focus on additional system expansion which could potentially be deferred depending on demand needs.
Debt-to-net plant has grown from a moderate 25% in fiscal 2011 to 40% in fiscal 2014. Also, the additional leveraging has increased the debt per customer levels to $2,470 for fiscal 2014, and future debt, if issued as currently planned, will push debt per customer to over $3,100 by 2019-2; 3x the 'AAA' median. The projected elevated debt levels are a credit concern and Fitch believes it will be necessary for the town to maintain strong financial metrics, including healthy all-in DSC and robust liquidity, to offset the rising debt burden and support the 'AAA' rating.
DYNAMIC ECONOMIC SERVICE AREA
The town's economy benefits from a strong commercial presence within the town's limits, including SAS Institute, Inc., the world's largest privately held software company. The regional economy is anchored by nearby Raleigh, the state capital, and Research Triangle Park (the largest research park in the U.S.). The area is also home to Duke University, North Carolina State University and University of North Carolina at Chapel Hill, and major health care providers in the area include Duke Raleigh Hospital, Wake Medical Center and Rex Healthcare. These universities and health care facilities add breadth to the area employment base. Wealth levels are high as compared to state and national levels reflecting the highly specialized nature of the town's employment base. The town unemployment as of November 2014 is low at 3.2%, well below the state (5.4%) and nation (5.5%), and has remained low even during recessionary years, never climbing above 6.5%. Employment levels have also not seen a decline since 2005. The individual poverty rate of just 6.3% is also very low compared to the state (17.9%) and the nation (15.9%).
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 2014);
--'U.S. Water and Sewer Revenue Bond Rating Criteria' (July 2013);
--'2015 Water and Sewer Medians' (December 2014);
--'2015 Sector Outlook: Water and Sewer' (December 2014).
Applicable Criteria and Related Research:
2015 Water and Sewer Medians
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=818409
U.S. Water and Sewer Revenue Bond Rating Criteria
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=715275
2015 Outlook: Water and Sewer Sector
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=818410
Revenue-Supported Rating Criteria
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=750012
Additional Disclosure
Solicitation Status
http://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=979634
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