Fitch Rates Greensboro, NC’s Combined Enterprise System Revs ‘AAA’; Outlook Stable

NEW YORK

Fitch Ratings has assigned an ‘AAA’ rating to the following Greensboro, NC (the city) revenue bonds:

–$26 million combined enterprise system revenue bonds, series 2016.

The bonds are expected to sell via negotiation the week of Jan. 11, 2016. Proceeds will be used to redeem outstanding bond anticipation notes and pay issuance costs.

In addition, Fitch affirms the following ratings:

–Approximately $230 million combined enterprise system revenue bonds (prior to the refunding) at ‘AAA’.

The Rating Outlook is Stable.

SECURITY

The bonds are payable from the net revenues of the city’s water and sewer system (the system).

KEY RATING DRIVERS

STRONG FINANCIAL RESULTS CONTINUE: System finances remain well-managed with consistently strong operating margins, high debt service coverage (DSC) and robust liquidity. Fitch expects these trends will continue.

AFFORDABLE RATES: Rates for most customers are amongst the lowest in the state, providing management with sufficient financial flexibility. The city projects rates will be increased by an additional 23% through 2022.

SIZABLE CAPITAL PROGRAM: The comprehensive capital improvement plan (CIP) is expected to keep the system well maintained, with roughly 40% to address aging water and sewer pipes and 30% to expand and upgrade wastewater treatment, including biological nutrient removal to meet regulatory requirements.

LEVERAGE TO RISE, REMAIN MANAGEABLE: The debt profile is projected to rise slightly over the next five years as roughly half of the CIP is expected to be debt-financed. Elevated reliance on variable rate and short-term debt is mitigated by conservative management, rate setting flexibility and strong liquidity.

STABLE ECONOMY: The economy continues to transition, although manufacturing remains a dominant employment sector. Prospects for continued economic development and diversification are buoyed by an increase in building permits and construction activity and Greensboro’s large university presence, educated workforce and transportation infrastructure anchored by Piedmont Triad International Airport (PTIA).

RATING SENSITIVITIES

MAINTENANCE OF STRONG FINANCES: The rating is sensitive to shifts in various credit fundamentals, including maintenance of strong financial metrics. Lower financial margins and/or liquidity coupled with emerging rate sensitivity could pressure the rating.

CREDIT PROFILE

Greensboro is the county seat of Guilford County (general obligation [GO] bonds rated ‘AAA’/Stable Outlook by Fitch) and the third largest city in the state with a current population of about 280,000.

STRONG FINANCES UNDERPIN THE ‘AAA’

The system’s financial profile remains sound, resulting from strong fiscal management and adherence to various financial policies. The system routinely generates strong operating margins (above 40% annually for the past seven years) and robust cash balances that are used to fund a sizable portion of the capital program.

Coverage of senior lien and all-in debt service has historically been above 2.0x, which is the city’s policy target. Fiscal 2015 DSC was a robust 2.9x, a slightly better result than previously projected and the 2.6x actual coverage in fiscal 2014. An increase in rates has led to a rise in operating revenues over the past three years while operating expenses and debt service have been fairly stable.

Updated pro forma financials provided by the city show results that are very similar to previous estimates and historical trends. DSC is expected to remain above the 2.0x policy goal providing strong excess cash for capital program funding and a strong liquidity position. Fitch believes this will help mitigate an expected rise in debt burden over time.

System liquidity remains robust. Unrestricted cash coupled with available capital reserves and renewal and replacement funds provided the system with over 600 days of cash on hand as of fiscal 2015 (in line with Fitch’s median). Liquidity is expected to remain strong with the help of projected rate increases ranging between 3% and 5.5% per year over the next several years. Additional assumptions that are built into the financial forecast appear reasonable and include modest customer and population growth rates as well as a 5% annual growth in operating expenses and increased debt service from the expected issuance of additional bonds.

RATES TO RISE, REMAIN AFFORDABLE

The city raised rates annually from 2004 through 2010 before implementing a slight rollback in rates in 2011. The rollback was attributable to receipt of a cash settlement related to one of the wastewater treatment facilities. Rates were again increased from fiscal 2013 through 2016 by an aggregate 16%.

The average monthly residential bill for combined service for customers living within city limits (covering the vast majority of customers) remains affordable at $66 for 7,500 gallons of water used in 2016, which is equal to about 1.9% of median household income. Most residential customers use closer to 5,000 gallons/month. Greensboro’s rates are competitive compared, ranking amongst the lowest in the state.

