OREANDA-NEWS. Fitch Ratings has affirmed the ratings on the following High Point, NC (the city) revenue bonds:

--$146 million combined enterprise system revenue bonds at 'AA+'.

The Rating Outlook is Stable.

SECURITY
The bonds are payable from a senior lien pledge of the net revenues of the city's water and sewer system (the system).

KEY RATING DRIVERS

SOLID FINANCIAL PERFORMANCE: Debt service coverage (DSC) is strong for the senior bonds and satisfactory for all debt paid by the system. A robust liquidity position provides financial flexibility and an offset to below average all-in DSC.

STRONG OPERATING PROFILE: Significant infrastructure investment has produced ample and reliable water supply and water and sewer treatment capacity that is more than sufficient to meet future customer needs. The average age of plant is good, and the system is not facing any regulatory issues.

STABLE RESIDENTIAL CUSTOMER BASE: High Point is located in the growing Piedmont Triad region of North Carolina. The city's customer base is roughly 90% residential and stable with modest growth anticipated as the regional economy continues to broaden and diversify.

HIGH RATES EXPECTED TO RISE: Rates are already elevated compared to regional utilities and median household income. Rates were increased modestly in 2015 and 2016. Additional city-projected water and sewer increases of about 4% annually in 2017-2019 could result in heightened affordability concerns.

ELEVATED AND RISING DEBT BURDEN: Debt ratios are above average compared to similarly-rated systems and are projected to rise with additional bonds planned for issuance later in 2016 and again potentially in 2020. Positively, the rising debt supports a robust capital investment program that should benefit the community over the long term.

RATING SENSITIVITIES

LOWER LIQUIDITY AND DEBT COVERAGE: The capital plan could challenge High Point, NC utility system's ability to maintain solid financial metrics. Downward rating pressure could build if expected increases in debt service result in diminished financial metrics over the intermediate term, despite planned rate increases.

CREDIT PROFILE
The city (general obligation bonds rated 'AA+' by Fitch) is located in the north central portion of the state in an area known as the Piedmont Triad region, which is composed of the cities of High Point, Winston-Salem, and Greensboro.

DIVERSIFYING REGIONAL ECONOMY
The city's strategic location, with easy transportation access to the I-85/I-40 corridor and relatively affordable housing, has contributed to population growth of 20% since the 2000 census to roughly 110,000 in 2015. The city continues to serve as a major wholesale and retail center for home furnishings although employment continues to diversify. The city is home to major colleges and universities, several regional health facilities and has a growing high-tech manufacturing presence.

The unemployment rate in the Greensboro-High Point metropolitan statistical area (MSA) is on the decline at 5.7% in January 2016, which is similar to the rate recorded a year prior. Employment levels have remained fairly steady while labor force participation has fallen over the past year.

SOLID SYSTEM OPERATING CHARACTERISTICS
High Point's utility system provides retail service to approximately 40,000 water and sewer customer accounts. Almost all of the system's customers (99%) are within the city limits and customer make-up is predominantly residential, limiting concentration amongst the largest users. Water supply is ample and consists of local surface water sources along with the new supply from the city's participation in the Piedmont Triad Regional Water Authority Randleman Dam and Reservoir project. Water supply from all sources is expected to sufficiently meet the community's needs through build-out, which is expected over the next 20 years.

Treatment capacity remains strong. The city's water treatment plant can treat up to 24 million gallons per day (mgd), which is twice the current average demand. The system's two wastewater treatment facilities will have a combined capacity to treat up to 36 mgd, which is also comfortably in excess of current average daily flows, upon completion of treatment upgrades to the smaller Westside Plant in 2017. The larger of the two facilities, the Eastside Plant, is an advanced treatment plant last upgraded and expanded to its current 26 mgd capacity in 2004. Westside Plant upgrades include replacing the activated sludge system with a new biological nutrient removal system.

SOLID FINANCIAL METRICS
The system's financial profile has historically been solid, although a rise in annual debt service, coupled with a decline in net revenues has led to increasingly lower DSC margins. In fiscal 2015 coverage on the senior bonds totaled 2.0x, which while solid, marks a decline from the 3.0x and 2.6x coverage levels recorded in fiscal 2013 and 2014, respectively. Coverage of all system-related debt (including senior revenue bonds, GO bonds issued for the system and state revolving fund loans) has declined from 1.6x in fiscals 2012 and 2013 to a below average 1.3x in fiscal 2015. Fitch's 'AA' category median for all-in coverage is 2.0x.

DSC results were slightly lower despite a rise in revenues due to a change in accounting for indirect costs, which were counted as a below-the-line transfer-out, but is now included in the system's operating expenses. Below average all-in DSC margins are partially mitigated by the system's high liquidity At fiscal-end 2015, the system held $49 million in unrestricted cash and investments, equating to 750 days of cash on hand.

Rates are set locally by the city council and have been on the rise for the past several years. For 2016, a typical residential customer pays roughly $95 for combined service (based on 7,500 gallons of use), which is high at 2.6% of median household income. Additional rate increases are currently under consideration to meet expected increases in annual debt service from additional bonds. Fitch will monitor the system's rate needs and future rate flexibility as they remain key drivers of future financial performance.

CAPITAL NEEDS TO INCREASE ALREADY ELEVATED DEBT BURDEN
The system's fiscal year 2016-2020 capital plan totals $113 million and will fund system-wide improvements including upgrading and expanding sewer treatment capabilities and extending and improving collection, distribution, and transmission assets. Roughly 80% of the CIP is expected to be debt-financed with bond issuances projected later in 2016 and in 2020.

Total outstanding debt per customer is slightly elevated at $2,329 as of fiscal 2015 and is expected to increase with the additional borrowings to about $3,000 over the next few years. Debt to net plant of 61% in fiscal 2015 is also considered elevated and measures above the median for 'AA' rated utilities. However, operating statistics such as the number of sewer overflows and line breaks per 100 miles of collection and distribution piping, respectively, are well below the limits expected for an average utility. In addition, once the current capital plan is completed, it is anticipated that the entire system will be completely rehabilitated and capacity for future growth will be fully in place.