NEW YORK - (Business Wire) Fitch Ratings assigns an 'AAA' rating to Charlotte, North Carolina's (the city) approximately $363 million water and sewer system revenue refunding bonds, series 2009B. The bonds are scheduled to sell Nov. 19, 2009 through negotiation. Bond proceeds will be used to take out all of the utility's outstanding commercial paper ($110 million) with the remainder funding system-wide capital projects. In addition, Fitch affirms the city's 'AAA' rating on outstanding parity bonds. The Rating Outlook is Stable. The 'AAA' rating of the utilities' revenue bonds reflects the broad, diverse service area with excellent long-term prospects for continued expansion in spite of some near-term economic softening, as well as the utilities' well-managed and well-maintained facilities, strong planning, ample water supply for current and projected needs, strong financial condition with sizable reserves, and moderate rates that should remain competitive even after reasonable future increases. The rating also takes into account the system's significant future capital needs which will keep overall debt service coverage levels (including subordinate debt service) adequate for the rating. The Stable Outlook reflects Fitch's expectation that the system will maintain ample operating margins to support all obligations and maintain financial metrics consistent with the rating category.
In fiscal 2008, the water system served approximately 242,000 customers. Commercial customers use less than one-quarter of the water volume, but no customer provides more than 1% of revenues. The sewer system provides service to approximately 223,000 customers. Growth in both the water and wastewater customer accounts is projected to continue at .5% for fiscal year (FY) 2010 and 2% annually thereafter, down from previous projections of 3% annually. In response to North Carolina's 2007 drought (the most significant one recorded), conservation measures reduced the service area's usage by 37% and lake levels remained above elevations necessary to sustain all water users. Raw water supply from Duke Energy Company reservoirs on the Catawba River is projected to remain sufficient for at least 40 years. Water treatment facilities are in good condition and can be expanded to accommodate expected growth. Sanitary sewer treatment is provided by five advanced treatment plants, all of which have national pollution discharge elimination system permits.
Despite a 15% rate increase at the end of FY 2008 to recover revenues lost due to stringent conservation measures and a smaller 5.2% increase for FY 2010, utility rates are below average compared with those of other local systems and similarly sized utilities throughout the Southeast. The average residential customer bill in FY 2010 is less than $60 per month assuming 1,000 cubic feet of water usage. Rate increases to sustain debt service coverage for bonds to support the large, growth-related capital improvement plan (CIP) hover around 10% annually through FY 2013. Despite the drought, FY 2009 financial results were sound; although total system revenue was down less than 1% from FY 2008, operating revenues were up 3.9%, largely reflecting the sizeable rate increase. Liquidity is ample with 605 days cash on hand at the close of FY 2009 (unaudited). Consumption for FY 2010 year-to-date is up 3% over FY 2009, as expected, and water and sewer revenues and expenditures are on target. Capacity and connection fees are below expectations and the system lowered its longer term assumptions to account for a continued slowdown.
The utilities are undergoing a large $1.1 billion capital CIP that will require an estimated $883 million in debt-funded expenditures over the next five years, in addition to $271 million of debt for projects approved in prior CIPs. Projects primarily will address growth-related needs, including planned annexations, and can be delayed or scaled back slightly if necessary. Although debt needs remain high, the city has increased the pay-as-you-go funding component of its capital plan from 10% of the total in FY 2009 to 34% in FY 2013. Still, the system's leverage will continue to increase, and parity debt service coverage, which has been strong historically, will decline. Coverage through FY 2014, with conservative revenue assumptions, is expected to be at least 1.8 times (x), a decrease from the 2.2x in FY 2008. System officials are committed to issuing revenue bonds in lieu of general obligation bonds and other subordinate debt. All-in coverage, although thin, is projected to increase to 1.5x at the conclusion of the projection period from the 1.2x of fiscal 2008.
The city of Charlotte's water and sewer utilities serve all of Mecklenburg County, with an estimated 2007 population of 867,067. Growth in the city and county has been consistent since the 1990s, and prospects for continued economic expansion are good despite some weakening in key economic indicators. The county's September 2009 jobless rate of 9.6% was substantially higher than 5.7% a year prior but lower than the county and state rates. Labor force and employment indicators also weakened in September 2009 from September 2008, retracting 6.7% and 2.7%, respectively. Per capita personal income levels in the county are well above state (by 37%) and national (by 21%) averages.
Additional information is available at 'www.fitchratings.com'.
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Fitch Ratings
Cindy Stoller, +1-212-908-0526 (New York)
cindy.stoller@fitchratings.com
Kelly McGary, +1-813-223-6600 (Tampa)
Barbara Ruth Rosenberg, +1-212-908-0568 (New York)
