Fitch Affirms Loudoun County Sanitation Auth (VA) at 'AAA'; Outlook Stable

NEW YORK--()--Fitch Ratings has affirmed the ratings for the following Loudoun County Sanitation Authority, VA (Loudoun Water, or the authority) revenue bonds:

--$265 million in outstanding water and sewer revenue bonds at 'AAA'.

The Rating Outlook is Stable.

SECURITY

The bonds are payable from a senior lien on Loudoun Water's net water and sewer revenues, including interest income and availability fees.

KEY RATING DRIVERS

AFFLUENT SERVICE AREA, ROBUST ECONOMY: Loudoun Water provides water and sewer services to a growing and affluent service area within the Washington D.C. metropolitan area. The local economy remains strong with low unemployment, above-average income, a highly educated labor pool, and continued residential and commercial development.

SOUND CAPITAL AND RESOURCE PLANNING: The system is well-managed with a comprehensive capital program that includes additional long-term water supply, preliminary spending or expanded wastewater treatment capacity and various system-wide renewal and upgrade.

STRONG FINANCE, LOW RATES: Financial performance remains strong and liquidity is exceptional. Significant rate increases following a decline in construction activity during 2008-2010, followed by smaller increases over the past few years, led to strengthened financial metrics and free cash flow. Rates are very low despite the increases.

ELEVATED, MANAGEABLE DEBT BURDEN: Debt is somewhat elevated for the rating, but manageable given the high wealth levels and low rates. Expectations for additional debt to fund the roughly $500 million five-year capital plan will increase leverage, but Fitch expects the debt profile will remain manageable.

RATING SENSITIVITIES

RATING STABILITY EXPECTED: The rating remains sensitive to shifts in various fundamental credit factors including financial and operating performance, overall debt levels, and rate and capital management. Fitch expects little change in the authority's strong credit profile.

CREDIT PROFILE

Loudoun County is located approximately 25 miles west of Washington D.C. adjacent to both Fairfax County, VA and Montgomery County, MD (both carry 'AAA' general obligation ratings from Fitch). Loudoun Water serves approximately 71,000 retail customers, with a service area population of approximately 220,000.

GROWING AND WEALTHY SERVICE AREA PROXIMATE TO WASHINGTON D.C.

Loudoun Water's service area includes all of Loudoun County (more than 500 square miles) except several incorporated towns within the county that operate their own independent systems. The customer base is mostly residential and affluent, and with its remaining undeveloped land and strong ties economically to nearby Washington-Dulles International Airport and Washington D.C., the area continues its transformation into a wealthy suburban bedroom community.

SOUND SYSTEM OPERATIONS AND LONG TERM PLANNING

Loudoun Water purchases most of its water and sewer services from large regional providers via long-term contractual agreements. Fairfax County Water Authority (Fairfax Water) provides the bulk of the authority's potable water supply, up to 50 million gallons per day (mgd), with the remaining provided by local sources purchased from the city of Fairfax in early 2014. Loudoun Water purchased all of the raw water storage and treatment facilities, water pipelines, and the raw water supplied by Goose Creek reservoir (7 mgd) from the city of Fairfax for about $30 million.

Expectations for significant additional customer growth have focused management's capital planning efforts on future water supply and treatment capacity. The capital improvement plan (CIP) is sizable at more than $500 million through 2019, with the bulk of the plan focused on developing new raw water supply from the Potomac River. Along with construction of a new water intake and transmission lines, the authority will also construct a new water treatment plant (WTP) and storage facilities.

The new Potomac supply, which is being constructed in phases, will provide sufficient excess capacity to customer growth through build-out over the next 30 years. The new WTP, expected to be completed in 2017, will initially be constructed with a design capacity of up to 40 mgd, but is expected to be expanded to 70 mgd as the service area matures. Loudoun Water expects to continue to purchase a portion of its supply from Fairfax Water.

The District of Columbia Water and Sewer Authority (DC Water) and the Loudoun Water's Broad Run treatment facility provide wastewater treatment. DC Water provides the authority with 13.8 mgd of capacity at its Blue Plains treatment plant. With the completion of the Broad Run water reclamation facility in 2008 and its 11 mgd in initial design capacity, the authority has significant intermediate term capacity to meet its approximately 15 mgd in annual flows. The Broad Run plant can be expanded to meet the authority's long-term treatment needs.

Expansion of the solids treatment system is included in the current five-year capital plan ($20 million) while the remaining expansion is expected to take place in the 2020-2024 timeframe.

STRONG FINANCIAL PROFILE, SIGNIFICANT GROWTH-RELATED FEES

Loudoun Water's historically strong financial performance experienced recessionary pressures in fiscals 2008 and 2009 as development in the county slowed, leading to reduced one-time development-related capacity fees. However, debt service coverage (DSC) rebounded from 2.1x from all pledged revenues and 1.1x excluding availability fees in fiscal 2009 to a solid 3.1x from all pledged revenues and 1.7x excluding availability charges in fiscal 2010. A combination of rate increases and strong customer growth further improved financial metrics in fiscal 2011.

