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

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