News Column

Fitch Assigns Initial 'AA' Rating to Fayetteville (NC) Public Works Commission Revs; Outlook Stable

August 18, 2014

NEW YORK--(BUSINESS WIRE)-- Fitch Ratings has assigned an initial long-term rating of 'AA' to the city of Fayetteville's (NC) Public Works Commission (PWC) Revenue Bonds, Series 2014.

The Rating Outlook is Stable.

SECURITY

The bonds are payable from and secured by a pledge of the net revenues of the combined utility system.

KEY RATING DRIVERS

DIVERSIFIED SERVICE PROVIDER: The city of Fayetteville Public Works Commission (PWC) operates a combined utility system that provides electric, water and wastewater services in and around the city. The majority of revenues are derived from PWC's electric distribution system. The system's wholesale power requirements are largely provided through an all-requirements contract with Duke Energy Progress (DEP).

STRONG FINANCIAL METRICS: Historically strong operating cash flow, low leverage and ample liquidity support PWC's solid financial position. Increased costs associated with PWC's recently renewed wholesale power contract will result in weaker Fitch-calculated debt service coverage (DSC) in fiscal years 2013 through 2018, but metrics should remain adequate for the rating category.

PRUDENT RATE MANAGEMENT: Rate stabilization fund (RSF) balances have been bolstered over the past five years as a result of meaningful rate increases designed to align rates with higher purchased power costs under PWC's new power contract. Funds accumulated in recent years will be used to offset higher power costs until additional planned rate increases take effect. Fitch views PWC's strategy to gradually align rates and power costs over time as prudent.

SOUND SERVICE AREA: The local economy benefits from the continued growth in and around the Fort Bragg military base, which is the city's largest employer. Even with military base expansion, sales growth is not expected to exceed 1% per annum. Slow growth is mitigated by PWC's stable, primarily residential customer base with modest customer concentration.

CAPITAL PLAN AND DEBT MANAGEABLE: PWC's current forecast anticipates higher, but still manageable, capital spending and related borrowing. Although the proposed debt issuance, along with additional debt issuances in 2017 and 2019, will double outstanding debt, very low debt levels should allow the utility's overall leverage position to remain below that of similarly rated entities.

LOW RATES, INCREASES ANTICIPATED: Despite recent increases, PWC's electric, water and wastewater rates are among the lowest in the region, which provides management with ample rate-making flexibility. Implementation of planned electric and water rate increases should absorb increased power supply, capital requirements and debt service costs, and restore DSC to levels above 3.0x by fiscal 2019.

RATING SENSITIVITIES

MANAGEMENT OF RATES: The current rating reflects Fitch's expectation that planned rate increases will be implemented to meet projected financial results. Failure to do so could put downward pressure on the rating or Outlook.

CREDIT PROFILE

PWC operates a combined utility system - including electric, water and wastewater - throughout a region that encompasses the city of Fayetteville, NC and portions of the broader Cumberland County. The majority of customers are within city limits (approximately 85% of electric customers).

Fayetteville is the sixth largest city in North Carolina and its economy is relatively dependent on the government sector. Approximately 50% of local Cumberland County employment is government-based, including the Fort Bragg military base, local governments, school districts and Veterans hospitals and services. While PWC does not provide full electric services to Fort Bragg, the utility does provide wholesale water supply.

The largest of the utility services is the electric system, which serves approximately 80,000 customers and accounts for 75% of fiscal 2013 revenue. Wholesale power is currently supplied by DEP through a 30-year all-requirements contract, expiring in 2042. The existing contract became effective in fiscal 2013, and includes higher power costs compared to the very favorable pricing of PWC's previous contract.

Upon entering into the contract in 2009, PWC adopted a strategy to gradually align its retail rates over time with the anticipated higher power costs. Meaningful rate increases in 2011 and 2012 have provided funds to bolster PWC's RSF. Draws from the RSF will continue to be used to offset increased costs as rate increases of 3% to 6% are phased in through 2019.

STRONG FINANCIAL METRICS

PWC's combined financial position is very strong and compares favorably to the 'AA' medians. Fitch-calculated DSC has approximated 4.0x in fiscal years 2009-2012, but decreased to a still strong 2.92x in 2013 due to increased purchased power costs. Coverage is expected to stabilize around 2.5x through 2018, excluding RSF transfers, before rebounding to above 3.0x once planned rate increases are implemented and debt service moderates.

PWC's consolidated leverage is very low and well below the 'AA' median. Planned debt issuance will roughly double outstanding debt, but given currently low outstanding debt levels, leverage is anticipated to remain modest and below category medians.

Additional information is available at 'www.fitchratings.com'.

Applicable Criteria and Related Research:

--'U.S. Public Power Peer Study -- June 2014' (June 13, 2014);

--'U.S. Public Power Peer Study Addendum - June 2014' (June 13, 2014);

--'U.S. Public Power Rating Criteria' (March 18, 2014);

--'2014 Outlook: U.S. Public Power and Electric Cooperative Sector' (Dec. 12, 2013).

Applicable Criteria and Related Research:

2014 Outlook: U.S. Public Power and Electric Cooperative Sector (Calm Under Pressure)

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=725447

U.S. Public Power Rating Criteria

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=740841

U.S. Public Power Peer Study Addendum - June 2014

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=750283

U.S. Public Power Peer Study -- June 2014

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=749789

Additional Disclosure

Solicitation Status

http://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=853255

ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: HTTP://FITCHRATINGS.COM/UNDERSTANDINGCREDITRATINGS. IN ADDITION, RATING DEFINITIONS AND THE TERMS OF USE OF SUCH RATINGS ARE AVAILABLE ON THE AGENCY'S PUBLIC WEBSITE 'WWW.FITCHRATINGS.COM'. PUBLISHED RATINGS, CRITERIA AND METHODOLOGIES ARE AVAILABLE FROM THIS SITE AT ALL TIMES. FITCH'S CODE OF CONDUCT, CONFIDENTIALITY, CONFLICTS OF INTEREST, AFFILIATE FIREWALL, COMPLIANCE AND OTHER RELEVANT POLICIES AND PROCEDURES ARE ALSO AVAILABLE FROM THE 'CODE OF CONDUCT' SECTION OF THIS SITE. FITCH MAY HAVE PROVIDED ANOTHER PERMISSIBLE SERVICE TO THE RATED ENTITY OR ITS RELATED THIRD PARTIES. DETAILS OF THIS SERVICE FOR RATINGS FOR WHICH THE LEAD ANALYST IS BASED IN AN EU-REGISTERED ENTITY CAN BE FOUND ON THE ENTITY SUMMARY PAGE FOR THIS ISSUER ON THE FITCH WEBSITE.



Fitch Ratings

Primary Analyst

Stacey Mawson, +1 212-908-0678

Associate Director

Fitch Ratings, Inc.

33 Whitehall Street

New York, NY 10004

or

Secondary Analyst

Dennis Pidherny, +1 212-908-0738

Managing Director

or

Committee Chairperson

Alan Spen, +1 212-908-0594

Senior Director

or

Media Relations:

Elizabeth Fogerty, +1 212-908-0526

elizabeth.fogerty@fitchratings.com

Source: Fitch Ratings


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