Fitch Affirms Cary, North Carolina’s Combined System Rev Bonds at “AAA”; Outlook Stable
For Immediate Release
April 26, 2010
Fitch Affirms Cary, North Carolina’s Combined System Rev Bonds at “AAA”; Outlook Stable
Fitch Ratings-San Francisco-22 April 2010: Fitch Ratings takes the following rating action on Cary, North Carolina's combined utility system as part of its continuous surveillance effort:
-- Approximately $57 million combined system revenue bonds, series 2001, 2004, 2007, affirmed at 'AAA'.The Rating Outlook is Stable.
RATING RATIONALE:
--Financial performance has been very strong with consistently strong debt service coverage of its revenue bonds and strong liquidity levels.
--Financial modeling efforts are robust and used to evaluate various rate and growth scenarios on an ongoing basis.
--Sufficient water supply and treatment capacity to meet projected growth.
--Capital needs, in addition to growth-related projects, require the construction of a third
wastewater treatment plant in order to meet state permit requirements.
--Rate increases, particularly on sewer rates to fund construction of the third treatment plant, have been sizable, although rates remain affordable.
--The town's economy is strong and the service territory has long-term potential for continued
growth and development.
KEY RATING DRIVERS:
--Construction of the Western Wake Regional Wastewater Management Facility (the town's third wastewater treatment plant) is needed to comply with state requirements for the town to begin discharging flow into the Cape Fear Basin, the water basin from which it draws its water supply. Construction is expected to begin in 2011, which is delayed from earlier expectations.
--Rate increase began to be phased in five years ago and sizable rate increases are expected to continue to fund the additional debt and loans needed for the town's capital requirements.
--Debt levels are expected to rise with the revenue bonds and general obligation (GO) debt issued to fund construction of the wastewater treatment plant but debt service coverage, including non-revenue bond obligations, is expected to remain strong and supportive of the 'AAA' rating.
SECURITY:
The bonds are secured by the net revenues of the Town of Cary's combined utility system.
CREDIT SUMMARY:
The Town of Cary provides water and sewer service to an area with approximately 49,000
customers in and around the communities of Cary and Morrisville. Morrisville merged into the Cary system in 2006, having previously been a wholesale customer. Cary also provides service to the Raleigh-Durham Airport. The water supply is drawn from Jordan Lake. Even with the service areas recent growth, the water supply still provides almost twice the system's average water demand. Treatment is provided by the Cary/Apex water treatment plant. Cary owns 77% of the treatment plant and operates the facility. Recent modifications at the plant were completed to comply with new state drinking water rules in 2009. Due to slower growth expectations in the region, the next capacity expansion of the plant, to 56 million gallons per day (MGD) from 40 MGD, has been delayed from 2014 to 2016.
Wastewater treatment is provided by two existing plants that provide tertiary treatment. Cary continues to work toward completion of a third wastewater treatment facility, the Western Wake Wastewater Management Facility. The facility is being built with two other communities, Apex and Holly Springs, and will meet Cary's obligation to begin discharging reclaimed water back to the Cape Fear water basin, the basin from which it draws its water supply. The facility will not be on-line to meet Cary's discharge requirements set by the state by the required date of January 2011. In the interim, Cary has an agreement with Durham County to treat a portion of its wastewater to meet the discharge requirements.
Capital needs of the combined utility relate primarily to the construction of the Western Wake Facility and the anticipated expansion of the water treatment plant in 2016. Other capital requirements include maintenance and growth-related needs as well as installation of advanced meter infrastructure over the next 18 months. The system has a $320 million capital plan over the next five years, with approximately 66% of the cost expected to be financed through additional debt- a combination of revenue bonds, GO bonds, and state loans. Debt levels will rise significantly but Cary has been phasing in the rate increases to support the capital spending. Additional annual rate increases are anticipated through the next five years. Despite sizable past rate increases, rates remain affordable with a combined bill at less than 1% of median household income.
Financial performance remains strong. Debt service coverage of revenue bonds was 4.1 times (x) in fiscal year (FY) 2009 and all-in debt service coverage (including GO bonds issued for utility purposes) was 1.8x. Fitch's analysis focuses on all-in coverage since it is the city's intent and practice to pay the GO bonds from water and sewer net revenues, although the revenues are not legally pledged. Cary issued $25 million in GO bonds in June 2009 that are supported by the combined utility system. The city has authorization for another $85 million in GO bonds, approved in 2005, to support the utility system. All-in debt service coverage may decline to around 1.6x at the end of the five-year capital plan, depending on the pace of spending on the Western Wake facility, which would be considered low. Coverage of revenue bonds is expected to remain strong, above 5.0x.
Liquidity remains consistently strong. The utility's operating fund of approximately $40 million at the end of fiscal 2009 provided 471 days cash. Including the system's substantial unrestricted funds dedicated to capital, unrestricted cash was $178 million, or 2,092 days cash.
Applicable criteria available on Fitch's website at www.fitchratings.com:
--Water and Sewer Revenue Bond Rating Guidelines, dated Aug. 6, 2008.
Contact:
Kathy Masterson +1-415-732-5622, San Francisco or Kelly McGary +1-813-224-0492, Tampa.
Karen Mills, Director of Finance, (919) 469-4110
Deanna Boone, Deputy Public Information Officer, (919) 462-3908
Susan Moran, Public Information Officer, (919) 460-4951
Additional information is available at www.fitchratings.com.
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