Fitch Affirms Chesterfield County, VA's Water and Sewer Revs at 'AAA'; Outlook Stable

AUSTIN, Texas--()--Fitch Ratings affirms the following Chesterfield County, Virginia's (the county or system) outstanding revenue bonds:

--$85.1 million water and sewer revenue bonds at 'AAA'.

The Rating Outlook is Stable.

SECURITY

The bonds are secured by a pledge of net water and wastewater system revenues.

KEY RATING DRIVERS

VERY STRONG FINANCIAL PROFILE: System financial performance is exceptional as evidenced through high debt service coverage (DSC) and robust liquidity levels, and projections indicate financial flexibility will remain solid.

LOW DEBT AND MANAGEABLE CAPITAL PLAN: Debt ratios all around are low and expected to remain favorable through 2017. Future capital needs appear very manageable and are expected to be met largely through a sizeable pay-as-you-go program.

AFFORDABLE RATES: In spite of planned annual rate hikes over the next five years, user charges should remain well below Fitch's 2% of median household income affordability threshold.

SOUND ECONOMIC FUNDAMENTALS: The county's combined water and wastewater system provides an essential service to a broad, diverse and affluent service area.

RATING SENSITIVITIES

INCREASED REGULATORY COSTS: The Environmental Protection Agency (EPA) may modify waste load allocations for the Chesapeake Bay, potentially increasing the system's capital wastewater costs toward the latter end of the decade. The rating incorporates expected EPA modifications unless they are dramatically more stringent and costly than expected.

CREDIT PROFILE

STRONG FINANCIAL PERFORMANCE EXPECTED

The system's financial profile remains very solid. Consistently sound financial operations have led to high cash balances -- the system typically maintains more than 1,100 days of cash on hand -- and strong levels of DSC. Fiscal 2012 net revenues, including capital contributions, yielded 5.5x DSC; DSC is forecast to remain above 5.0x through fiscal 2017. Reasonable projections assume user rates will increase annually by an average of 4% and that the annual customer growth rate will average 1.2% over the next five years.

The average monthly residential bill for fiscal 2013, based on usage of about 7,500 gallons per month, totals approximately $53. At 0.9% of MHI, the monthly bill is comfortably below Fitch's affordability threshold of 2% of MHI.

LOW DEBT BURDEN AND CAPITAL COSTS

The system's debt burden is minimal, at just $446 per customer, and debt amortization is rapid with principal payout at 51% and 100% in 10 and 20 years, respectively. The fiscal years 2013-2017 capital improvement plan (CIP) totals $213 million, of which approximately 50% is for continued funding of water and wastewater contingency and rate stabilization reserves. The remaining funding is for water and wastewater replacement, expansion and repair. All capital needs are anticipated to be funded from pay-as-you-go sources.

The county plans to expand its Proctors Creek wastewater treatment plant (WWTP) to 54 million gallons per day (MGD) from 27 MGD, with engineering anticipated to commence in 2017. An EPA study designed to determine if waste load allocations are properly set for the James River Basin -- a Chesapeake Bay tributary -- is scheduled to be completed sometime around 2015 or 2016 or just before the planned $326 million WWTP expansion. Based on the outcome, wastewater system capital costs could increase.

SYSTEM AND SERVICE AREA

The system treats water from a county-owned reservoir and purchases treated water from the Appomattox River Water Authority and the City of Richmond. The county owns and operates two WWTPs and sends wastewater from the northern portion of the county to Richmond in exchange for the treatment of a portion of Richmond's wastewater by a service agreement between the two localities. A service agreement with the South Central Wastewater Authority provides a small amount of additional wastewater treatment capacity. All of the facilities are reportedly in good to excellent condition and provide ample treatment capacity; the county's water supply is reportedly sufficient through 2040. There are no outstanding regulatory or permitting issues.

Chesterfield County encompasses roughly 446 square miles in east-central Virginia adjacent to Richmond. The county serves approximately 102,000 water and 86,000 wastewater customers; water and wastewater customers have each grown at a sound average of roughly 1.0% annually over the past five years. Income levels are 15% and 38% above the state and national average, respectively.

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 the U.S. Municipal Revenue-Supported Rating Criteria, this action was additionally informed by information from Creditscope.

Applicable Criteria and Related Research:

--'Revenue-Supported Rating Criteria' (June 12, 2012);

--'U.S. Water and Sewer Revenue Bond Rating Criteria' (Aug. 3, 2012);

--'2013 Water and Sewer Medians' (Dec. 5, 2012);

--'2013 Outlook: Water and Sewer Sector' (Dec. 5, 2012).

Applicable Criteria and Related Research

U.S. Water and Sewer Revenue Bond Rating Criteria

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=684901

2013 Water and Sewer Medians

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=695756

2013 Outlook: Water and Sewer Sector

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=695755

Revenue-Supported Rating Criteria

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=681015

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Contacts

Fitch Ratings
Primary Analyst
Julie G. Seebach, +1-512-215-3740
Director
Fitch Ratings, Inc.
111 Congress, Suite 2010
Austin, TX 78701
or
Secondary Analyst
Evette Caze, +1-212-908-0376
Director
or
Committee Chairperson
Karen Ribble, +1-415-732-5611
Senior Director
or
Media Relations:
Elizabeth Fogerty, New York, +1 212-908-0526
Email: elizabeth.fogerty@fitchratings.com

Sharing

Contacts

Fitch Ratings
Primary Analyst
Julie G. Seebach, +1-512-215-3740
Director
Fitch Ratings, Inc.
111 Congress, Suite 2010
Austin, TX 78701
or
Secondary Analyst
Evette Caze, +1-212-908-0376
Director
or
Committee Chairperson
Karen Ribble, +1-415-732-5611
Senior Director
or
Media Relations:
Elizabeth Fogerty, New York, +1 212-908-0526
Email: elizabeth.fogerty@fitchratings.com