OREANDA-NEWS. Fitch Ratings has affirmed the 'AA+' rating for the following Buncombe County Metropolitan Sewerage District, NC's (the district) revenue bonds:

--Approximately $106 million in outstanding sewer system bonds.

The Rating Outlook is Stable.

SECURITY

The bonds are secured by a pledge of net revenues of the district's sewer system.

KEY RATING DRIVERS

SOLID FINANCIAL PROFILE: Financial performance is consistently strong with healthy cash balances and good debt service coverage (DSC). Management is sound, highlighted by prudent financial policies and comprehensive long-term capital planning. User charges reflecting actual customer consumption are low and compare favorably to other regional providers.

MODERATE DEBT BURDEN: Debt metrics are moderate and are comparable to the 'AA' category rating medians.

MITIGATED VARIABLE RATE DEBT EXPOSURE: Variable rate debt comprises a relatively high 30% of total debt. However, the liquidity agreement, along with the district's strong operating margins, healthy cash position, and swap agreements mitigate potential interest rate volatility.

MANAGEABLE CAPITAL PROGRAM: The district's aggressive funding of renewal and replacement projects maintains the system in a state of good repair and minimizes the risk of regulatory intervention. The district is an essential regional service provider and has ample treatment capacity.

STABLE SERVICE AREA: The Buncombe County economy continues to improve as evidenced by lowered unemployment statistics and a steadily diversifying workforce.

RATING SENSITIVITIES

CONTINUED STRONG PERFORMANCE: The rating is sensitive to various credit fundamentals including financial performance and debt management. The Stable Outlook reflects Fitch's expectation that the Buncombe County Metropolitan Sewerage District will continue to post strong financial performance and maintain stable operations in line with historical results.

UTILITY CONSOLIDATION: The rating could be impacted by a merging of the district and the City of Asheville's water system, although if such an event were to occur over the next few years it is expected to be a credit neutral.

CREDIT PROFILE

SOLID FINANCIAL PERFORMANCE EXPECTED

The district continues to generate robust operating margins, good DSC and high cash balances. Net system revenues in fiscal 2015 yielded 2.9x senior lien and all-in DSC (subordinate lien debt service is de minimus). Coverage excluding system connection fees in fiscal 2015 was also strong at 2.2x. Financial projections through fiscal 2023 provided in the system's fiscal 2016 budget appear conservative given assumptions that include moderate yearly rate increases of 2.5%, 0.75% growth in customer accounts and demand, 3% annual operating expense growth and 5% annual interest costs on variable rate bonds. All-in DSC is projected to range between 2.0x and 2.8x over the next five years.

System liquidity is excellent, not falling below 600 days cash on hand (DCOH) since at least 2010. The district's liquidity levels follow a historic trend of declining over the course of three to four years due to cash-funding capital needs until the district issues an anticipated intermittent long-term debt issuance to reimburse itself for prior capital outlays, per the district's reimbursement resolution. Following a series 2014 issue, management expects to issue again in fiscal 2018 and subsequently in fiscal 2021. Fiscal 2015 unrestricted cash and investments of about $46 million equated to a very strong 1,200 DCOH.

The average customer monthly bill of approximately $29 comprises an affordable 0.7% of median household income (MHI), falling comfortably below Fitch's affordability benchmark of 1% of MHI for a single utility cost. This relative affordability lends management a moderate degree of rate-raising flexibility. Historical and planned rate increases generally track inflation, or about 2.5% annually. The district's rates are regionally very competitive and include a relatively high percentage of fixed base charges, mitigating potential fluctuation in flows based on variable weather or consumption patterns.

MANAGEABLE DEBT BURDEN

Overall debt levels comprise a low 27% of net plant and debt per customer and per capita metrics of $2,021 and $421, respectively, closely approximate (albeit slightly exceed) the 'AA' medians. Total annual debt service (ADS) carrying costs comprised a somewhat high 25% of gross revenues in fiscal 2015 and are shown to remain elevated at this level according to the system's five-year financial projections. Debt amortization is above average, with about 48% and 90% retiring in 10 and 20 years respectively.

The district's series 2008A bonds are variable rate demand obligations backed by a standby purchase agreement (SBPA) provided by Wells Fargo Bank, N.A. (rated 'AA-/F1+'/Stable Outlook). The 2008A bonds represent the district's only variable rate debt. Liquidity facility provisions include a stepped-up rate and three-year term out of bank bonds. The series 2008A bonds comprise 30% of the county's total indebtedness, including this issuance. Fitch considers this amount elevated.

The district also has a floating-to-fixed rate swap outstanding with Bank of America (rated 'A/F1' with a Negative Outlook). The swap can be terminated at the district's option if the counterparty's credit rating falls below 'Baa3'/'BBB-'. The swap carries a manageable mark-to-market valuation of negative $4.5 million as of June 30, 2015 (liquidity remains high at over 1,000 days' cash on hand even after adjusting for this exposure).

STRONG CAPITAL PROGRAM AND AMPLE CAPACITY

The district updates its 10-year capital improvement plan CIP annually. Projects focus primarily on rehabilitation of sewer mains, including interceptors, collection lines, and private sewers. The system's five-year, fiscal 2016-2020 CIP totals $106.8 million and appears manageable based on prior capital spending plans. About 30% of the plan will be financed from a projected debt issuance in fiscal 2018. An additional $32 million is expected by fiscal 2021, consistent with prior intermittent debt issuances to support capital spending as cash levels are drawn down. The balance of capital funding will come from existing cash reserves and annual surplus revenues.

The district's only wastewater treatment plant maintains treatment capacity of 40 million gallons per day. Average daily flows fall comfortably below available treatment capacity, allowing substantial room for additional customer growth.

POTENTIAL WATER SYSTEM CONSOLIDATION CURRENTLY CREDIT NEUTRAL

In May 2013 the North Carolina State General Assembly adopted HB 488, a bill that would consolidate the City of Asheville's Water System with the district into a regional Metropolitan Water and Sewerage District, with the district serving as operator. This decision has been contested by the City of Asheville and an appeal request is currently being contemplated by the State Supreme Court.

MSD management has indicated that should the two systems merge, water and sewer system revenue pledges would remain separate at least for the time being. According to a preliminary feasibility study, the near-term financial impact of a potential consolidation would likely result in net savings from operational efficiencies gained from shared administrative resources. Fitch currently expects that any consolidation would be a credit neutral and would not impair existing bondholders.

SOUND ECONOMIC FUNDAMENTALS

The district provides sewerage conveyance and treatment to over 53,000 customer accounts in the city of Asheville and surrounding communities, including certain unincorporated areas of Buncombe County. Through separate contractual arrangements, the district also serves customers in the Cane Creek Water and Sewer District in northern Henderson County and in the Avery Creek Sanitary Sewer District in the southern portion of the county.

Approximately 46% of the district's customers are located within the city of Asheville, which serves as the economic and employment center for western North Carolina. Income levels are on par with the state but are around 11% lower than the nation. Buncombe County's unemployment rate as of August 2015 was low at 4.6%. Following the closure of several textile manufacturing firms over the past decade, the local economy still maintains a strong manufacturing sector but is steadily diversifying with the expansion of its health care, small business, tourism, retail, and arts and culture industries.