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Fitch Rates Orange Water and Sewer Authority, NC Refunding Revs 'AA+'; Outlook Stable.

Austin: Fitch Ratings has assigned a 'AA+' rating to the following Orange Water and Sewer Authority, North Carolina (OWASA or the authority) bonds:

--Approximately $18.5 million water and sewer revenue refunding bonds, series 2018.

The bonds will be sold via negotiation the week of April 9. Proceeds will be used to refund the series 2004B variable-rate water and sewer revenues bonds and to pay cost of issuance.

In addition, Fitch affirms the 'AA+' rating on the outstanding series 2010 and 2014 revenue refunding bonds and the series 2004B (pre-refunding) variable rate water and sewer revenue bonds.

The Rating Outlook is Stable.


The bonds are secured by a senior lien pledge of the net revenues of the authority's water and sewer system. A debt service reserve will not be funded for the series 2018 bonds.


STRONG FINANCIAL PROFILE: The system continues to post strong financial results with debt service coverage (DSC) at 2x or more for the last five fiscal years and healthy liquidity averaging over 400 days of cash on hand (DCOH) over the same period.

SOLID SERVICE AREA ECONOMY: The service area benefits from the presence of the University of North Carolina, Chapel Hill (the university) as well as its proximity to the growing Research Triangle Park and the state capital of Raleigh.

AVERAGE DEBT BURDEN: Current debt ratios are average for the rating category and debt to funds available for debt service (FADS) registers a favorable 4.3x for fiscal 2017.

AMPLE CAPACITY: Ample water supply and significant excess treatment capacity help keep capital needs manageable.


STABILITY EXPECTED: Significant leveraging or unforeseen regulatory burdens placed on the authority could pressure the rating. Given the authority's financial flexibility and advanced treatment facilities with ample capacity, this is viewed by Fitch as unlikely to occur.


The authority operates in southeastern Orange County (general obligation bonds AAA/Stable), about 10 miles southwest of Durham and 25 miles northwest of Raleigh. The service area includes the towns of Chapel Hill and Carrboro, with the system serving an estimated population of 80,000 (most of whom reside in Chapel Hill).


The service area benefits considerably from the presence of the university (AAA/Stable) and its proximity to the Research Triangle Park and Raleigh. The university remains the state's flagship school and anchor to the region's employment base. The university's fall 2017 enrollment exceeded 29,000. Service area income levels are above the state and national average.

The authority serves over 21,000 water and sewer customers. The customer base is mostly residential and stable. However, more than 20% of water sales in 2017 were derived from the university, which remains the single largest customer. This large customer concentration is offset by the university's importance within the state higher education system and its role as a large regional employer. In addition, no other user accounts for more than 2% of system sales.


Following years of decline, water demand appears to be leveling off. Demand has averaged just under 7 million gallons per day (mgd) since fiscal 2012. Despite a decline in water consumption over the last decade, OWASA's financial performance trends remain strong. Severe drought conditions in 2002 and again in 2007 through 2008, coupled with the implementation of a conservation-based rate structure and increased usage of reclaimed water by the university, led to a significant drop in demand of about 30% from 2002 to present. The corresponding decline in operating revenues prompted the implementation of sizeable rate increases to boost operating margins and increase DSC.

DSC since 2011 has consistently registered at or above 2x. Management's forecast, which appears reasonable and relatively conservative, indicates continued coverage at historical norms or stronger through fiscal 2023. Unrestricted cash and cash equivalents for fiscal 2017 was healthy at over $25 million, providing a sizable cushion of 434 DCOH. The projections include conservative estimates for future energy, chemical and health insurance costs while anticipating inflationary rate adjustments of approximately 3%.


The average monthly residential bill for combined service is a somewhat high $109 or about 2% of MHI, assuming Fitch's standard monthly consumption of 7,500 gallons. According to the authority, demand for the average residential user is just 3,900 gallons per month. Using this lower monthly consumption results in a much more affordable monthly bill of about 1.3% of MHI. Rates were increased significantly from fiscal years 2009 to 2011 but have not increased since fiscal 2013. Management plans include annual inflationary increases of 3% for planning purposes.


Debt ratios are average for the rating level with debt per customer of $1,639, aligning well with Fitch's 'AA' category median of $2,000. Debt amortizes rapidly, with 95% of the authority's debt burden maturing within 10 years. Despite the potential for about $49 million in debt or loans to finance capital investment, debt to FADS is expected to remain generally level over the next five-year period.

Total debt outstanding as of fiscal 2017 of $70.5 million is a favorable 23% of net assets and a manageable 21% of gross revenues. Following the refunding of the series 2004B variable-rate bonds with the current offering, all of OWASA's debt will be fixed-rate instruments.


OWASA's raw water supply is drawn from two surface reservoirs and University Lake, and supplies reportedly are sufficient to meet projected demand for at least the next 40 years. For emergency purposes, the authority also maintains an allocation from Jordan Lake and has supplementary finished water connections to other neighboring utilities.

Treatment capacity at the authority's water treatment facility totals 20 mgd, which is well in excess of the 6.7 mgd average daily demand. There is also significant capacity at OWASA's wastewater treatment plant, with design capacity at roughly 2x the current average daily flow. With minimal growth projected and ample supply and treatment capacity, the authority's capital needs through 2022 total a reasonable $96 million. The program is expected to be approximately 50% cash funded, with the remainder to be funded with $14.8 million in approved state revolving loans as well as revenue bonds.
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Publication:Daily the Pak Banker (Lahore, Pakistan)
Geographic Code:1U5NC
Date:Jun 22, 2018
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