OREANDA-NEWS. Fitch Ratings has assigned an 'AA+' to the following Charleston, SC revenue bonds;

--\\$148 million waterworks and sewer system capital improvement revenue bonds series 2015.

The bonds are expected to sell via negotiation the week of July 13. Proceeds will be used to make various system-wide capital improvements, provide for capitalized interest through February 1, 2016, and pay issuance costs.

In addition, Fitch affirms the following ratings:

--\\$485 million waterworks and sewer system revenue bonds at 'AA+'.

The Rating Outlook is Stable.

SECURITY

The bonds are payable from a senior lien on net revenues of the Charleston Water System (CWS), including impact fees.

KEY RATING DRIVERS

STRONG FINANCIAL PROFILE: CWS consistently maintains a solid financial profile characterized by high margins, exceptional liquidity and strong debt service coverage (DSC). Finances are conservatively managed with actual results routinely outperforming forecasted levels, which is expected to continue.

COMPREHENSIVE CAPITAL PLAN: The system's capital planning process is extensive and incorporates improvements and expansion projects in concert with long-term master planning. Robust historical capital spending has kept the system well-maintained, but resulted in an elevated debt burden.

HIGH LEVERAGE RATIOS: Debt ratios are above those of similarly-rated water and sewer utility systems. However, capital needs are focused on system renewal and cash is ample, providing flexibility regarding the pace of future investment and an offset to high leverage.

AMPLE INFRASTRUCTURE CAPACITY: System capacity, including raw water supply, remains ample and coupled with planned capital spending for system renewal should provide long-term operating stability.

LONG-TERM PLANNING PRACTICES: Long-term financial, capital and water supply planning practices provide a strong enhancement to credit quality.

RATING SENSITIVITIES

WEAKER FINANCIAL PERFORMANCE: Increased debt levels beyond management's current expectations or financial margins that are consistently lower than historical levels could pressure the rating. However, Fitch's Stable Outlook reflects the expectation that margins and debt issuance will continue to outperform management's conservative forecasted levels.

CREDIT PROFILE

The Charleston Water System provides mainly retail water and sewer services to residents of the city of Charleston and significant portions of the surrounding metropolitan area.

SOLID SERVICE AREA

The water system serves 112,000 direct retail accounts, the majority of which live outside of Charleston's city limits, while the sewer system's direct retail customer base is closer to 53,000. CWS also provides some wholesale service through long term contractual agreements with several nearby municipal providers. The customer base is mostly residential with modest annual growth.

CWS is a legally separate entity with governance provided by a five-member board of commissioners. Three commissioners are elected at-large by Charleston residents and the remaining two members are the mayor and one council member.

The service area, anchored by significant military presence and coastal location, is home to Joint Base Charleston and its 22,000 active-duty military personnel and civilians. The metro area's unemployment rate of 5.3% in March 2015 is low due to a 2.5% increase in jobs over the March 2014 employment numbers and despite a rise in the labor force.

STRONG FINANCIAL PERFORMANCE, ABUNDANT LIQUIDITY

Strong financial margins persisted in fiscal 2014, continuing a trend of margins that have averaged 51% over the past five fiscal years. DSC has been no less than 1.7x from all revenues since fiscal 2010, and increased to a healthy 2.3x in fiscal 2014 due to a combination of rate increases and higher (one-time) connection fee collections. DSC excluding the one-time fees was a still strong 1.9x in fiscal 2014, and has been no lower than 1.6x since fiscal 2010.

Financial projections provided by a bond feasibility consultant show DSC from all revenues declining from current levels to as low as 1.4x from all revenues through fiscal 2018. However, similar to previous pro form provided to Fitch, CWS builds conservative assumptions into the forecast and typically outperforms its annual budget, and coverage improves in fiscals 2019 and 2020. Fitch's rating anticipates continued strong DSC in the range of historical levels. The forecasted lower projected DSC results from an increase in debt service from the current issuance and a 13.5% rise in operating and maintenance costs in the fiscal 2015 budget, which based on year-to-date results appears very conservative. The forecast also includes already approved rate increases for fiscal 2016 followed by additional, albeit smaller, rate increases in fiscals 2018 - 2020.

Liquidity remains exceptional. CWS ended fiscal 2014 with total unrestricted resources, including non-current (but liquid) investments, totaling approximately \\$240 million, or a very robust 1,527 days cash on hand. Cash is 7.5x current liabilities and more than 6.0x the negative mark-to-market on outstanding swaps. Liquidity is expected to remain very strong, with a continued reliance on debt funding to fund ongoing capital investment.

