Fitch Affirms Dare County, NC's Utility System Revs at 'AA-'; Outlook Stable

Fitch Ratings affirms the rating on the following bonds issued by Dare County, NC (the county):

--Approximately $7 million in outstanding utility system revenue bonds at 'AA-'.

The Rating Outlook is Stable.

SECURITY

The bonds are payable from the net revenues of the county's water and sewer utility system (the system), including impact fees, rentals, assessments, and other charges. There is no debt service reserve fund for the bonds.

KEY RATING DRIVERS

STABLE FINANCES, STRONG LIQUIDITY: The system's finances are stable, although debt service coverage (DSC) has remained below average over the past few years. Nevertheless, the utility's significant liquidity position continues to mitigate low DSC.

MANAGEABLE DEBT BURDEN AND CIP: Debt levels continue to moderate and compare favorably to similarly rated systems. Debt is expected to continue to decline as the county plans to fund its ongoing capital needs with internal sources over the next seven years. Capital spending will focus on system improvements and maintenance.

SERVICE AREA VULNERABILITY: Economic activity is highly concentrated in tourism and exhibits significant seasonal volatility. The majority of developable land within the county is located on a barrier island, creating an additional vulnerability to storm damage. However, the attractiveness of the region has served to encourage rebuilding efforts following past storms.

SUFFICIENT CAPACITY; SOUND OPERATING PROFILE: The system provides water treatment and disposal services only. The operating profile is sound and capacity is sufficient to meet peak summer demands. However, the groundwater water supply is brackish, which together with the geographically dispersed nature of the service area makes for a somewhat expensive treatment and delivery process.

HIGH PEAK SEASON RATES: Rates are approximately 1.3% of median household income assuming the 7,500 gallons of use that is more typical during the summer peak season. Local rate setting autonomy and expectations for only modest future increases mitigates the already high peak rates.

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

Dare County (GO bonds rated 'AA' by Fitch) is located along the northeastern North Carolina coast and contains most of the popular barrier island region known as the Outer Banks. The system provides water treatment and distribution service to a customer base of approximately 19,500 mostly residential accounts that are located primarily in Kitty Hawk, Duck and Southern Shores and in unincorporated portions of the county.

The system also provides wholesale water supply to the towns of Kill Devil Hills, Manteo and Nags Head mainly through long-term cost of service agreements. The retail customer base is diverse and wholesale delivery comprises about 16% of total revenues.

STABLE FINANCIAL PERFORMANCE, LIQUIDITY REMAINS ROBUST

Financial performance has been solid historically with net cash flow of approximately $2 million produced in fiscals 2008-2011, and annual DSC averaged 2.2x. Operating revenues increased by nearly 7% year-over-year in fiscal 2012, although an increase in annual debt service expense from the issuance of the series 2011 bonds resulted in a decrease in DSC to 1.7x. In fiscal 2014, DSC was even lower but acceptable at 1.5x given the system's ample liquidity, the expectation that debt service will start to decline in fiscal 2015, and no new debt.

Liquidity has been strong historically and remains a key credit strength as it provides cushion against an uneven revenue stream and potential storm-related risks. Despite a decline in system cash, in fiscal 2013, resulting from a $3.5 million interfund loan to the county's health insurance fund, liquidity remains ample. In fiscal 2014, the system had nearly $5 million in unrestricted cash and an additional $13 million in renewal and replacement (R&R) and other reserve funds (classified as restricted, but available), which was equivalent to 845 days cash on hand.

Financial projections are generally updated by the county on a biennial basis with the most recent projections completed in fiscal 2014. Financial results are projected by the county to remain stable with a slight improvement in DSC due to the scheduled decline in annual debt service by $300,000 in fiscal 2015. In addition, management forecasts a rise in pro forma revenues resulting from modest customer growth and anticipated 2% annual rate increases. Fitch expects the system will continue to achieve stable financial results.

Rates are set independently, generally as part of the annual budget process and have been increased by an average of about 3% each year since fiscal 2009. Rates are approximately $63 per month in fiscal 2015 assuming 7,500 gallons of use, which is elevated at 1.3% of median household income. While rates are high, especially during the higher peak use summer months, the county projects only modest 2% annual increases through fiscal 2019.

MANAGEABLE DEBT BURDEN AND LIMITED CAPITAL NEEDS

The system's debt position has moderated over time. Outstanding debt of approximately $31 million in fiscal 2014 was a manageable $1,598 per customer and 48% of net plant. Amortization is slow with just 69% of outstanding principal retired over the next 20 years. However, debt carrying costs are somewhat moderate at 24% of gross revenues, and no new debt is planned for the next seven years. The system's seven-year capital improvement plan (CIP) totals a modest $10 million and is anticipated to be funded from annual cash flow and existing R&R balances.

The majority of the CIP is for various system improvement and replacement projects. In addition to the aforementioned CIP spending, the county also spends approximately $600,000 per year on maintenance and repairs from its operating budget, a practice that is expected to continue. While capital needs are manageable, the average age of plant is on the rise, indicating the potential need for additional capital maintenance and renewal funding beyond the currently identified projects.

STABLE OPERATING PROFILE

The system's raw water is derived from ground water sources located mainly in the western portions of the county. At 17.5 millions of gallons per day (enough to meet more than twice the average summer demand and 130% of peak day demand), treatment capacity of the combined plants is considered solid for the intermediate term.

VULNERABLE SERVICE AREA ECONOMY

The county is a popular vacation area, as evidenced by the summertime increase to about 250,000 daily residents from about 34,000 year-round. Tourism and related services support the economy, and the county is a popular destination for retirees and second homeowners. The county's unemployment rate remains elevated. However, employment is seasonal and varies greatly over the year, which is typical of tourist-based economies. The contrast between the county's January 2015 unemployment rate of 13.8% and its more moderate July 2014 rate of 5.5% is representative of the county's historical trends.

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

In addition to the sources of information identified in Fitch's Revenue-Supported Rating Criteria, this action was additionally informed by information from Creditscope.

Applicable Criteria and Related Research:

--'Revenue-Supported Rating Criteria' (July 2014);

--'U.S. Water and Sewer Revenue Bond Rating Criteria' (July 2013);

--'2015 Water and Sewer Medians' (December 2014);

--'2015 Outlook: Water and Sewer Sector' (December 2014).

Applicable Criteria and Related Research:

Revenue-Supported Rating Criteria

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=750012

U.S. Water and Sewer Revenue Bond Rating Criteria

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=715275

2015 Water and Sewer Medians

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=818409

2015 Outlook: Water and Sewer Sector

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=818410

Additional Disclosure

Solicitation Status

http://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=984059

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