Published: July 30, 2010
Fitch Rates County of Spotsylvania, VA's Water & Sewer Syst Revs 'AA-'; Outlook Stable
NEW YORK - (BUSINESS WIRE) - Fitch Ratings assigns an 'AA-' rating to the following Spotsylvania
County, VA's water and sewer system revenue bonds:
--Approximately $58 million series 2010A, 2010B, and 2010C water and
sewer system revenue bonds.
The bonds are expected to sell via negotiated sale on Aug. 11, 2010, and
are secured by a pledge of the water and sewer system's net revenues
(including connection fees). Bond proceeds will be used to finance the
cost of facility expansion and improvements, refund all or a portion of
the outstanding series 2001, fund a debt service reserve, and pay costs
of issuance.
In addition, Fitch affirms the following ratings:
--$119 million outstanding (prior to the refunding) Spotsylvania County
water and sewer system revenue bonds, affirmed at 'AA-'.
The Rating Outlook is Stable.
RATING RATIONALE:
--Strong cash reserves provide a high degree of financial flexibility,
especially in light of the system's historical reliance on growth
related fees. Adopted rate increases, including an increase to base
charges, is expected to address this weakness by better aligning ongoing
operating revenues with operating expenses.
--Rates are competitive, providing management with the flexibility to
make additional rate adjustments to maintain strong liquidity levels,
while improving debt service coverage from net operating revenues.
--The system's physical plant is relatively new and in good condition,
limiting future capital needs and providing ample systemwide capacity
and regulatory compliance.
--The above average debt burden is partially offset by the system's
manageable capital needs, strong liquidity and rate raising flexibility.
--Legal provisions are considered adequate and include a 1.15 times (x)
rate covenant and additional bonds test.
KEY RATING DRIVER:
--The system's ability to maintain strong liquidity and affordable
rates, while managing service area growth and improving debt service
coverage from operating revenues will remain a key rating driver.
SECURITY:
The bonds are secured by a pledge of the net revenues of the water and
sewer system. Revenues include all receipts and revenues derived from
the operation of the system, including connection fees.
CREDIT SUMMARY:
Spotsylvania County (general obligation [GO] bonds rated 'AA' by Fitch)
is a mostly residential community located in northeastern Virginia along
the I-95 corridor, within commuting distance of the Washington D.C. (55
miles) and Richmond, VA (55 miles) metropolitan areas. The water and
sewer system (the system) covers a large geographic area of 400 square
miles and consists of several raw water supply sources, distribution and
collection assets (pipes), and water and sewer treatment facilities.
Fitch notes the system's ample water supply and treatment capacity as a
credit strength, diminishing the system's long-term capital needs and
allowing it to use excess annual margins to keep the system in good
repair. The system provides retail service to a customer base of 26,400
residential and 1,800 non-residential water accounts as of January 2010.
The system also provides wholesale service to city of Fredericksburg via
long-term (perpetual) contract since 1995. Customer concentration is
minimal and wholesale revenues from Fredericksburg account for just 5.9%
of 2010 revenues.
Customer growth has recently slowed, but remains positive. The County
projects adding roughly 200 new accounts per year over the next five
years (versus 500 in 2007, 800 in 2006, and over 1,000 annually from
2000 to 2005). Slower growth has impacted developer fee revenues,
requiring the system to adjust fees to provide greater fixed charge
coverage from operating revenues.
Historical financial performance remains mixed, with coverage of debt
service from all available pledged revenues at close to 2.0x from fiscal
2003 through 2008. The system has historically been reliant on
connection fees, as evidenced by debt service coverage from net
operating revenues alone ranging between below 1.0x in fiscals 2003 to
2005, to about 1.4x in fiscal 2008, when such coverage hit its peak. For
fiscal 2009, financial results were not as robust as prior years due to
stagnant customer growth (which depressed connection fees) and an
increase in operating expenses and debt service. Debt service coverage
from all revenues was just 1.25x in fiscal 2009, and less than 1.0x from
operating revenues only. When excluding capital items from operating
expenditures, the coverage improves to 1.45x from all revenues.
Liquidity, however, remains very healthy providing over three years of
operating expenses. Fitch also views as positive management's adoption
of multi-year rate increases that is expected to reduce reliance on such
one-time fees. Pro-forma financial results show overall debt service
coverage remaining only adequate at between 1.3x and 1.5x through 2015
from all revenues, with steady improvement in coverage from operating
revenues alone to above 1.0x by 2011.
System leverage is above average with outstanding debt per customer
totaling $2,100 in 2009. The system's $90 million five-year capital
program will be mostly debt-financed; however, continued customer growth
coupled with manageable capital needs is expected to reduce debt levels
over time. System rates are expected to rise through the forecast
period, however, at $42 for 5,000 gallons in 2011 rates are still
affordable at just 0.7% of median household income.
Applicable criteria available on Fitch's website at www.fitchratings.com:
--'Revenue-Supported Rating Criteria', dated (Dec. 29, 2009);
--'Water and Sewer Revenue Bond Rating Guidelines', dated (Aug. 6, 2008).
Additional information is available at www.fitchratings.com.
Related Research:
Revenue-Supported Rating Criteria
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=493154
Water and Sewer Revenue Bond Rating Guidelines
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=395918
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 Ratings, New York
Andrew DeStefano, +1-212-908-0284
Barbara
Ruth Rosenberg, +1-212-908-0731
or
Cindy Stoller,
+1-212-908-0526 (Media Relations)
cindy.stoller@fitchratings.com
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