TEXT - Fitch affirms Sanford, North Carolina
Nov 20 - Fitch Ratings takes the following rating action on Sanford, North Carolina's (the city) bonds: --Approximately $50 million outstanding enterprise system revenue bonds affirmed at 'AA-'. The Rating Outlook is Stable. SECURITY The bonds are secured by a senior lien pledge of the net revenues of the city's water and sewer enterprise system (the system), including system connection charges. KEY RATING DRIVERS STABLE FINANCIAL PERFORMANCE EXPECTED: System financial performance has been solid with rate increases implemented in anticipation of the wastewater plant expansion project and the series 2010 bonds leading to strong debt service coverage (DSC) in fiscals 2009 and 2010. As expected, coverage margins weakened in fiscals 2011 and 2012 (unaudited) as the new debt began to amortize. Future financial performance is expected to be stable, although pro forma DSC is somewhat low for the rating. HIGH LIQUIDITY PROVIDES FLEXIBILITY: Consistently strong liquidity provides some financial flexibility and helps offset the anticipated below average pro forma DSC and the somewhat concentrated customer base. RISING BUT MANAGEABLE DEBT PROFILE: The debt burden is manageable despite significant debt issuance and state revolving fund loans over the past several years. LIMITED CAPITAL NEEDS: The fiscal 2013 - 2017 capital improvement plan (CIP) totals just $34 million. The CIP is expected to be funded almost entirely from existing bond proceeds, which should lead to improvement in the system's debt profile over the forecast period. HIGH RATES RELATIVE TO INCOME: Utility charges are competitive to nearby systems, but a somewhat high 2.3% of median household income. STABLE, CONCENTRATED CUSTOMER BASE: The system serves a stable but relatively small customer base. In addition, a large industrial presence in the economy leads to somewhat high customer concentration. WHAT COULD TRIGGER A RATING ACTION SIGNIFICANT DECLINE IN LIQUIDITY: Given the system's limited capital needs, Fitch expects continued maintenance of a strong liquidity position, as strong cash resources will remain an important offset to the low expected DSC. CREDIT PROFILE STRONG LIQUIDITY OFFSETS LOWER DSC Fitch's concerns regarding customer concentration and low projected DSC is in large part mitigated by the system's strong liquidity position. Historically low debt levels have allowed for strong DSC and the build-up of significant cash balances. In fiscal 2010, pledged revenues covered annual debt service (ADS) by 2.2x. Unrestricted cash for the same period remained high at over 580 days of operating expenses. For fiscal 2011, DSC declined to a still solid 1.7x due to an increase in system operating costs and ADS, while liquidity increased to about 660 days cash. Post-issuance of the 2010 bonds, Fitch expected total DSC to drop to about 1.9x by fiscal 2012 and to roughly 1.6x by fiscal 2015. An updated financial pro-forma provided by the city shows somewhat higher pro forma ADS than prior projections and lower pro forma gross revenues, resulting in lower, but still adequate DSC. DSC is projected to be between 1.7x and 1.9x for the senior lien bonds and between 1.4x and 1.6x all-in through fiscal 2017, which is somewhat low. Failure to meet or exceed these coverage levels could result in downward pressure on the rating. AMPLE WATER SUPPLY & SYSTEM INFRASTRUCTURE LIMITS CAPITAL NEEDS The system benefits from an abundant water supply from the Cape Fear River and water treatment capacity that is nearly twice average daily demand. A 5.2 million gallons per day (mgd) expansion of the system's sewer treatment plant (to 12 mgd) is expected to be completed in 2013, resulting in significant sewer treatment capacity for the long term. Historically steady growth in the customer base has stagnated since the onset of the economic and housing downturn and future growth projections remain modest. With growth in the service area having slowed in recent years, the system's long-term capital needs are manageable. The system's five-year CIP totals just $34 million, the majority of which is for the sewer treatment plant expansion project. The balance of the CIP is focused on improving water and sewer lines, building an elevated water storage tank, and replacing a pump station. Almost the entire capital program is funded from existing bond proceeds and proceeds of a state revolving fund loan. No additional debt is expected. The lack of near-term borrowing plans should help to improve the system's debt profile, which is currently relatively high. Most debt ratios including debt to plant (53% in 2012) and debt per customer ($2,551) are above Fitch medians for 'AA' rated systems. RATES COMPETITIVE BUT HIGH RELATIVE TO INCOME User charges are somewhat high in comparison to household income, which could limit future flexibility. Sizeable rate hikes beginning in fiscal 2009 through fiscal 2011 were prudently implemented to fund the expansion of the system's lone wastewater treatment facility. The combined monthly residential bill assuming 6,000 gallons of use is over $75 for fiscal 2013, which at 2.3% of MHI exceeds Fitch's affordability threshold (2% of MHI). Future rate increases are projected to be manageable given limited near-term capital needs. Fitch will continue to monitor the city's financial profile commensurate with its ability to implement sufficient rate increases to maintain high liquidity and meet at least adequate financial metrics going forward. STABLE, MIXED CUSTOMER BASE WITH LARGE INDUSTRIAL PRESENCE Sanford serves as the county seat of Lee County (the county), located about 45 miles south of the city of Raleigh (general obligation bonds rated 'AAA' by Fitch). The city's utility system serves about 17,300 water customers and close to 9,300 wastewater accounts. The system's service area extends beyond Sanford's city limits into unincorporated parts of the county and neighboring Chatham County, spanning a population estimated at 57,000. Socioeconomic indicators for the city are below average. The unemployment rate remains elevated at 10.8% in September 2012 (down from 11.9% in the prior year) and median household income (MHI) equalled just 85% and 75% of the state and nation, respectively. Nevertheless, collections remain high and service is promptly discontinued for non-payment. Concentration among customers is high with the system's 10 largest users accounting for nearly one-fourth of total operating revenues, and the largest account (Pfizer Inc., Issuer Default Rating of 'A+' by Fitch) comprises about 9.5% of operating revenues in fiscal 2012. The next two leading customers (Frontier Spinning, and Moen, Inc.) account for 4.5% and 3.8% of fiscal 2012 operating revenues, respectively. Each of the remaining seven leading customers comprises less than 1.5% of annual operating revenues. The high customer concentration is somewhat offset by both the stability in the leading customers and some diversity amongst them, including pharmaceutical, textile, home building, heavy machinery and various other manufacturing concerns, food processing, and healthcare services. Pfizer's operations have decreased at the Sanford facility over the past few years. However, city management expects Pfizer to maintain operations in Sanford.