OREANDA-NEWS. Fitch Ratings has affirmed the 'AA-' rating on the following Brunswick County, NC (the county) bonds:

--$27.6 million in enterprise system revenue bonds series 2008A and 2012A.

The Rating Outlook is Stable.

SECURITY

The bonds are payable from a first lien on net revenues of the county's enterprise system (the system), which consists of the water and sewer system.

KEY RATING DRIVERS

STRONG LIQUIDITY/SOUND COVERAGE: The system continues to post healthy financial results, characterized by exceptional liquidity of over 800 days cash on hand (DCOH) and relatively stable all-in debt service coverage (DSC). DSC on total debt has declined slightly but remains adequate for the rating level, registering 1.5x for the last two fiscal years.

ELEVATED DEBT BUREN: Debt burden is elevated but manageable. The system's debt profile is expected to remain stable given the rapid rate of amortization on current debt providing capacity for additional debt anticipated within the next 10 years.

ADEQUATE SUPPLY AND CAPACITY: Expansions in the last decade have provided the system with a good operational profile with ample water supply and water and wastewater treatment capacity.

LIMITED RATE FLEXIBILITY: Financial flexibility is somewhat limited by the system's costly rates which register at 2.4% of median household income (MHI), above Fitch's affordability threshold. To date, the rapid growth of accounts has alleviated the need to raise rates to sustain healthy financial performance.

REGIONAL PROVIDER: The system serves as a regional wholesale water and sewer service provider to the county. As such, wholesale customers make up a significant portion of system revenues.

RATING SENSITIVITIES

CONTINUED STABLE FINANCIAL PERFORMANCE: The rating is sensitive to shifts in various credit fundamentals including financial performance and flexibility, maintenance of a solid operating profile and a manageable debt burden. Fitch expects such shifts to be unlikely over the near term.

CREDIT PROFILE

The county is primarily a residential community located in southeastern North Carolina along the Atlantic Ocean (Fitch rates the county's GOs 'AA' with a Stable Outlook). Population grew dramatically over the last 20 years, including a 62% jump from 2000 to 2014 and a nearly 43% increase during the 1990s. Growth has tapered off since 2009 but still averages over 2% annually.

REGIONAL SERVICE PROVIDER

The system serves as a regional utility, providing service to a majority of the 118,000 county residents, and has 11 wholesale water contracts, and nine wholesale sewer contracts with various municipalities and sanitary districts. Concentration in revenues among users is significant; the 10 largest water users accounted for almost 40% of total water revenues in fiscal 2015, and the leading sewer customers comprised about 21% of total sewer revenues. However, officials do not anticipate a financial impact from any wholesale customers discontinuing their purchases from the county given the lack of available raw water sources.

Upgrades and expansion over the last decade have provided the system with water supply and overall treatment capacity well in excess of current demand. Excess capacity is also due in part to a slowdown in customer growth in recent years. Historical growth stemmed from a combination of system acquisitions and population growth. Fiscal 2013 saw a jump in sewer customers with the completion of two special assessment districts (SADs) which added over 2,000 customers to the system. There are no additional SADs expected in the near to intermediate future.

MARGINAL RATE FLEXIBILITY

User charges have been relatively unchanged since 2006. The board approved a $1 increase to the system's water base rate in fiscal 2015, but no other rate increases are anticipated over at least the next five years. A residential bill assuming water consumption of 7,500 gallons totals a high $93, or 2.4% of MHI, above Fitch's affordability threshold of 2% of MHI. Actual average water consumption of system users is lower at about 4,500 gallons each month. This lower usage results in a monthly bill of $78, or 2% of MHI, leading Fitch to assess the system as having limited future rate raising flexibility. Rates have a favorable structure that includes a significant fixed base charge of over 50% providing stability to the revenue stream.

STRONG LIQUIDITY, HEALTHY FINANCIAL METRICS

The system continues to post solid financial results and a robust unrestricted cash position despite rising annual debt service (ADS) costs a trend of holding rates steady. All-in DSC for fiscal years 2014 and 2015 registered 1.5x, slightly below the 2x DSC median for 'AA' rated credits. Partially offsetting the below average DSC was the system's strong cash position. Liquidity has remained robust averaging over 750 days cash over the last six years. Despite plans to fund a portion of the capital program with reserves, Fitch expects liquidity to remain at a solid level through the current financial forecast which runs through fiscal 2020.

Financial projections point to a slight decline in DSC through the 2020 forecast period with all-in DSC hovering at 1.4x, due primarily to increasing ADS. However, the system has a history of outperforming its financial forecast and the projections conservatively assume inflationary increases in operational expenses, limited growth in consumption and yearly growth in customer accounts below growth rates experienced over the last five years. The 'AA-' rating assumes this trend of out-performance will continue.

ELEVATED DEBT PROFILE

The county's combined 2016 - 2020 capital improvement plan (CIP) is a manageable $34.7 million. This is a sizable reduction from the prior $75 million 2014 - 2018 and $94 million 2012-2016 CIPs. The current CIP is evenly split between water (45%) and wastewater (55%) projects. The size and scope of the CIP has diminished as projects have been completed and growth in the service area has slowed. From 2003 to 2010 the county constructed numerous projects that increased wastewater treatment and transmission capacity. Most recently, the county has completed several SAD projects that increased the number of residential customers.

In May 2015 the county issued $66 million in enterprise system revenue bonds to finance capital projects and refund a portion of the system's outstanding series 2008A and 2010 bonds. The current CIP will be funded from system revenues and approximately $17 million in proceeds from the series 2015 issuance.

Excess revenues shown in the system's financial forecast through fiscal 2020 exceed projected pay-go by a solid margin. Historical capital spending has kept the system in good repair; over the last four years CapEx/Depreciation has averaged a healthy 1.8x. The significant investment in infrastructure results in a very young plant age of 9 years, compared to the 'AAA'-'A' category median of 14 years.

Debt levels on a per capita basis are high at 2.4x the 'AA' rating category median. All-in debt as a percent of gross revenues is projected to grow from 20% in fiscal 2009 to almost 40% by fiscal 2017. Amortization of debt is rapid at 97% in 20 years, reducing the overall debt burden over the next five years, but anticipated debt to support the future expansion-related capital plans will keep debt levels elevated for the intermediate future.

TOURISM BASED ECONOMY

The county's economy is largely tourism-based, although some economic diversification exists. Income levels are on par with the state average, but continue to rank below the nation. The August 2015 unemployment rate remains somewhat elevated at 7% and largely unchanged from the year prior. Despite the below-average income levels and higher unemployment, collections remain at or close to 100%.