NEW YORK--(BUSINESS WIRE)--Fitch Ratings has affirmed the 'AA-' rating on the following Sanford, North Carolina (the city), bonds:
--Approximately $47 million outstanding enterprise system revenue bonds series 2010A & B.
The Rating Outlook is Stable.
The bonds are payable by a senior lien pledge of the net revenues of the city's water and sewer enterprise system (the system), including system connection charges.
KEY RATING DRIVERS
CONTINUED FINANCIAL STABILITY EXPECTED: Future financial performance is expected to be stable, with consistently strong liquidity helping to offset the anticipated below average pro forma debt service coverage (DSC) and a somewhat concentrated customer base.
MANAGEABLE DEBT PROFILE: The debt burden is manageable despite significant debt issuances over the past several years.
LIMITED CAPITAL NEEDS: Major capital needs have waned and the current capital improvement plan (CIP) will be mostly funded by recurring revenues.
STABLE, CONCENTRATED CUSTOMER BASE: The system serves a stable but relatively small customer base. In addition, a large industrial presence in the economy leads to somewhat high customer concentration.
HIGH RATES RELATIVE TO INCOME: Utility charges are competitive to nearby systems, but a somewhat high 2.2% of median household income (MHI). Moderate annual rate increases are expected going forward.
SIGNIFICANT DECLINE IN LIQUIDITY: Fitch expects that strong historic liquidity levels and a recently concluded large CIP should provide rating stability and an important offset to the low expected DSC.
STRONG LIQUIDITY OFFSETS LOWER DSC
Sanford's utility system debt has historically been very low, resulting in strong DSC and an accumulation of significant cash balances. A 2010 bond issuance increased existing debt levels fourfold and led to heightened leverage metrics. Financial results have mostly exceeded conservative coverage expectations provided by management, with net revenues yielding 1.7x and 1.6x DSC of the senior lien and all-in annual debt service (ADS) amounts, respectively for both fiscal years 2012 and 2013. Unaudited results for fiscal 2014 show these coverage levels will continue.
Out-year net revenue projections are conservative and yield declining coverage in fiscal 2015 and beyond as ADS ramps up annually through fiscal 2019. Senior lien DSC is projected to be between 1.5x and 2.0x through the forecast, and between 1.2x and 1.5x all-in, both of which are somewhat low for the rating. Failure to meet or exceed these coverage levels could result in downward pressure on the rating.
Concerns over the projected decline in coverage are alleviated by management's ability to historically exceed coverage expectations as well as by the system's strong and growing liquidity position; unrestricted cash in fiscal 2013 totaled $21.6 million or a high 722 days of operating expenses.
LIMITED CAPITAL NEEDS
The system benefits from an abundant water supply from the Cape Fear River and a water treatment capacity that is nearly twice average daily demand. A recently completed expansion of the system's only wastewater treatment plant (WWTP) has also resulted in ample long-term treatment for current and future wastewater customers.
The WWTP expansion project costs dominated recent capital programs and were funded by the 2010 bond issuance. Current capital needs reflect ongoing system upkeep and total only $8.7 million for fiscals 2014 through 2019. The primarily cash-funded CIP includes water and sewer line improvements and the construction of an elevated water storage tank.
DECLINING DEBT BURDEN
Debt metrics have improved following the city's 2010 bond issuance to more closely align with the 'AA' medians. Debt as a percent of plant has declined from nearly 80% in fiscal 2011 to 47% in fiscal 2013. Debt per customer, though somewhat high at $2,502, has also declined since 2011 and is projected to moderate further as no additional debt plans are under consideration by management at this time.
RATES COMPETITIVE BUT HIGH RELATIVE TO INCOME
User charges are somewhat high in comparison to household income, but rank favorably relative to neighboring communities. Sizeable rate hikes beginning in fiscal 2009 through fiscal 2011 were implemented to fund the expansion of the system's lone wastewater treatment facility. The combined monthly residential bill assuming 6,000 gallons of use is over $75 for fiscal 2013, which at 2.2% of MHI exceeds Fitch's affordability threshold (2% of MHI). Nevertheless, collections remain high and service is promptly discontinued for non-payment. Future rate increases are projected to be manageable given limited near-term capital needs.
STABLE, MIXED CUSTOMER BASE WITH LARGE INDUSTRIAL PRESENCE
Sanford serves as the county seat of Lee County (the county) and located about 45 miles south of the city of Raleigh (general obligation bonds rated 'AAA' by Fitch) and inside the North Carolina 'Research Triangle' area. The city's utility system serves about 17,300 water customers and close to 9,300 wastewater accounts. The system's service area extends beyond Sanford's city limits into unincorporated parts of the county and neighboring Chatham County, spanning a population estimated at 57,000.
Socioeconomic indicators for the city are below average. The unemployment rate remains elevated at 8.7% in August 2014 (down from 11.2% the prior year) and MHI equaled just 85% and 77% of the state and nation, respectively.
Concentration among customers is high with the system's 10 largest users accounting for nearly one-fourth of total operating revenues, and the largest account Pfizer Inc., (Issuer Default Rating of 'A+' by Fitch), comprised about 8% of operating revenues in fiscal 2014. The next two leading customers, Frontier Spinning, and Moen, Inc., account for 5% and 4% of fiscal 2014 operating revenues, respectively. The high customer concentration is somewhat offset by the diversity amongst them; they include pharmaceutical, textile, home building, heavy machinery and various other manufacturing concerns, food processing, and healthcare services. Though Pfizer's operations have decreased at the Sanford facility over the past few years city management expects the company to maintain operations in the city.
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 and Related Research:
--'Revenue-Supported Rating Criteria' (June 2013);
--'U.S. Water and Sewer Revenue Bond Rating Criteria' (July 2012);
--'2014 Water and Sewer Medians' (December 2013);
--'2014 Outlook: Water and Sewer Sector' (December 2013).
Applicable Criteria and Related Research:
U.S. Water and Sewer Revenue Bond Rating Criteria
2014 Water and Sewer Medians
2014 Outlook: Water and Sewer Sector
Revenue-Supported Rating Criteria – Effective June 12, 2012 to June 3, 2013