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Fitch Affirms Salisbury, NC Combined Enterprise System Revs at 'AA-'; Outlook Stable

AUSTIN, Texas--(BUSINESS WIRE)-- Fitch Ratings affirms Salisbury, NC (the city) bonds as follows:

--Approximately $15.5 million combined enterprise system revenue refunding bonds, series 2010 at
'AA-'.

The Rating Outlook is Stable.

SECURITY
Bonds are secured by a first lien on net revenues of the water and sewer system (the system).

KEY RATING DRIVERS

SOUND FINANCIAL METRICS: Financial results consistently show strong senior-lien debt service coverage (DSC) levels of over 2.0x and adequate annual DSC of all existing obligations of at least 1.3x. Liquidity has declined in recent years but remains healthy at over 290 days cash on hand (DCOH).

SLIGHTLY ELEVATED DEBT LEVELS: Debt on a per capita basis is moderately high, although this factor is mitigated to a degree by the rapid amortization of debt.

LIMITED RATE FLEXIBILITY: Rates have been raised steadily to preserve financial margins, although user charges are high relative to income levels for the service area. The system's already high user charges could impede future rate hikes and funding of future capital needs.

AMPLE SUPPLY AND TREATMENT CAPACITY: The enterprise provides an essential service to a diverse service area, and water supply and treatment capacity are well in excess of demand.

CREDIT PROFILE

REGIONAL SERVICE PROVIDER

Salisbury, the seat of Rowan County, is located halfway between Charlotte and Greensboro on Interstate 85. Over the last decade, the system has transitioned into a regional water and sewer service provider. The system now serves an estimated population of about 52,000 spanning the city of Salisbury and eight other municipalities throughout Rowan County. The city maintains 15-year wholesale contracts with the town of Landis, and the city of Kannapolis that are based on a minimum sale of water under a take or pay agreement. Wholesale service is also provided to Southern Power and some industrial sites beyond city limits.

The system's customer base is primarily residential. Historical growth rates averaged about 2.0% annually for the service area, but abated with the onset of the economic recession, prompting a much slower rate of growth at about 0.5%. Despite below-average income levels and a high unemployment rate of 10.5%, revenue collections have reportedly remained close to 100%. Close to one-fourth of total revenue is derived from the system's top ten users, the majority being municipalities, which somewhat mitigates the concern over concentration in revenue. The balance of major customers includes a prison, two hospitals and a manufacturing firm, which management believes is currently stable.

AMPLE WATER SUPPLY AND TREATMENT CAPACITY

The city operates one water treatment plant with capacity of up to 24 million gallons per day (mgd), well in excess of typical demand levels of 7.9 mgd. The Yadkin River provides the city with an abundant supply of water believed to be sufficient beyond 2050. The city owns and operates three wastewater treatment plants with a total treatment capacity of 12.5 mgd, comfortably above the average daily flow of 7.9 mgd. While there are no outstanding or pending regulatory issues at this time, management does expect nutrient removal or other new regulatory requirements to be imposed to some extent in the near future. In anticipation of potential regulations, the city has already purchased land on which they could construct if necessary a new wastewater treatment plant.

STABLE FINANCIAL PERFORMANCE

Financial performance has been consistently good for a number of years. Senior lien coverage is high for the rating category at 2.9x. All-in DSC is average at 1.5x for 2011; however, it registered at a weaker 1.3x for 2009 and 2010. While all-in DSC is below average, it is still adequate for the rating category.

Liquidity has declined from a high of 522 DCOH in 2008 to a still strong 290 DCOH in fiscal 2011 and aligns closely to the 'AA' median level. Contributing to the decline in DCOH is the system's use of its reserves for capital projects and a land purchase in recent years, which Fitch views positively.

RATE FLEXIBILITY LIMITED

The last rate increase was a modest 2.8% in fiscal 2012, pushing the combined residential bill to $74 (based on consumption of 6,000 gallons). While somewhat in line regionally, the average residential bill is considered high at 2.4% of median household income for the city.

MANAGEABLE CAPITAL PLAN

The system's multi-year capital program is reviewed annually with projects added, removed and prioritized. High-priority projects include the elimination of the 2nd Creek wastewater treatment plant and automated meter reading (AMR) system. The most recent five-year (2013-17) capital improvement plan (CIP) totals about $39 million, a slight decline from 2011-15's $42 million. The plan is split 60% water projects, 40% sewer projects, and it is anticipated the CIP will be 70% debt funded. Debt per capita is moderately high at $892 compared to the 'AA' median level of $433. Fitch expects leverage ratios to remain relatively flat as the rapid amortization will likely offset the system's plans for additional debt issuance over time.

Additional information is available at www.fitchratings.com. The ratings above were solicited by, or on behalf of, the issuer, and therefore, Fitch has been compensated for the provision of the ratings.

In addition to the sources of information identified in the U.S. Municipal Revenue-Supported Rating Criteria, this action was additionally informed by information from Creditscope.

Applicable Criteria and Related Research:
--'Revenue-Supported Rating Criteria', June 12, 2012;
--'Water and Sewer Revenue Bond Rating Guidelines', Aug. 3, 2012.
--'2012 Water and Sewer Medians', Dec. 8, 2011.
--'2012 Outlook: Water and Sewer Sector', Dec. 8, 2011.

Applicable Criteria and Related Research:
2012 Outlook: Water and Sewer Sector
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=657110
Revenue-Supported Rating Criteria
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=681015
U.S. Water and Sewer Revenue Bond Rating Criteria
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=684901
2012 Water and Sewer Medians
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=657111

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Fitch Ratings
Primary Analyst:
Teri Wenck, +1-512-215-3742
Associate Director
111 Congress, Suite 2010
Austin, TX 78701
or
Secondary Analyst:
Christopher Hessenthaler, +1-212-908-0773
Senior Director
or
Committee Chairperson:
Michael Rinaldi, +1-212-908-0833
Senior Director
or
Media Relations:
Elizabeth Fogerty, +1-212-908-0526
elizabeth.fogerty@fitchratings.com

Source: Fitch Ratings