AUSTIN, Texas--(BUSINESS WIRE)--Fitch Ratings affirms its 'AA-' rating on the following Hopewell, Virginia (the city) sewer system revenue bonds:
--$21.6 million sewer system refunding revenue bonds series 2011 A and B;
--$4.1 million sewer system revenue bonds, series 2010.
The Rating Outlook is Stable.
Bonds are limited obligations of the city, payable solely from net revenues derived from the city's sewer system (the system).
KEY RATING DRIVERS
SOLID FINANCIAL PROFILE: Financial performance has been positive, with coverage of maximum annual debt service (MADS) at 1.9x for fiscal 2012. Results have been bolstered by the implementation of substantial rate increases in fiscal 2009 and 2013. Liquidity levels are exceptional, with over four years of cash on hand reported in fiscal 2012.
HIGH DEBT BURDEN: The system's debt load is twice that of similarly rated credits on a per capita basis. The debt was incurred for a large capital expansion, and debt levels should decline going forward as the system has no plans for additional borrowing in the near term.
COMPETITIVE RATES: The system's competitive rate structure is moderately tempered by the city's below-average income levels. Rates remain affordable despite recent double digit percentage increases.
SMALL, CONCENTRATED CUSTOMER BASE: The customer base is relatively small, with large wholesale customers accounting for a sizable amount of system revenues. No changes are anticipated for the wholesale service agreements.
IMPROVED CAPACITY: The recent expansion project addresses regulatory issues identified in a 2009 consent order and secures sufficient sewer treatment capacity for the near term.
STABLE PERFORMANCE EXPECTED: The system's robust liquidity somewhat offsets the system's elevated debt burden and weak economic indicators, and also provides a cushion against recent swings in debt service coverage levels. Barring significant economic distress or the loss of revenues from a wholesale customer, which appears unlikely, Fitch believes the Outlook will remain Stable.
The city owns and operates a primary wastewater treatment plant, which was recently relocated and expanded to 16.5 million gallons per day (mgd) treatment capacity from 6.8 mgd. The primary plant was relocated to the site of the 50 mgd Hopewell Regional Wastewater Treatment Facility (HRWTF), which provides secondary treatment to the primary plant and to five industrial users. The HRWTF is accounted for as a separate enterprise fund of the city and those revenues are not pledged to and do not support the repayment of the system's bonds.
STABLE CUSTOMER BASE
The customer base includes around 8,500 retail customers, although the bulk of the treatment is provided to wholesale customers. Service contracts with the three largest users, the Federal Correctional Complex, Prince George County (GO bonds rated 'AA-' with a Stable Outlook by Fitch), and Fort Lee, accounted for approximately 53% of fiscal 2012 revenues. Fitch considers these contracts stable, as current allocations provided by the system appear sufficient. Flows to the primary plant have averaged 4.8 mgd recently, and with increased conservation efforts and continued repair and replacement of the system's aged sewer lines management anticipates the increased capacity of the primary plant should be sufficient for at least the next several years.
HIGH BUT DECLINING DEBT BURDEN
As a result of the debt issued to finance the relocation and capacity expansion of the primary plant, leverage levels are high at $1,191 on a per capita basis compared to the 'AA' median of $599. Amortization is slow with only 51% of the debt principal paid off in 20 years. However, the debt burden should continue to decline as there are no additional borrowings expected over the next five years.
REDUCED PRIMARY CAPITAL REQUIREMENTS
With the large scale capital needs of the primary treatment facility addressed, the city has identified $2 million in annual capital needs over the next several years to adhere to a sanitary system overflow consent decree, which will be funded from excess system revenues. Costs associated with needed nitrogen removal at the regional facility are estimated at more than $80 million, with 60% to be grant funded and the balance to be paid by industrial users of the HRWTF system.
System rates are still among the lowest in the area despite the 69% increase adopted in 2009 and an additional 23% increase in fiscal 2013. Despite the hikes, current rates register at 0.7% of median household income (MHI). This level is well below Fitch's affordability threshold of 1% of MHI, providing the system with significant rate raising flexibility. Cost of service studies are completed every two years and additional rate increases are not expected until the 2016-2017 timeframe. Moderate incremental rate increases are anticipated at that time to meet capital needs on a pay-go basis and to keep the system is good working order.
IMPROVED FINANCIAL PERFORMANCE
Financial operations in recent years have seen marked improvement as a result of the large rate increase. Fiscal 2012 results indicate healthy MADS coverage at 1.9x and exceptionally strong liquidity of 1,934 days of cash on hand, which includes over $1 million set aside for system renewal and replacement. The rate covenant is adequate, allowing the inclusion of connection fees in the requirement that net revenues cover senior debt service by at least 1.15x.
The city of Hopewell (GO bonds rated 'AA-' with a Stable Outlook by Fitch) is located in the Richmond metropolitan area at the confluence of the James and Appomattox rivers, approximately 25 miles from downtown Richmond (GO bonds rated 'AA+' with a Stable Outlook). The city's 2010 population of 22,591 has remained relatively flat since 2000 and city officials continue efforts to diversify the historically manufacturing-based economy, concentrating on the revitalization of downtown Hopewell.
An increase in personnel at nearby Fort Lee has benefited Hopewell and the system. The area economy is anchored by manufacturing and healthcare. Other economic indicators are weak, with local median household income falling each year for the last five years and now at 58% of the state and 69% of the national averages. Unemployment for June 2013 was reported at 8.8%, which while down from the year prior rate of 9.2% was still above the state (6%) and national (7.8%) averages.
Additional information is available at 'www.fitchratings.com'
In addition to the sources of information identified in Fitch's 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 2013);
--'U.S. Water and Sewer Revenue Bond Rating Criteria' (July 2013);
--'2013 Water and Sewer Medians' (December 2012);
--'2013 Sector Outlook: Water and Sewer' (December 2012).
Applicable Criteria and Related Research:
2013 Outlook: Water and Sewer Sector
Revenue-Supported Rating Criteria
U.S. Water and Sewer Revenue Bond Rating Criteria
2013 Water and Sewer Medians