OREANDA-NEWS. Fitch Ratings assigns a 'AAA' rating to the following bonds issued by the by the city of Durham, NC (the city):

--Approximately $44 million utility system revenue refunding bonds.

Bond proceeds will refund outstanding series 2011 bonds for present value savings. The bonds are scheduled to sell via negotiation the week of Aug. 8.

In addition, Fitch affirms the following outstanding bonds:

--Approximately $62.4 million utility system revenue bonds (pre-refunding) at 'AAA'.

The Rating Outlook is Stable.

SECURITY

The bonds are secured by net revenues of the city's combined water and sewer utility system.

KEY RATING DRIVERS

STRONG FINANCIAL METRICS: The water and sewer utility system's (the system) financial profile is strong. As calculated by Fitch, all-in debt service coverage (DSC), which includes subordinate debt service on a state revolving fund (SRF) loan and system-supported general obligation (GO) bonds, improved to 4.2x in fiscal 2015. Fitch's 'AAA' median for all-in DSC is 2.6x.

ADEQUATE DEBT CAPACITY: The system's five-year capital improvement plan (CIP) will likely lead to an increased debt load. However, the system's current debt profile is well positioned to absorb any potential new revenue bonds associated with the CIP. Current debt-per-customer is just $600 versus a 'AAA' median of $1,093.

SOUND MANAGEMENT PRACTICES: Conservative budgeting and long-term planning support the system's sound financial results.

ROBUST LOCAL ECONOMY: The economy benefits from an extensive university and healthcare presence, diverse transportation network and proximity to the Research Triangle Park (RTP). Wealth indicators are average, unemployment is below average and the labor pool is highly educated.

RATING SENSITIVITIES

DETERIORATION OF FINANCIAL POSITION: Given potential new debt service requirements driven by the city of Durham, NC's comprehensive capital plan, preservation of all-in debt service coverage margins and liquidity consistent with Fitch's 'AAA' medians is key to maintaining the current water and sewer system rating.

CREDIT PROFILE

The combined water and wastewater system serves a population of approximately 260,000 via 86,000 individual connections within the city of Durham (GO bonds rated 'AAA' by Fitch) and significant portions of the unincorporated area of Durham County and the RTP.

STRONG FINANCIAL PROFILE

The city's financial profile is strong and continues to improve due to the combination of rate-driven revenue increases and decreasing costs of debt service. Fitch-calculated senior and all-in DSC finished at a strong 6.1x and 4.1x, respectively, in fiscal 2015. Each of these numbers compares favorably to Fitch's equivalent medians of 3.2x and 2.6x. Likewise, the system's liquidity metrics are also strong, finishing fiscal 2015 with an outstanding 995 days of cash on hand (DCOH; versus Fitch's 'AAA' median of 764). Unaudited fiscal 2016 results are expected to outperform fiscal 2015 and budget.

Management's forecast, which does not include this refunding, demonstrates all-in DSC decreasing to a minimum of approximately 1.7x by 2024 as debt service associated with future revenue bonds increases to fund the city's CIP. Liquidity is also projected to decrease to the required minimum of 180 DCOH as management plans to draw on its cash reserves to partially fund its capital plan. Such a decrease in unrestricted cash would be notably lower than other similarly rated utility systems.

In Fitch's view, a decrease in DSC as forecast combined with a significant decrease in liquidity would pressure the rating and could lead to negative rating action. Nevertheless, management has previously noted that its projections typically consider a conservative, 'worst case' scenario, which historically has been the case in Fitch's recent reviews of the system.

WELL-POSITIONED DEBT PROFILE

The system's current debt profile is well positioned for bond-related capital expenditures. Current debt-per-customer and debt-to-net plant metrics are low at $600 and 18%, respectively. However, extensive and costly system upgrades are possible in order to remain compliant with state regulatory requirements. To address such requirements, the system's CIP includes around $600 million in projects over next the five years beginning in 2017. Of these projects, approximately 65% are anticipated to be funded by debt. The plan also includes financing for a new Jordan Lake water treatment plant, funding of which is currently anticipated to begin in 2020. Full cost-realization of the CIP could push debt-per-customer up to approximately $1,800 by 2021. At this level, debt metrics would be above Fitch's 'AAA' median but still manageable.

RATE FLEXIBILITY

Based on Fitch's standard assumptions of 7,500 gallons per month of usage of water and 6,000 sewer, the combined customer bill in fiscal 2015 was elevated at $92, or approximately 2.3% of median household income (MHI). However, the city reports lower actual usage and resulting customer bills, which are said to average $48 monthly (or about 1.2% of MHI). At this level, actual bills are comfortably below Fitch's affordability threshold of 2% of MHI, leaving ample rate flexibility to offset rising debt obligations.

EXCESS WATER SYSTEM CAPACITY

The system benefits from an ample long-term raw water supply, derived primarily from Lake Michie, which is supplied by the Flat River and the Little River Reservoir. The city also maintains contractual agreements with seven neighboring cities for additional supply through existing interconnections if needed. Both current water supply and treatment capacity at the system's two water treatment plants are more than double the fiscal 2015 demand of 24 million gallons daily. The wastewater system provides collection, treatment and disposal service and operates two treatment facilities with ample capacity for the foreseeable future.

STABLE AND ROBUST LOCAL ECONOMY

The city's stable and diverse economy is anchored by higher education and healthcare. It is home to Duke University and Medical Center and International Business Machines' (IDR 'A+'/Stable Outlook) supply chain management division, which provide over 42,000 jobs collectively. Durham has enjoyed strong employment growth relative to the state and nation over the past several years. The city's May 2016 unemployment rate was 3.9%, which compared favorably to the state rate of 4.7% and national rate of 5.1%. The economy's success is also related to the nearby RTP, one of the most prominent research and development centers in the nation, which has helped draw biotechnology and high-tech firms into the city.