Fitch Affirms Henderson, NC, Utility Rev Bonds at 'A+'; Outlook to Negative.

WASHINGTON -- During the course of routine surveillance, Fitch Ratings affirms the 'A+' rating on the City of Henderson, North Carolina's $14.1 million of outstanding combined enterprise system revenue bonds, series 2001. The Rating Outlook is revised to Negative from Stable.

The 'A+' rating reflects the utility system's ample water supply, solid debt service coverage, and sufficient financial reserves. The rating also incorporates a one-notch enhancement based upon the oversight of the North Carolina Local Government Commission. Senior lien debt service coverage, required to be maintained above 1.25 times (x) from net revenues, is sound at about 2.0x, although sizable rate increases have been necessary to offset a loss of revenues due to the closure or downsizing of a few large industrial users.

The Negative Outlook reflects Fitch's belief that currently above-average utility rates will need to be increased further to address wastewater treatment plant upgrades and potentially higher payments to the Army Corps of Engineers (ACOE), the city's wholesale raw water provider. These higher rates may be difficult to implement in a service area that is economically distressed, with low income levels and high unemployment.

Under average day conditions, water and sewer treatment demand is well below permitted capacity levels. However, peak day wastewater flows over the past two fiscal years were well in excess of plant limitations, indicating high levels of infiltration and inflow. Additionally, the city is in negotiations with ACOE to replace its expiring water withdrawal contract with a long-term storage contract. If approved, city payments for raw water may rise significantly, requiring cost recovery by the utility. Fitch notes that these new capital and operating costs are not related to system growth, likely leading to higher rates for existing customers.

The utility capital plan through fiscal 2009 totals $36 million, much of it for system rehabilitation and an expansion of the wastewater treatment plant to 7 mgd (millions of gallons per day) from 4.14 mgd. Most of the plan will be financed from subordinate revolving fund loans or loans from area banks.

Henderson is the seat of Vance County, just south of the Virginia border and 40 miles from Raleigh. With an economy rooted in manufacturing, including a large textile sector, the region has experienced significant job loss over the past several years, and recent improving unemployment rates are the result of labor force declines, rather than job gains. The city is a member of the Kerr Lake Regional Water System, a partnership that purchases raw water from the U.S. Army Corps of Engineers' Kerr Lake Reservoir, treats it, and distributes it to the city, Warren County, and the City of Oxford. Henderson exercises rate-making authority and day-to-day management control over the partnership. The city maintains long-term wholesale water delivery contracts with a neighboring town and county that provide a moderate level of revenue stability.

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