WELL-MANAGED OPERATING PROFILE

CWS has ample, long-term supply from two surface water sources, the Bushy Park Reservoir and the Edisto River. Raw water is supplied through large-diameter underground tunnels capable of moving a minimum of 100 mgd each. Total supply from the two sources is estimated at 10 billion gallons. Water treatment is handled by the 115 million gallons per day (mgd) Hanahan Water Treatment Plant. The plant has treated approximately 55 mgd on average over the past five years, leaving plenty of excess capacity. Several points of interconnection within the system and external connection with nearby utilities provide redundancy and emergency supply.

CWS provides retail sewer collection and treatment to nearly all of the water customers within Charleston's city limits and to several thousand additional customers living just outside of the city. Some wholesale service is also provided. Wastewater is treated at the 36 mgd Plum Island treatment facility and a smaller 1 mgd plant serving Daniel Island.

Sewer treatment capacity is sufficient with total flows recorded in fiscal 2014 equal to 23 mgd. Treated effluent is released via outfall into Charleston Harbor. Requirements of recently extended treatment and discharge permits are consistently met with no regulatory or environmental issues.
While CWS provides primarily retail service to most of the metropolitan area on a direct basis, it also provides treated water on a wholesale basis to several municipal entities through long-term contractual agreement. Raw water capacity is also provided to several large customers including KapStone Paper and Packaging Corp., and B.P. Amoco Chemical Company. CWS' top 20 water and sewer customers comprise a moderately concentrated 16% of gross fiscal 2014 revenues. However, the leading customer list is comprised of several municipal wholesale customers, mitigating concentration concerns.

COMPREHENSIVE CAPITAL PLAN, ELEVATED BUT MANAGEABLE DEBT BURDEN

Management's capital planning efforts are robust and include recurring capital improvements as well as longer-term facilities renewal and expansion. CWS has a strong capital reinvestment philosophy, which has resulted in higher debt levels but assets that are in a good state of repair. The CIP incorporates four comprehensive 25-year master plans that cover wastewater treatment, wastewater collection, water treatment and water distribution. The master plans provide the basis for long-range capital forecasting and are updated periodically.

The capital improvement plan (CIP) through fiscal 2019 totals approximately \\$400 million with the majority of the plan devoted to system-wide rehabilitation projects. The CIP is comprehensive but flexible with the ability to delay spending on certain projects. Overall, approximately 77% of the CIP is anticipated to be debt-financed (including the proceeds of the 2015 bonds) with the remainder to be funded from internal sources. Another approximately \\$170 million parity issuance is anticipated in 2019.

Leverage of system assets is above average compared with similarly rated credits, both in relation to net capital assets and end users. As of fiscal 2014, debt equated to 53% of net plant and approximately \\$3,100 per direct retail customer. When adding the estimated 21,000 retail customers served through wholesale agreement, debt per customer is lower. However, with the 2015 bonds and additional planned debt, the system's leverage position is expected to remain elevated over the next five years, particularly since principal amortization after issuance will be somewhat slow; 32% and 76% of all debt will be amortized within 10 and 20 years, respectively ('AA' medians are 39% and 81%, respectively).

Nevertheless, the age of plant is relatively young at 13 years, providing flexibility in execution of the CIP. Fitch notes that management engages in continual review and analysis of the system's major capital projects and associated financings, and actual spending in the next five years seems likely to occur below the conservative \\$400 million CIP estimate.

RISING USER FEES, AUTONOMOUS RATE SETTING

Rate setting is accomplished by the commission and is independent of outside regulatory influences. The rate structure consists of a minimum base charge for the first 200 cubic feet (cf) of service as well as a volumetric component. The minimum fixed charge accounts for a sizable 45% of the total combined monthly bill, which Fitch views positively as this results in less variability in revenues caused by changes in weather, the economy, or rate elasticity. Rates have been increased roughly annually since fiscal 2004 with little public opposition; water rates were increased in aggregate by approximately 50% and sewer rates by about 75%.

Based on water usage of 1,000 cf (roughly 7,500 gallons) per month and wastewater usage of 700 cf in fiscal 2015, the average monthly in-city retail bill is high at \\$89, or 2.1% of MHI. Fitch notes that the typical CWS in-city customer consumes less water, or about 5,240 gpm and thus the average actual monthly bill is slightly more affordable at 1.8% of MHI.

Rates are approximately 20% higher for customers living outside of Charleston's city limits. Still, there is some flexibility to raise rates with additional increases to support capital costs and increased debt service payments expected to be modest over the near term. No rate increases are expected in fiscal 2017 followed by projected annual increases of 2% for water and 4% for wastewater in fiscal years 2018 to 2020.