Fitch Rates Greensboro, NC’s Combined Enterprise System Revs ‘AAA’; Outlook Stable
By Business Wire News
Fitch Ratings has assigned an ‘AAA’ rating to the following Greensboro, NC (the city) revenue bonds:
–$32 million combined enterprise system revenue refunding bonds, series 2015.
The bonds are expected to sell via negotiation the week of May 18.
Proceeds will be used to advance refund a portion of the outstanding series 2007A and current refund a portion of the 2014A bonds for interest savings and pay issuance costs. Maturities are expected to match and savings are expected to be taken annually.
In addition, Fitch affirms the following outstanding ratings:
–Approximately $200 million combined enterprise system revenue bonds (prior to the refunding), at ‘AAA’.
The Rating Outlook is Stable.
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.
AFFORDABLE RATES: Rates for most customers are amongst the lowest in the state and just below 2% of median household income (MHI), providing management with some financial flexibility. Projected rate increases necessary to meet long-term capital needs are manageable but are projected to increase charges by an additional 23% over the next five years.
LEVERAGE TO RISE, REMAIN MANAGEABLE: The debt profile is projected to rise slightly over the next five years as roughly half of the capital improvement plan (CIP) is expected to be debt financed. Elevated reliance on variable rate and short-term debt is mitigated by conservative budgeting of debt service costs, rate setting flexibility and solid liquidity.
SIZABLE CAPITAL PROGRAM: Roughly 40% of the CIP will address water and sewer pipe maintenance and upgrade projects, while expansion to one of the system’s wastewater treatment facilities to include biological nutrient removal comprises 30% of the CIP. Overall, the capital plan is fairly comprehensive and should keep the system well maintained.
STABLE ECONOMY: The economy continues to transition, although manufacturing remains a dominant employment sector. Prospects for economic development and diversification are buoyed by Greensboro’s university presence, educated workforce and transportation infrastructure anchored by Piedmont Triad International Airport (PTIA).
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.
Greensboro is the county seat of Guilford County (GO bonds rated ‘AAA’, Outlook Stable 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 six 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 2014 DSC was 2.6x, a slightly better result than previously estimated and an increase over the 2.1x recorded in the three previous fiscal years. The improved DSC resulted from a combination of increased operating revenues and a slight decline in annual debt service.
Updated pro forma financials provided by the city show results similar to 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 unrestricted capital reserves and renewal and replacement funds provided the system with over 500 days of cash on hand as of fiscal 2014 (Fitch median for ‘AAA’ is 481 days). Liquidity is expected to remain strong with the help of projected rate increases ranging between 3.5% 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, 5% annual growth in operating expenses and increased debt service from the expected issuance of additional bonds.
RATES TO RISE, MANAGEABLE INCREASES EXPECTED
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 increased again by 3.5% in fiscal 2013 and by similar amounts in fiscal 2013 and 2014.
The average monthly residential bill for combined service for customers living within city limits remains affordable at $62 for 7,500 gallons of water used, which is equal to about 1.8% of MHI. Customers living outside of the city, which comprise about 10% of the customer base, pay a premium for service. Greensboro’s rates are competitive compared to peer systems, 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. However, projected rate increases will eventually push rates above Fitch’s affordability marker of 2% of MHI.
REASONABLE DEBT BURDEN; VARIABLE RATE EXPOSURE
The system’s debt burden remains manageable with ratios that are mostly favorable. Outstanding debt per customer was just $1,137 in fiscal 2014, which approximated the ‘AAA’ median, and debt carrying charges, which peak at $23 million in fiscal 2016, were a modest 17% of gross revenues. Debt to net fixed assets has declined to 38% in fiscal 2014, but remains elevated relative to the ‘AAA’ median.
Principal amortization is accelerated with 57% of outstanding debt retired in the next 10 years, and 95% in 20 years, which Fitch views favorably. The debt burden is expected to rise slightly due to anticipated borrowings over the next few years but remain manageable with most debt metrics remaining near the medians for similarly rated systems.
The system has approximately $230 million in total debt outstanding as of fiscal 2014, including approximately $150 million of fixed rate bonds and $30 million in variable rate short-term bond anticipation notes (BANs) due in 2016. Approximately $70 million of the long-term debt, or a somewhat above average 30% of total debt consists of the series 2014 variable rate demand obligations (VRDOs).
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 Negative Outlook by Fitch) that expires in 2017. The city anticipates lowering the system’s exposure to variable rate debt with a partial refunding of the 2014A bonds from this issuance. In addition, the city plans to refinance the BANs prior to maturity with traditional long-term, fixed-rate debt.
The city budgets conservatively for variable debt service by assuming 200 basis points above the current market rate. 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 YET MANAGEABLE CAPITAL PROGRAM
The system’s updated five-year CIP totals $240 million through 2019 and is similar in size and scope to the previous plan. The city will continue to invest in its distribution and collection system with roughly 40% of CIP spending dedicated to water and sewer line expansion and repairs. Approximately $86 million is included in the CIP to upgrade and expand the system’s treatment facilities in order to comply with expected biological nutrient removal requirements. 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 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 103,000 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 region. About 90% 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 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 PTIA. The economy has diversified away from textile and related manufacturing, with investment from industries including technology, life sciences, pharmaceuticals, warehousing and distribution, and machinery products. Development of these sectors should continue to add diversity and stability to the economy.
The Greensboro-High Point metropolitan statistical area (MSA) unemployment rate of 5.7% in February 2015 is well below the previous February’s rate of 7.2%, and 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 and Related Research:
–‘Revenue-Supported Rating Criteria’ (July 2014);
–‘U.S. Water and Sewer Revenue Bond Rating Criteria’ (July 2013);
–‘2015 Water and Sewer Medians’ (December 2014);
–‘2015 Outlook: Water and Sewer Sector’ (December 2014).
Applicable Criteria and Related Research:
Revenue-Supported Rating Criteria
U.S. Water and Sewer Revenue Bond Rating Criteria
2015 Water and Sewer Medians
2015 Outlook: Water and Sewer Sector
Andrew DeStefano, +1-212-908-0284
Fitch Ratings, Inc.
33 Whitehall Street
New York, NY 10004
Eva D. Rippeteau, +1-212-908-9105
Adrienne Booker, +1-312-368-5471
Elizabeth Fogerty, +1-212-908-0526
Media Relations, New York