Fitch Rates Union County, North Carolina's $20MM Enterprise Sys Revs 'A+'; Outlook Stable

The 'A+' rating reflects the system's ample supply and treatment capacity and healthy financial profile marked by substantial cash reserves, strong operating margins, and solid debt service coverage levels. The rating is somewhat tempered by an exceptionally high rate of customer growth experienced over the years coupled with the current lack of a longer-term capital improvement plan, though Fitch believes the system maintains significant debt capacity and rate flexibility needed to meet the challenge of operating in a high-growth service area. While residential development within the service area as well as the larger region has slowed dramatically, a rebound in the housing market and return to rapid residential construction activity could pressure the system's operations and treatment and supply capacity in the future. Also of concern to Fitch are weaker than average legal covenants that allow for a portion of reserves to be applied to debt service coverage calculations and the county's substantial exposure to variable rate debt obligations and interest rate swap risk.

Located southeast of Charlotte, the county's population grew 47% in the 1990's and by an additional 50% through the current decade to reach an estimated 193,200 in 2008. With an employment base somewhat concentrated in construction and manufacturing, the county's unemployment rate climbed to almost 11% in May 2008, slightly better than regional and statewide averages, though still above the national figure. Income levels are well above average.

A jointly owned water treatment facility between Union County and neighboring Lancaster County, SC Water and Sewer District provides ample treatment capacity to the water system's nearly 38,000 customers. A planned expansion of the water treatment plant will increase capacity by 50% and help absorb growth in customer accounts that has averaged almost 10% annually over the last 10 years. The county also purchases additional treatment capacity from the nearby Anson County pursuant to a 20-year agreement that expires in 2014. Raw water is drawn from the Catawba River. Despite a similar rate of growth in wastewater customers, the system's five wastewater treatment facilities coupled with purchased capacity from neighboring utilities provides adequate capacity. However, to meet future demand, a portion of the current borrowing will fund the expansion of an existing county facility and the design phase of an additional treatment plant. Concern about customer concentration has dissipated over the years as the county's top users have diversified somewhat, though Pilgrim's Pride, a poultry producer, still accounts for about 3.5% of water and sewer revenues.

A growing customer base has helped the system generate healthy operating margins and strong debt service coverage through the years. Pledged revenues covered annual senior lien debt service by a strong 3.4 times (x) in fiscal 2008. Factoring in subordinate lien obligations, including general obligation bonds and state loans, coverage was still solid at 1.8x. Exceptional cash balances equal to well over 1,000 days worth of operating expenses somewhat mitigate Fitch's concern regarding the system's significant exposure to variable rate debt and outstanding swaps. Almost half of the system's outstanding debt is variable rate, and all of it remains hedged with a negative valuation. Financial projections show annual senior-lien debt service coverage remaining close to 2.0x through fiscal 2014, although the forecast does not incorporate additional debt issuance or further rate hikes. Fitch believes the system's rates are relatively low, equal only to about 1.0% of the county's median household income level.

The fiscal years 2010-2013 capital improvement plan (CIP) totals $111 million and centers on the expansion of existing water and sewer treatment facilities to meet future growth. Funding is expected to come from the current offering, about $40 million in additional parity debt, and on a pay-go basis from existing reserves and excess operating revenues. With outstanding debt equal only to about 40% of system assets, Fitch believes the system is well positioned to absorb the additional debt included in the CIP.

Fitch's rating definitions and the terms of use of such ratings are available on the agency's public site, 'www.fitchratings.com'. Published ratings, criteria and methodologies are available from this site, at all times. Fitch's code of conduct, confidentiality, conflicts of interest, affiliate firewall, compliance and other relevant policies and procedures are also available from the 'Code of Conduct' section of this site.

SOURCE: Fitch Ratings

Fitch Ratings, New York 
Christopher Hessenthaler, +1-212-908-0773 
Cindy Stoller, +1-212-908-0526 (Media Relations) 
cindy.stoller@fitchratings.com