OREANDA-NEWS. Fitch Ratings has affirmed the following Greenville, SC (the city) revenue bonds:

--Approximately $55 million in outstanding waterworks system revenue bonds at 'AAA'.

The Rating Outlook is Stable.

SECURITY

The bonds are payable from a senior lien on the net revenues of the Greenville Water system (the system).

KEY RATING DRIVERS

STRONG OPERATING AND FINANCIAL PROFILES: Financial results are strong with healthy debt service coverage (DSC) over the past four fiscal years and ample liquidity. An abundant and safe water supply, ample treatment capacity, and a manageable capital program signal long-term operating stability.

LOW RATES AND DEBT: Rates remain very affordable and competitive relative to rates charged by peer/regional systems, providing management with significant additional financial flexibility. The debt burden is also low and existing bonds amortize quickly.

MANAGEABLE CAPITAL PLAN: Along with a low debt burden, significant previous capital investment (mainly from internal sources) has left the system with manageable future capital needs which are primarily focused on routine repair and upkeep.

STRONG REGIONAL ECONOMY: The city is the economic hub for the nine-county region with access to major healthcare service providers, higher education opportunities, and a sizable corporate presence. Potable water service is provided to a large, stable and mostly residential customer base of 172,000 connections.

RATING SENSITIVITIES

RATING STABILITY EXPECTED: Greenville Water's very strong underlying credit fundamentals, which include strong financial performance and rate flexibility, low and rapidly amortizing debt, strong infrastructure capacity and limited capital needs, support the 'AAA' rating. Only a significant decline in one or more of these strong attributes could impact the rating.

CREDIT PROFILE

Greenville Water operates separately from the city and is governed by a five-member commission of public works composed of three elected members (six-year staggered terms) and two ex-officio members including Greenville's mayor and a city council member. Day-to-day operations are managed by an experienced team of utility professionals, including the chief executive.

SOLID SERVICE AREA, STABLE RESIDENTIAL CUSTOMER BASE

Greenville Water is a mostly residential water utility serving an estimated 570,000 residents through 172,000 retail accounts. The service area includes all of the city (general obligation [GO's] rated 'AAA' with a Stable Outlook by Fitch), as well as a significant portion of Greenville County (GO's also rated 'AAA' with a Stable Outlook), and other neighboring counties, with the majority of customers living outside the city limits of Greenville. The system also serves several small wholesale customers, although concentration is modest.

The city is located on the I-85 corridor which connects the cities of Charlotte, NC and Atlanta, GA, and serves as the economic and commercial center for the region. The economy's sizable corporate base, affordable housing stock, and strong historical population growth have led to gains within the professional and businesses services, education, and healthcare sectors, which have helped diversify traditionally manufacturing-based employment.

Countywide income levels are above the state average but lag the nation's. However, the area benefits from a lower cost of living than other major Southeast cities. The April 2015 unemployment rate for the Greenville metropolitan statistical area (MSA) was 5.5%, which compares favorably to the statewide rate of 6.1%.

STRONG FINANCIAL METRICS SUPPORT FITCH'S HIGHEST RATING

Historically strong financial margins and DSC (above 2.0x) have allowed the system to spend generously on capital needs while limiting debt issuance. DSC dipped in fiscal years 2009 and 2010 to below-average levels, a result of a decline in demand and capacity fees due to the economic recession. However, a combination of modest rate increases and higher demand helped improve the system's DSC to closer to historical levels in the following years.

In each of the past four fiscal years, the system generated an average of $30 million in net revenues (after operating expenses), and DSC of 2.1x - 2.6x. Other financial metrics were also strong, including free cash flow (FCF) of over 100% of annual depreciation since fiscal 2011.

The system ended fiscal 2014 (ending July 31, 2014) with more than $50 million in available resources (comprised of unrestricted cash and capacity fee fund balance), which is equivalent to a sizable 632 days of operations, well above the median for similarly-rated systems. Liquidity is projected to remain strong as the capital program is modest and the system is expected to continue generating healthy annual cash flows.

In 2014, management decided to change the fiscal year to coincide with the calendar year to better align financial data with operational information and statistics. The change resulted in a short fiscal year beginning on August 1, 2014 and ending December 31, 2014. Financial projections provided to Fitch show DSC above 2.0x through fiscal 2019.

AFFORDABLE RATES SET LOCALLY

Rates are set by the board of commissioners without any regulatory approval or other oversight. Rates consist of a base fee plus consumption-related charges. For the typical residential customer living within the city of Greenville, rates are a very affordable $15.80 per month in fiscal 2015 for 8,000 gallons.

Residents living outside of the city, who comprise the majority of the system's retail customers, pay a higher rate of $24 per month or 0.6% of median household income. Future rate increases are projected to be 3% annually for fiscals 2016 and 2017 according to management's estimates. Rates should remain low and continue to provide significant financial flexibility.

DEBT IS LOW, AMORTIZES RAPIDLY

The system has approximately $97 million of fixed-rate long-term bonds outstanding. Fitch considers the low debt burden a significant credit strength. Over the past eight years (through fiscal 2014) debt ratios have been on a steady decline. Debt-to-net plant was 21% in fiscal 2014, down from 28% five years prior, and debt per customer totaled just $565, comparing very favorably to the 'AAA' median of $1,259. Debt carrying costs were also manageable at 21% of gross revenues in fiscal 2014.

Amortization of existing bonds is very rapid, with 98% of principal retired within 10 years. Annual debt service is level through fiscal 2021 before a scheduled decline to just $4.2 million by fiscal 2023. With no new debt anticipated, debt ratios are projected to remain below Fitch's 'AAA' medians.

SOLID SYSTEM OPERATIONS AND INFRASTRUCTURE

The availability of abundant and clean water and significant treatment and transmission capacity underpin the system's solid operating profile. The system is served by two manmade mountain reservoirs (Table Rock and North Saluda), as well as raw water from Lake Keowee via contract with Duke Energy Co. (Duke). Automatic renewal of the water agreement with Duke will coincide with Duke's relicensing of the Lake Keowee project with the Federal Energy Regulatory Commission in 2016.

Greenville Water expects the relicensing to occur as planned and the Lake Keowee source to remain a significant source of supply for the future. Fitch has no reason to believe this will not occur as expected. Additionally, Greenville Water has sufficient near-term water supply from the reservoirs even in the unlikely event access to Lake Keowee supply is delayed or curtailed from current levels.

The reservoirs have a combined effective capacity of 15 billion gallons, with a combined yield of 90 million gallons per day (mgd) in normal weather conditions and 45 mgd in years of extreme drought. Total available supply from all sources, including Lake Keowee, equals 132 mgd (during drought conditions), which is more than twice the system's average daily demand. Management believes current water supply to meet the region's needs for another 75 years.

Significant historical capital investment has left the system with ample infrastructure capacity and manageable near-term capital needs. Greenville's two water treatment facilities (one for the reservoirs and one for Lake Keowee) provide up to 135 mgd in treatment capacity, which is well in excess of current demand. Management has identified roughly $36 million in capital spending mainly for system maintenance and renewal through fiscal 2019, or about $7 million annually.