Fitch Rates Charleston Water System, SC $38MM Utility System Revs 'AA'.

NEW YORK -- Fitch Ratings assigns an 'AA' rating to Charleston Water System, SC's (Charleston Water) $38 million water and sewer system revenue bonds, series 2006A. The bonds are scheduled to price on April 5 through negotiation led by Banc of America Securities. Bond proceeds will be used for various capital improvements to the utility system's water and wastewater infrastructure as well as to fund $3.8 million of capitalized interest through 2008. Fitch also assigns an 'AA' rating to approximately $362 million of outstanding parity utility system revenue bonds. The Rating Outlook is Stable.

Charleston Water will also issue $130 million variable-rate water and sewer revenue bonds, series 2006B, scheduled to price on April 26. Proceeds will be used for capital improvements and $9.5 million of capitalized interest. Short- and long-term ratings on the 2006B bonds will be assigned closer to the pricing date. The short-term rating will be based on the provisions of a stand-by bond purchase agreement.

The 'AA' rating reflects the strength of Charleston Water's management practices and policies, a financial position characterized by ample liquidity and solid debt service coverage by pledged revenues, as well as a plentiful long-term water supply and adequate treatment capacity in both the water and sewer systems. Legal protections for bond holders are somewhat below average and Fitch notes that the system is highly leveraged compared to others in the 'AA' rating category; a large capital plan will require further debt issuance.

Charleston Water's service area includes the City of Charleston as well as portions of Charleston, Dorchester and Berkley Counties. The Charleston area is a popular tourism destination given its desirable location close to area beaches and the historic nature of the city of Charleston. The water system's service area encompasses 455 square miles, serving 98,572 accounts, about 40% of which are located within the city of Charleston. The water system has long-term retail service area agreements in place with several area municipalities, the largest of which is North Charleston, representing about 25% of system accounts. The wastewater system's service area is smaller, as many area residents are served by publicity owned sewer districts. About 85% of Charleston Water's 43,733 sewer customer accounts are located within the city of Charleston.

Charleston Water has an ample raw water supply drawn from two surface water sources, the Edisto River and the Bushy Park Reservoir. Raw water treatment is provided by the Hanahan water treatment plant, with a permitted capacity of 118 million gallons per day (mgd). In 2004 average day demand was well below capacity at 43mgd. Wastewater treatment is provided mainly by the Plum Island Plant, which has a permitted capacity of 36mdg. In 2004 average day use of 22mgd left 39% of capacity remaining. It is estimated that the Plum Island Plant will be operating at 80% of treatment capacity on an average day by 2010. The current capital improvement plan (CIP) includes projects needed to prepare for eventual expansion of the facility. The Plum Island Plant currently provides secondary treatment, but Fitch is concerned that there may be stricter environmental regulations for wastewater system discharge in the future, requiring systems nationwide, including Charleston Water, to upgrade to tertiary treatment standards at a significant capital expense.

Financial operations are sound, generating solid debt service coverage. The system had 1,022 days of cash on hand at the close of fiscal 2004; however, cash levels are projected to decline to a low of 142 days cash on hand by the end of 2010 due to the use of reserves for recurring capital expenditures. The rate covenant requires debt service coverage of 1.2 times (x) by net revenues and impact fees, Charleston Water's internal coverage target is 1.4x. In the past the system has exceeded this target; in 2004 coverage including impact fees was 2.2x, excluding impact fees coverage was still strong at 1.6x. Adopted annual rate increases through 2010 of an average of 4.2% and 6.6% annually for water and sewer, respectively, are expected to offset debt service associated with the 2006 issuance and an additional $110 million of parity debt planned for 2009. Coverage including impact fees is expected to be around 1.6x between 2006 and 2010. Including the 2006 rate increase, Charleston Water's rates are about average compared to those of other area systems.

Charleston Water's fiscal years 2005-2010 CIP totals $367 million. 79% of the CIP will be debt funded from the current issuance and $110 million is planned to be issued in 2009. The remainder of the plan will be funded from cash reserves on a pay-as-you-go basis. Approximately 70% of the plan will address infrastructure needs to handle system growth, while 30% is focused on recurring maintenance needs.

The system's service area is stable; the local economy focuses on tourism and military employment, associated with naval base operations, and benefits from the stable presence of higher education and health care employment. The Charleston metropolitan statistical area encompasses Charleston, Dorchester and Berkeley counties. Population growth in the 1990s totaled 8.3%; since the beginning of the decade growth has been more robust, posting a 6.3% increase since the 2000 census. Per capita income levels in 2003 equaled 106% and 88% of state and national levels, respectively. Fitch rates Charleston County's GO debt 'AA'.

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