A strong rebound in growth in fiscals 2012 and 2013 led to an increase in availability fees collected. However, Loudoun Water is less reliant on customer growth than it once was, and in fiscal 2013 all-in DSC from all revenues totaled 5.9x, and 2.3x excluding availability fees. Projected/preliminary results for fiscal 2014 show lower but still strong DSC of 4.6x from all revenues, and 2.0x excluding availability fees. Pro forma results provided show a decline in DSC to a still strong 2.9x from all revenues by fiscal 2018, but just 1.2x excluding availability fees. The pro forma includes attainable customer growth projections (roughly 3,300 new annual connections), additional debt and are based on very conservative assumptions of growth in operations and maintenance expenses. Fitch believes Loudoun Water will outperform the projections with DSC at or above their internal 1.5x policy target.

AFFORDABLE RATES, MANAGEABLE INCREASES EXPECTED

Rates were increased fairly significantly in 2010-2012 following a decline in construction activity (and availability fees) and lower financial metrics. More modest 3% annual rate increases followed in fiscals 2013-2015. Rates remain very affordable despite the recent increases, in part due to the historically strong availability fee collections, with the average residential customer bill of approximately $183 per quarter (based on 21,000 gallons of use) at just 0.6% of median household income.

The rate increases helped restore financial margins to previously strong levels, while maintaining ample liquidity and lowering Loudoun Water's reliance on one-time fees. Liquidity, measured by days cash on hand from $108 million in unrestricted cash and investments, remains exceptional at 1,001 days in fiscal 2013. The strong liquidity combined with low rates provides Loudoun Water with exceptional financial flexibility.

DEBT BURDEN TO REMAIN MANAGEABLE, CIP FOCUSED ON WATER SUPPLY

Loudoun Water's debt profile is somewhat mixed with some metrics above the medians for this rating. Debt per customer rose to $2,123 after the last new money issuance in 2013, which is below peak fiscal 2008 levels but still well-above the $1,259 median for water and sewer utilities rated 'AAA' by Fitch. However, debt to net plant assets was low at just 24%, due in part to the significant developer contributions received over the years. Debt to funds available for debt service was also low at just 3.0x in fiscal 2013, comparing favorably to the median of 3.6x for similarly-rated systems.

The vast majority of Loudoun Water's debt is fixed-rate, long-term bonds. Amortization is somewhat slow with just 38% retired over the next 10 years. The series 2005 variable rate demand bonds have a current par outstanding of roughly $19 million, or just 7% of total par outstanding in fiscal 2013. These bonds are un-hedged (i.e. there is no swap). Instead the large unrestricted balance sheet resources are used as a hedging source. Liquidity for the 2005 bonds is provided by Bank of America until 2017.

Loudoun Water's sizable five-year, approximately $520 million CIP, is sizable with roughly 44% expected to fund the new water supply. The CIP is expected to be approximately 35% bond-funded with a new issuance in 2016, or perhaps sooner, followed by another $100 million issuance in 2017 or 2018. The new debt will raise leverage ratios over the next few years. However, the very low rates, significant collection of availability fees from expected new development (and approximately $199 million in non-current investments at fiscal year-end 2013 in reserve from previous collections), sizable unrestricted liquidity, and the size and affluence of the customer base offsets the rise in debt.

Additional information is available at 'www.fitchratings.com'.

In addition to the sources of information identified in Fitch's Revenue-Supported Rating Criteria, this action was additionally informed by information from Creditscope.

Additional Disclosures

Solicitation Status

https://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=985700

Endorsement Policy

https://www.fitchratings.com/jsp/creditdesk/PolicyRegulation.faces?context=2&detail=31

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 MAY HAVE PROVIDED ANOTHER PERMISSIBLE SERVICE TO THE RATED ENTITY OR ITS RELATED THIRD PARTIES. DETAILS OF THIS SERVICE FOR RATINGS FOR WHICH THE LEAD ANALYST IS BASED IN AN EU-REGISTERED ENTITY CAN BE FOUND ON THE ENTITY SUMMARY PAGE FOR THIS ISSUER ON THE FITCH WEBSITE.

Contacts

Fitch Ratings
Primary Analyst
Andrew DeStefano
Director
+1-212-908-0284
Fitch Ratings, Inc.
33 Whitehall Street
New York, NY 10004
or
Secondary Analyst
Eva D. Rippeteau
Associate Director
+1-212-908-9105
or
Committee Chairperson
Doug Scott
Managing Director
+1-512-215-3725
or
Media Relations:
Elizabeth Fogerty, +1-212-908-0526
elizabeth.fogerty@fitchratings.com
Sandro Scenga, +1-212-908-0278
sandro.scenga@fitchratings.com

Contacts

Fitch Ratings
Primary Analyst
Andrew DeStefano
Director
+1-212-908-0284
Fitch Ratings, Inc.
33 Whitehall Street
New York, NY 10004
or
Secondary Analyst
Eva D. Rippeteau
Associate Director
+1-212-908-9105
or
Committee Chairperson
Doug Scott
Managing Director
+1-512-215-3725
or
Media Relations:
Elizabeth Fogerty, +1-212-908-0526
elizabeth.fogerty@fitchratings.com
Sandro Scenga, +1-212-908-0278
sandro.scenga@fitchratings.com