NEW YORK--()--Fitch Ratings affirms the 'A-' rating on Bristol Virginia Utilities Authority's (BVUA or the authority) implied utility system revenues bonds. BVUA's rating takes into account approximately $43.4 million of outstanding Utility System Revenue Bonds, but is assigned to implied obligations since none of the outstanding debt is publicly held.
The Rating Outlook is Stable.
BVUA's utility system revenue bonds are secured by a pledge of net revenues of the water, wastewater and electric systems and the telecommunications system, all of which are owned and operated by the authority.
KEY RATING DRIVERS
Combined Utility System: BVUA owns and operates a combined electric distribution, water, wastewater and telecommunications system in southwest Virginia. The electric distribution system contributes approximately 67% and 36% of the Authority's fiscal 2012 revenue and funds available for debt service (FADS), whereas the telecommunications division accounts for 24% and 50% of revenue and FADS.
Strong Contribution from Telecommunications Division: The telecommunications division, doing business as OptiNet, provides telephone, cable and internet services to the greater Bristol area. While OptiNet is self-supporting, the competitive nature of telecommunication services provides an additional level of risk.
Strong Financial Metrics: Financial metrics of the consolidated system have been strong and above rating category medians. However, OptiNet operations are significantly less predictable and reliable compared to BVUA's other divisions.
Stable long-term power supply: BVUA's power is supplied through a 20-year, all-requirements contract with Tennessee Valley Authority (TVA, rated 'AAA' with a Negative Outlook by Fitch). The long-term contract, which expires in 2028, eliminates virtually all power supply uncertainty and volatility.
Competitive Rates: BVUA's rates across all sectors compare favorably to neighboring utilities and telecommunication companies. Water and wastewater retail rates are notably low for the region, providing ample flexibility for planned rate increases. Creation of a self-regulating board in 2010 is viewed positively by Fitch.
Weak Service Territory: Economic indicators of the City of Bristol currently and historically have lagged both the state and the nation, with per capita income at 70% of the national average. Recent economic development points toward improvements in the commercial and industrial sectors.
WHAT COULD TRIGGER A RATING ACTION
Increased Contribution from Traditional Utility Divisions: An increased reliance on income and cash flow generated by the electric, water and wastewater divisions, as opposed to OptiNet, would be viewed favorably.
BVUA provides retail electric, water, wastewater and telecommunication services to the City of Bristol, Virginia (the city) and portions of the surrounding counties. The city historically operated the utility system; however, in 2010 BVUA assumed ownership and oversight of all the utility's divisions, in part to facilitate future expansion. Recent rate actions have been supportive of utility system operations.
The electric distribution system, BVUA's largest division, serves 17,443 customers and in fiscal 2012 contributed approximately 67% and 36% of the Authority's revenue and funds available for debt service (FADS). Wholesale power is supplied by TVA pursuant to a long-term, all-requirements contract.
The telecommunications division, doing business as OptiNet, represents the authority's fastest growing segment, accounting for 24% and 50% of the authority's fiscal 2012 revenue and FADS. OptiNet operations include cable, internet and phone services. According to management, OptiNet was the first municipal utility in the U.S. to offer video, voice and data services over a fiber-to-the premise system.
OptiNet is self-sustaining, based on current rates and charges, and serves over 11,000 customers. BVUA's ability to attract and maintain telecommunication customers is subject to direct competition from other regional service providers. Due to the competitive nature of the telecommunications market, Fitch believes that the OptiNet operations increase the business risk profile of BVUA, and is a meaningful rating factor. This risk is partially mitigated by the positive track record of operating the cable and internet system over the last 9 years.
LONG-TERM POWER SUPPLY
Wholesale power is currently supplied pursuant to a 20-year, all-requirements contract with TVA. The contract began on Jan. 1, 2008, prior to, BVUA was procuring power from American Electric Power Company at market rates. The TVA contract decreases the volatility and uncertainty that was previously surrounding the authority's power supply.
As a TVA customer, BVUA's retail electric rates allow for the pass through of TVA wholesale rate changes; however, base rate changes need review and approval by BVUA's board and by TVA. All of TVA's 157 distribution customers are subject to this same oversight, which is designed to ensure rate parity among the TVA distributors.
BVUA has reported relatively strong financial metrics on a fully consolidated basis. Fitch-calculated DSC of 4.78x for fiscal 2012 compares favorably to the 'A-' peer median of 2.39x, as does coverage of full obligations of 1.71x, compared to the median of 1.40x. Liquidity has been relatively stable over the last three years, at between 90 to 100 days cash on hand at each fiscal year-end.
While consolidated financial performance is strong, the system relies heavily on earnings and cash flow from the telecommunications division, which is a more unpredictable revenue stream than those provided by the other utility divisions. OptiNet's exposure to competitive pressures and a non-monopolistic and unreliable stream of revenue creates additional risk. Financial forecasts assume continued sound operations of each of the four systems and reasonable regulatory support.
Additional information is available at 'www.fitchratings.com'. The ratings above were solicited by, or on behalf of, the issuer, and therefore, Fitch has been compensated for the provision of the ratings.
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:
--'U.S. Public Power Rating Criteria' (Jan. 11, 2012);
--'U.S. Public Power Peer Study - June 2012' (June 15, 2012);
--'U.S. Public Power Distribution Systems' (Nov. 17, 2011).
Applicable Criteria and Related Research:
U.S. Public Power Rating Criteria
U.S. Public Power Peer Study -- June 2012
U.S. Public Power Distribution Systems