Fitch Rates Gastonia, NC's Combined Utilities System Revenue Bonds 'AA'
OREANDA-NEWS. Fitch Ratings assigns an 'AA' rating to the following Gastonia, NC (the city) revenue bonds:
--$22 million combined utilities system revenue bonds series 2015.
The bonds are expected to sell via negotiated sale the week of December 9th. Proceeds will be used to finance the cost of certain improvements to the city's combined water and sewer system (the system) and pay issuance costs.
In addition, Fitch upgrades the following to 'AA' from 'AA-':
--$12.5 million combined utility system revenue refunding bonds series 2009.
The Rating Outlook is Stable.
The bonds are payable from a pledge of net system revenues.
KEY RATING DRIVERS
STRONG FINANCIAL RESULTS SUPPORT UPGRADE: Debt service coverage (DSC) and liquidity have steadily improved over time and exceeded Fitch's expectations in fiscal 2015 (unaudited) results. These metrics are expected to stay strong through the five-year forecast.
LOW DEBT PROFILE: The system's low debt burden and associated metrics lend the system ample capacity to absorb approximately $52 million in expected new debt, including this issuance. This additional leveraging will more than double the system's existing debt burden, but key debt metrics are expected to remain well below Fitch's 'AA' medians.
STRONG OPERATING PROFILE: The system has ample water and sewer treatment capacity and continues its initiative of regionalization by incorporating additional wholesale customers into the system.
LOCAL ECONOMY IMPROVING: The city has experienced notable employment growth and economic diversification in recent years.
CONTINUED SOLID FINANCIAL PERFORMANCE: The rating is sensitive to shifts in fundamental credit characteristics, including financial performance, debt management, and the execution of the system's new water treatment plant construction. The Stable Outlook reflects Fitch's expectation that such shifts are unlikely.
STABLE OPERATIONAL PROFILE
The city of Gastonia is located in western North Carolina and provides water and sewer service to over 100,000 residents and 28,899 water and 26,389 sewer customers within the city (general obligation bonds rated 'AA' by Fitch) and surrounding towns and municipalities. The customer base is predominantly residential and relatively diverse.
The top 10 customers account for only about 10% of the system's total operating revenues and include five stable wholesale municipal customers and a large industrial user. Each of these customers operates under long term, minimum volume-based contracts. The system's permitted raw water allocation is anticipated to meet the needs of the system through 2050, and water and sewer treatment capacity remains ample.
STRONG FINANCIAL PROFILE
The system's financial profile and overall financial flexibility has shown marked improvement in recent years as evidenced by increased free cash flow (FCF), growing operating margins, strong DSC and ample liquidity. Senior lien and all-in DSC, which includes both revenue bonds and low-interest state revolving fund (SRF) loans as parity debt, was 2.7x in fiscal 2014. Excluding connection fees totaling of $1.4 million in 2014, all-in DSC was closer to 2.4x. Upon closing of the current 2015 revenue bond issue, the system will amend the master trust agreement to re-classify SRF and other state clean water loan programs as subordinate indebtedness. This change will take effect beginning in fiscal 2016.
On May 1, 2015 management paid down the remaining $2.7 million of series 2005 bonds from existing cash, removing an estimated $750,000 of annual debt service (ADS) through fiscal 2019. Unaudited fiscal 2015 financial results showed an estimated 2.8x senior lien and 2.5x all-in DSC levels, above prior estimates.
The fiscal 2016 - 2020 financial forecast incorporates additional ADS from the current series 2015 bonds and SRF loans. Financial results are projected to stay strong over the forecast period, with senior lien DSC exceeding 2.2x and coverage of all debt remaining above 1.8x but averaging closer to 2.1x.
The system makes annual payments in lieu of property taxes and additional business taxes to the general fund. These payments are included in the system's operations and maintenance (O&M) costs in the income statement but are legally paid after debt service. Fitch's analysis considers these to be fixed costs, however when removing the payments from O&M, DSC (excluding connection fees from revenues) improves to 2.9x in fiscal 2014. The payments represent a manageable 7% of operating revenues and are expected to remain stable and consistent at this level through the forecast with minimal to no changes in the calculation formulas. Fitch views favorably the system's strong historic and anticipated DSC levels inclusive of these payments.
HEALTHY LIQUIDITY TO CONTINUE
The system ended fiscal 2014 with $19.6 million in unrestricted cash and investments, equating to a positive 306 days' cash on hand (DCOH). An additional $1.8 million in available renewal and replacement (R&R) funds boosts liquidity closer to 335 DCOH. Liquidity is expected to decline as management spends $8 million in available cash to support capital needs. Despite this decline Fitch anticipates that liquidity will remain at acceptable levels and will likely rebound to its existing robustness within the five-year forecast. Capital spending and available FCF relative to annual depreciation are expected to continue to improve and consequently lower the system's somewhat elevated age of plant.
LOW DEBT TO REMAIN MANAGEABLE
The system's debt burden remains low: debt-to-net-plant was only 16% in fiscal 2014, well below the medians for similarly-rated utilities. In addition, ADS equated to only 16% of gross revenues and long-term debt per customer was a low $555 that year. In addition to the current issuance, management plans to issue $30 million in 0% interest SRF loans in calendar year 2015 in order to fund the rehabilitation of its sole water treatment plant.
Debt metrics will increase however the overall debt burden is expected to remain manageable; debt per customer is projected to increase to nearly $1,300 in fiscal 2016 (compared to the 'AA' median of $1,934) and by year five decline to closer to $1,100. ADS levels are shown to remain largely flat through the five-year forecast therefore carrying costs should remain very low at around 15% of gross revenues.
The city is located approximately 20 miles west of Charlotte (GO bonds rated 'AAA' with a Stable Outlook by Fitch). The local economy, historically reliant on a now waning textile and automotive manufacturing sectors, benefits mostly due to its proximity to Charlotte, the country's second largest financial center, and the Charlotte Douglass International Airport (rated 'A+' by Fitch), a regional hub. The city has redefined itself as a service, distribution and retail center, and recently developed the Gastonia Technology Park to attract high-tech corporate companies, both foreign and domestic, to the area. The unemployment rate continues to decline as the March 2015 rate of 5.9% improved from the prior year's rate of 6.7%. However, the city's poverty rate was elevated in 2014 at 22%.