Fitch Rates Union County, NC's $22MM Enterprise Systems Revs 'AA'; Outlook Stable

AUSTIN, Texas--()--Fitch Ratings has assigned an 'AA' rating to the following Union County, NC (the county) revenue bonds:

--Approximately $22.3 million enterprise systems revenue bonds, series 2015.

The bonds are expected to sell via negotiation the week of Nov. 16, 2015. Proceeds will be used to finance the capital costs of extensions, additions, and improvements to the water and sewer system (the system), system renewal and replacement and new equipment costs, and pay capitalized interest and costs of issuance on the series 2015 bonds.

In addition, Fitch has affirmed the 'AA' rating on the following outstanding revenue bonds:

--$44.4 million outstanding enterprise systems revenue bonds.

The Rating Outlook is Stable.

SECURITY

The bonds are secured by a pledge of net operating revenues of the combined water and sewer system (the system), including tap, capacity and impact fees.

KEY RATING DRIVERS

HEALTHY FINANCIAL PROFILE: Total debt service coverage (DSC) levels are expected to decline to around 1.8x with the issuance of additional bonds over the next few years from a currently very strong at 3.3x. Exceptional liquidity levels at over 1,100 days cash on hand (DCOH) as of fiscal 2015 are also expected to decline to over 500 DCOH over the next five years but should still remain above the 'AA' rating category medians.

RISING DEBT BURDEN: Debt levels are low for the 'AA' rating category but are expected to increase over the next five years as the county's sizeable capital improvement plan, which is expected to be primarily debt-funded, is implemented to meet system growth needs.

INCREASING RATES TO REMAIN AFFORDABLE: Rates are very affordable compared to regional facilities at 1.2% of median household income (MHI). Even with projected annual rate increases averaging just over 9% over the next five years, rates are anticipated to remain affordable.

STRONG ECONOMIC PROFILE: Fitch expects the area's role as a regional center for trade, transportation, health care and financial services, among other sectors, will contribute to a general trend of economic stability.

RATING SENSITIVITIES

LOWER LIQUIDITY AND DEBT COVERAGE: Increasing capital needs may challenge the system's ability to maintain its solid coverage of debt service and strong cash position. If all-in DSC from recurring revenues drops to very low levels, or if liquidity declines materially beyond expectations, downward rating pressure could result.

CREDIT PROFILE

Union County, NC (general obligations rated 'AA+' by Fitch) is a rapidly growing, primarily residential, suburb of the city of Charlotte, NC. The county's population, estimated at 218,568 in 2014, grew a substantial 63% since the 2000 census and is projected to grow another 25% over the next 10 years.

FINANCIAL PERFORMANCE SOUND, LIQUIDITY SUBSTANTIAL

Financial operations have been healthy, supported by the annual incremental rate increases that have helped to offset rising operating expenses and capital costs. Senior lien and all-in DSC levels were strong at 4.2x and 3.3x, respectively, in fiscal 2015. While actual DSC levels have historically come in above forecast, all-in coverage levels are projected to decline to 1.8x by fiscal 2019 with the issuance of additional bonds over the next five years. Projected levels are slightly below-average for the rating but are somewhat offset by the strong liquidity position and rate raising flexibility.

The utility maintains a strong balance sheet, with fiscal 2015 unrestricted cash balances totaling an exceptional $62.9 million or 1,109 days of operating expenses. This is in excess of the county's policy of 365 days, which Fitch views as a favorable credit characteristic.

Liquidity margins are anticipated to decline to still solid levels of over 500 DCOH over the next five years (relative to the category 'AA' median of 442 DCOH), providing an offset to anticipated declines in future DSC.

COSTLY CAPITAL PROJECTS NEEDED TO MEET GROWTH DEMANDS

The proposed $510 million six-year 2016-2021 capital program addresses the water and wastewater system needs for improvement, expansion, and renewal and rehabilitation (R&R). System improvements and expansion projects (totaling approximately $468 million) focus on meeting the future capacity needs of the system based on current population growth trends. The remainder of the program ($42 million) is for system R&R.