Additional rate increases are projected to fund the capital plan, although the scope of the increases appears manageable. Fitch believes that the currently below average rates provide adequate cushion to absorb the projected increases without significantly altering rate competitiveness over the next several years.

MANAGEABLE DEBT BURDEN; VARIABLE RATE EXPOSURE

The system’s debt burden remains manageable with ratios that are mostly favorable. Outstanding debt per customer was just $1,153 in fiscal 2015, which approximated the ‘AAA’ median, and debt carrying charges were a modest 17% of 2015 gross revenues. Debt to net fixed assets has declined to 38% but remains elevated relative to the ‘AAA’ median.

Principal amortization is accelerated with 60% of outstanding debt (after issuance of the 2016 bonds) retired in the next 10 years and 94% in 20 years. The debt burden is expected to rise slightly due to anticipated borrowings over the next few years but remain manageable, with most debt metrics approximating the medians for similarly rated systems.

After issuance, the system will have approximately $230 million in total debt outstanding, including approximately $170 million of fixed rate bonds and approximately $60 million of variable rate demand obligations (VRDOs), or a somewhat above average 26% of total debt outstanding.

The interest rate for VRDOs is not hedged with a swap, although the bonds are supported by a liquidity facility provided by Bank of America Corporation (long-term Issuer Default Rating of ‘A’ with a Stable Outlook by Fitch) that expires in 2017. Concentration in a single counterparty for liquidity support raises some additional risks in the debt profile. However, strong annual financial margins, healthy existing unrestricted liquidity, and rate raising flexibility coupled with presumed strong market access as an ‘AAA’ rated entity helps mitigate the varied risks associated with a large variable rate portfolio.

SIZEABLE BUT MANAGEABLE CAPITAL PROGRAM

The system’s capital plan totals $259 million through 2019. The city will continue to invest in its distribution and collection system with roughly 40% of spending dedicated to water and sewer line expansion and repairs. Approximately $95 million is included in the CIP to upgrade and expand the system’s T.Z. Osborne sewer treatment plant in order to comply with biological nutrient removal requirements. The plant will be expanded by 16 million gallons per day (mgd), allowing the city to decommission its older and smaller North Buffalo facility (which will be used as a pump/transfer station). Longer term capital planning includes an additional roughly $300 million in projects through 2025.

The financial forecast continues to show the city’s commitment to funding a significant amount of the CIP with pay-as-you-go sources. In addition, the city expects to continue to use short-term bond anticipation notes (BANs) to fund initial capital spending before refinancing the BANs with traditional fixed-rate, long-term bonds. The ‘AAA’ long-term rating reflects Fitch’s expectation that the city will be able to roll over the short-term BANs prior to their maturity. The current rating also anticipates the additional debt will not compromise the city’s strong financial metrics and rate raising flexibility.

STABLE RESIDENTIAL CUSTOMER BASE, TRANSITIONING ECONOMY

The city’s combined water and sewer utility system provides service to approximately 104,000 water and 99,000 sewer accounts in and around Greensboro (GO bonds rated ‘AAA’ with a Stable Outlook), which is geographically located in the northern and central portion of the state known as the Piedmont Triad region. Over 95% of customer accounts are located in Greensboro, while the balance resides just outside of city limits in unincorporated parts of Guilford County. The customer base is diverse and primarily residential and growth trends have been positive but modest.

Over 1 million people live in the Piedmont Triad region. The economy continues to grow and diversify, with economic activity buoyed by a highly educated workforce and solid transportation infrastructure provided by major interstate highway access and the Piedmont Triad International Airport. The economy has diversified away from textile and related manufacturing, with investment from industries including technology, life sciences, pharmaceuticals, warehousing and distribution, aircraft manufacturing and maintenance and machinery products. Development of these sectors should continue to add diversity and stability to the economy. Building permits have increased over the past several years, pointing to continued growth and development throughout the service area.

The Greensboro-High Point metropolitan statistical area unemployment rate of 5.5% in September 2015 has been on a steady decline and is half the peak rate in 2010. The decline results from a combination of employment growth and a slightly smaller labor force. Income levels are about average compared to regional figures but below average compared to 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

U.S. Water and Sewer Revenue Bond Rating Criteria (pub. 03 Sep 2015)

https://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=869223

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https://www.fitchratings.com/creditdesk/press_releases/content/ridf_frame.cfm?pr_id=996926

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https://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=996926

Endorsement Policy

https://www.fitchratings.com/jsp/creditdesk/PolicyRegulation.faces?context=2&detail=31

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