SECURITY
The bonds are payable by a first lien on net revenues of the city's water and sewer system (the
system).

KEY RATING DRIVERS
MAINTENANCE OF SOLID FINANCES DRIVE POSITIVE OUTLOOK: The Positive Outlook on the rating reflects the maintenance of a strong financial profile relative to Fitch's 'A' rating category medians. The system has maintained strong liquidity and debt service coverage (DSC) after significant weakening due to the system's financial support of the city's broadband network (Fibrant). Management-provided forecasts point toward stability in the system's financial performance through fiscal 2022.

LOW LEVERAGE: The system's debt burden is low. Debt to net plant also compares favorably with 'A' category medians. Leverage is expected to remain low even with planned additional debt issuance to support close to 50% of the system's capital improvement plan (CIP).

RATE AFFORDABILITY PRESSURE: Rates have been raised steadily to preserve financial margins, resulting in user charges that are high relative to income levels for the service area. The system's elevated user charges could pressure future rate hikes.

AMPLE SUPPLY AND TREATMENT CAPACITY: The enterprise provides an essential service, and water supply and treatment capacity are well in excess of demand.

RATING SENSITIVITIES
CONTINUED STRONG FINANCIAL PERFORMANCE: Continuation of the system's sound financial performance, coupled with strong cash balances and a low debt burden could result in upward rating movement.

CREDIT PROFILE
Salisbury, the seat of Rowan County, is located halfway between Charlotte and Greensboro on Interstate 85. Over the last decade, the system has transitioned into a regional water and sewer service provider. The system now serves an estimated population of about 53,942 spanning the city of Salisbury and eight other municipalities throughout Rowan County. Wholesale service is provided to Rowan County, as well as to Southern Power and some industrial sites beyond city limits.

SUSTAINED FINANCIAL STRENGTH
The Outlook revision to Positive from Stable reflects the system's sustained financial performance for the past five fiscal years. Financial improvement has been bolstered by annual rate increases. Fitch-calculated senior lien and all-in DSC was 3.6x and 2.2x respectively in fiscal 2017, which align comfortably with the 'AA' rating category medians. All-in DSC has increased each year since fiscal 2013, comfortably above the 'A' rating category median of 1.7x. Liquidity currently remains over 300 days cash on hand (DCOH), after it dropped to under 200
DCOH in fiscal 2013. The system's operating margin has averaged close to 40% for the past five years.
The system's financial profile improved after significant weakening due to the system's support for Fibrant. The utility system ceased contributing to Fibrant's operations in fiscal 2014, and Fitch's rating incorporates management's commitment not to provide future support. Fibrant was recently leased for 20 years to a Florida-based communications company called Hotwire. Beginning in fiscal year 2011, the system provided a cumulative $7.6 million of interfund loans to Fibrant (the current outstanding balance is approximately $6.8 million). Principal repayment from the broadband services fund commenced in fiscal 2016, and has incrementally increased to
$300,000 annually.
The authority's current financial forecast, which includes annual 0.5% water and sewer sale increases and 2% annual rate increases, is expected to yield continued strong DSC levels.

LOW LEVERAGE / MANAGEABLE CAPITAL NEEDS
The city has undertaken a 10-year capital improvement program (CIP); the five-year (fiscal 2019 to 2023) CIP totals approximately $47 million, about a $10 million increase over the fiscal 2017 to 2021 CIP. About 50% of the five-year CIP is expected to be debt-funded, with the remaining funded by pay-go.
The system benefits from extremely low leverage, and Fitch expects leverage to remain low, even incorporating future debt issuance. Debt to FADS was a very manageable 2.5x in fiscal 2017, well below the 'AA' rating category median of 5.5x. The system's debt also amortizes very rapidly, providing flexibility for the issuance of new debt. Debt to net plant was also a low 24% in fiscal 2017.

HIGH RATES
The combined residential bill (based on consumption of 7,500 gallons) registers a high 2.9% of median household income (MHI) for the city, although rates are considered more affordable regionally. Additionally, average residential consumption is much lower (approximately 3,325 gallons), which serves to slightly ease affordability concerns.
Management has used the CPI Urban South as an indicator for rate increases, and will use this method to determine rates going forward. Rates are approved by the board annually, and were last increased by 2.15% in fiscal 2018.
Rate flexibility will continue to be strained given planned rate increases coupled with a weak MHI that showed several years of contraction. MHI returned to growth in 2014, but remains much weaker than state and national averages. The county's MHI is more favorable.

REGIONAL WATER PROVIDER WITH AMPLE SUPPLY AND TREATMENT CAPACITY
The system's customer base is primarily residential. Close to 30% of total revenue is derived from the system's top ten users, but the majority are municipalities, somewhat mitigating the concern over concentration in revenue. Other major customers include a utility, hospitals and manufacturing entities.
The city operates one water treatment plant with capacity of up to 24 million gallons per day (mgd), well in excess of typical demand levels of 9.2 mgd for fiscal 2017. The Yadkin River provides the city with an abundant supply of water believed to be sufficient beyond 2050. The city owns and operates two wastewater treatment plants with a total treatment capacity of 12.5 mgd, comfortably above the average daily flow of 8.1 mgd for fiscal 2017.
Contact:
Primary Analyst
Nicole Wood
Director
+1-212-908-0735
Fitch Ratings, Inc.
33 Whitehall Street
New York, NY 10004
Secondary Analyst
Teri Wenck, CPA
Director
+1-512-215-3742
Committee Chairperson
Amy Laskey
Managing Director
+1-212-908-0568

A January 2018 district court ruling that dismissed claims regarding payment of Puerto Rico Highways and Transportation Authority debt has raised questions about the scope of protections provided by Chapter 9 of the U.S. bankruptcy code to bonds secured by pledged special revenues. Fitch's rating criteria treat special revenue obligations as independent from the related municipality's general credit quality. The outcome of the litigation could result in modifications to Fitch's approach. For more information, see "What Investors Want to Know: The Impact of the Puerto Rico Ruling on Special Revenue Debt" available at www.fitchratings.com

Media Relations: Sandro Scenga, New York, Tel: +1 212 908 0278, Email:
sandro.scenga@fitchratings.com.
Additional information is available on www.fitchratings.com
Applicable Criteria
Rating Criteria for Public-Sector, Revenue-Supported Debt (pub. 26 Feb 2018)
https://www.fitchratings.com/site/re/10020113
U.S. Water and Sewer Rating Criteria (pub. 30 Nov 2017)
https://www.fitchratings.com/site/re/10010508

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