NEW YORK--(BUSINESS WIRE)--Fitch Ratings has assigned a 'AA+' rating to the following High Point, NC (the city) revenue bonds:
--$49 million combined enterprise system revenue refunding bonds, series 2016.
The bonds are expected to sell via negotiation the week of Oct. 17. Proceeds will be used to refund all or a portion of the outstanding series 2006 and 2008 bonds for interest savings and to pay issuance costs. Savings will be taken annually and maturities are expected to match the bonds to be refunded.
In addition, Fitch has affirmed the following ratings:
--$145 million combined enterprise system revenue bonds at 'AA+'.
The Rating Outlook is Stable.
The bonds are payable from a senior lien pledge of the net revenues of the city's water and sewer system (the system).
KEY RATING DRIVERS
MIXED FINANCIAL PERFORMANCE: Debt service coverage (DSC) has declined the past four years but remains solid for the senior bonds and satisfactory for all debt paid by the system. Free cash flow (FCF) is weak. However, robust liquidity provides financial flexibility and an offset to below average FCF and DSC.
STRONG OPERATING PROFILE: Significant infrastructure investment has produced ample and reliable water supply and water and sewer treatment capacity that is more than sufficient to meet future customer needs. The average age of plant is good, and the system is not facing any regulatory issues.
STABLE RESIDENTIAL CUSTOMER BASE: High Point is located in the growing Piedmont Triad region of North Carolina. The city's customer base is roughly 90% residential and stable with modest growth anticipated as the regional economy continues to broaden and diversify.
HIGH RATES EXPECTED TO RISE: Rates are high compared to regional utilities and median household income. Additional increases are expected to meet ongoing capital spending needs.
ELEVATED AND RISING DEBT BURDEN: Debt ratios are above average compared to similarly-rated systems rated by Fitch. Debt is projected to rise further with additional bonds planned for 2017 and 2019. Positively, the rising debt supports a robust capital investment program that should benefit the system over the long-term.
FURTHER DEBT SERVICE COVERAGE DECLINES: The capital plan could challenge High Point, NC utility system's ability to maintain solid financial metrics. Downward rating movement could result if further declines in debt service coverage occur as a result of additional debt service costs, even with continued strong liquidity levels at the system.
The city (general obligation bonds rated 'AA+' by Fitch) is located in the north central portion of the state in an area known as the Piedmont Triad region, which is composed of the cities of High Point, Winston-Salem, and Greensboro.
DIVERSIFYING REGIONAL ECONOMY
The city's strategic location, with easy transportation access to the I-85/I-40 corridor and relatively affordable housing, has contributed to population growth of 20% since the 2000 census to roughly 110,000 in 2015. The city continues to serve as a major wholesale and retail center for home furnishings although employment continues to diversify. The city is home to major colleges and universities, several regional health facilities and has a growing high-tech manufacturing presence. The unemployment rate in the Greensboro-High Point metropolitan statistical area (MSA) is on the decline at 5.1% in July 2016.
SOLID SYSTEM OPERATING CHARACTERISTICS
High Point's utility system provides retail service to approximately 40,000 water and sewer customer accounts. Almost all of the system's customers (99%) are within the city limits and customer make-up is predominantly residential, limiting concentration amongst the largest users. Water supply is ample and consists of local surface water sources along with the new supply from the city's participation in the Piedmont Triad Regional Water Authority Randleman Dam and Reservoir project. Water supply from all sources is expected to sufficiently meet the community's needs through build-out, which is expected over the next 20 years.
Treatment capacity remains strong. The city's water treatment plant can treat up to 24 million gallons per day (mgd), which is twice the current average demand. The system's two wastewater treatment facilities will have a combined capacity to treat up to 36 mgd, which is also comfortably in excess of current average daily flows, upon completion of treatment upgrades to the smaller Westside Plant in 2017. The larger of the two facilities, the Eastside Plant, is an advanced treatment plant last upgraded and expanded to its current 26 mgd capacity in 2004. Westside Plant upgrades include replacing the activated sludge system with a new biological nutrient removal system.
MIXED BUT SOLID FINANCIAL METRICS
The system's financial profile is mixed with declining DSC but very strong liquidity levels. DSC on the senior bonds remained solid at 2.0x in fiscal 2015, although below Fitch's 'AA' category senior lien DSC median of 2.6x. DSC has declined annually from roughly 3.0x in fiscal 2012, primarily as a result of increased expenditures and debt service costs, although a change in the accounting treatment of indirect costs in fiscal 2015 led to higher operating expenditures since those costs were previously treated as a below the line transfer. Estimated and unaudited results provided by the city for fiscal 2016 indicate financial metrics similar to metrics recorded in fiscal 2015.
Coverage of all system-related debt (including senior revenue bonds, GO bonds issued for the system and state revolving fund loans) has declined from 1.6x in fiscals 2012 and 2013 to a below average 1.3x in fiscal 2015. Fitch's 'AA' category median for all-in coverage is 2.0x. The 2016 refunding is expected to provide level annual relief to debt service costs, creating some capacity for new revenue bonds planned in fiscals 2017 and 2019. However, further declines in senior-lien DSC could result in downward rating movement.
FCF ratios have averaged just 34% of annual depreciation over the past six years, indicating the system does not generate sufficient free cash to pay for its capital program without additional debt.
Below average DSC margins levels are partially mitigated by the system's high liquidity. At fiscal-end 2015, the system held $49 million in unrestricted cash and investments, equating to 750 days of cash on hand, continuing the system's practice of holding very large cash and investment balances.
ELEVATED RATES, ADDITIONAL INCREASES NEEDED TO FUND CIP
Rates are set locally by the city council and have been on the rise for the past several years. In fiscal 2016, a typical residential customer paid approximately $95 for combined service (based on 7,500 gallons of use), which is high at 2.6% of median household income. Rates increased by an additional 4% on Oct. 1, 2016.
The city will undergo a formal rate sufficiency analysis with an outside consultant next year to coincide with the issuance of additional bonds. Fitch will continue to monitor the system's rate needs and future rate flexibility as they remain key drivers of future financial performance.
CAPITAL NEEDS TO INCREASE ALREADY ELEVATED DEBT BURDEN
The system's fiscal year 2017 - 2021 capital plan totals $130 million and will fund system-wide improvements including upgrading and expanding sewer treatment capabilities and extending and improving collection, distribution, and transmission assets. Roughly 80% of the CIP is expected to be debt-financed with bond issuances projected in 2017 and in 2019. The remaining balance will be funded from pay-go revenues but management has not indicated a spend-down in cash balances to fund the CIP.
All of the system's debt consists of long-term, fixed-rate bonds, including $145 million in senior lien bonds and $24 million in subordinate general obligation bonds and state loans. Total outstanding debt per customer was a slightly elevated at $2,285 in fiscal 2015 and is expected to increase with the additional borrowings to about $2,700 over the next five years.
Debt to net plant of 61% in fiscal 2015 is also above Fitch's median for 'AA' rated utilities of 47%. However, operating statistics such as the number of sewer overflows and line breaks per 100 miles of collection and distribution piping, respectively, are well below the limits expected for an average utility. In addition, once the current capital plan is completed, it is anticipated that the entire system will be completely rehabilitated and capacity for future growth will be fully in place.
Additional information is available at 'www.fitchratings.com'.
Revenue-Supported Rating Criteria (pub. 16 Jun 2014)
U.S. Water and Sewer Revenue Bond Rating Criteria (pub. 03 Sep 2015)
Dodd-Frank Rating Information Disclosure Form
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