Some of the more noteworthy projects include some basin and zone improvements at an expected cost of $51 million, Twelve Mile Creek Wastewater Treatment Plant improvements at an estimated cost of $44 million, and the Yadkin Water Supply Project (YWSP) at an expected cost of $147 million. Although current capacity is sufficient for the intermediate term, system expansion will be needed to meet the county's growing population. Once the YWSP is completed (within 10 years), water supply needs are anticipated to be sufficient to meet the county's 50-year projected population growth, and the need for future rate increases and capital costs should decline.

DEBT BURDEN TO RISE

The system's total outstanding debt (including general obligation debt paid from system revenues and state revolving fund loans) as of fiscal 2015 was approximately $55 million. Debt ratios are low with debt per customer at around $723 and debt per capita at $251. The additional borrowing (approximately $224 million over the next five years) will increase debt ratios to about $2,923 per customer in five years, above 'AA' category rating median levels of $2,049. On a positive note for credit quality, beyond the five- to six-year horizon, the system six-year capital plan is anticipated to significantly decline to under $100 million from $510 million, currently.

The system's debt portfolio includes approximately $24 million (approximately 43% of total outstanding debt) in variable rate bonds which are hedged through floating-to-fixed swaps. Fitch views the county's exposure to the current negative mark-to-market valuations of the swaps as manageable given the county's strong fiscal 2015 unrestricted cash balance. However, Fitch will monitor such exposure going forward as the capital plan is implemented and new debt is issued.

USER CHARGES TO REMAIN AFFORDABLE

At $63.78 in fiscal 2015, the average residential monthly bill (assuming Fitch's standard water usage of 7,500 gallons per month, and wastewater usage of 6,000 gallons per month) is low, equal to just 1.2% of MHI. Average residential water usage in this area is reportedly lower, and the monthly bill is below average when compared to 14 other area service providers. Thus, rates are very competitive and affordable for the area.

The most recent rate ordinance that went into effect on July 1, 2015, set rate increases for fiscals 2015 through 2017, with rates increasing by an average of 6.6% annually over the three-year period. Proposed rate increases by the county's rate consultant for the fiscals 2018 through 2020 average 10% annually. Despite the adopted and proposed rate increases, the county retains ample rate-raising flexibility.

FAVORABLE ECONOMIC INDICATORS

The county's economic indicators are generally positive. Labor statistics show that unemployment declined by 0.5% year-over-year in August 2015 to 5.2% while the labor force increased by 4% over the same period. Wealth indicators are positive, with the county's MHI at 135% of the state and 117% of the nation.

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

In addition to the sources of information identified in Fitch's Revenue-Supported Rating Criteria, this action was additionally informed by information from Creditscope.

Applicable Criteria

Revenue-Supported Rating Criteria (pub. 16 Jun 2014)

https://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=750012

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https://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=993749

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Contacts

Fitch Ratings
Primary Analyst
Julie Garcia Seebach
Director
+1-512-215-3743
Fitch Ratings, Inc.
111 Congress Avenue
Austin, TX 78701
or
Secondary Analyst
Evette Caze
Director
+1-512-908-0376
or
Committee Chairperson
Amy R. Laskey
Managing Director
+1-212-908-0568
or
Media Relations:
Sandro Scenga, +1 212-908-0278
sandro.scenga@fitchratings.com

Contacts

Fitch Ratings
Primary Analyst
Julie Garcia Seebach
Director
+1-512-215-3743
Fitch Ratings, Inc.
111 Congress Avenue
Austin, TX 78701
or
Secondary Analyst
Evette Caze
Director
+1-512-908-0376
or
Committee Chairperson
Amy R. Laskey
Managing Director
+1-212-908-0568
or
Media Relations:
Sandro Scenga, +1 212-908-0278
sandro.scenga@fitchratings.com