Fitch Rates Chesterfield County, VA Water and Sewer System Rev Bonds 'AAA'; Outlook Stable

AUSTIN, Texas--()--Fitch Ratings assigns an 'AAA' rating to the following Chesterfield County, VA (the county) water and sewer system revenue bonds:

--$59.3 million water and sewer system revenue refunding bonds, series 2016.

The bonds are scheduled to price on June 16. Proceeds will be used to refund all of the outstanding bonds for debt service savings and to pay issuance costs.

In addition, Fitch affirms its ratings on the following outstanding water and sewer system bonds (pre-refunding):

--$73.7 million water and sewer system revenue bonds, series 2007 and 2009 at 'AAA'.

The Rating Outlook is Stable.

SECURITY

The bonds are secured by a pledge of the county's net water and wastewater system (the system) revenues.

KEY RATING DRIVERS

EXCELLENT FINANCIAL PROFILE: System financial performance is exceptional, characterized by robust debt service coverage (DSC) at nearly 8x and days cash on hand (DCOH) at 1,702 in fiscal 2015. Approved rate increases support continued strong financial results.

LOW DEBT; MANAGEABLE CAPITAL PLAN: Debt ratios are low and expected to remain favorable as no additional debt is currently contemplated. Capital needs appear manageable and are expected to be sufficiently funded by recurring revenues. System debt amortizes rapidly at nearly 84% in 10 years, compared with the 'AAA' median of 50%.

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

SOUND ECONOMIC FUNDAMENTALS: The system provides an essential service to an economically broad, diverse and affluent service area.

STRONG FINANCIAL PLANNING: Management has demonstrated consistent and extensive financial and capital planning.

RATING SENSITIVITIES

STABILITY EXPECTED: The rating is sensitive to shifts in fundamental credit characteristics including the system's strong debt and financial profiles. The Stable Outlook reflects Fitch's expectation that such shifts are unlikely.

CREDIT PROFILE

Chesterfield County encompasses roughly 446 square miles in east-central Virginia and suburban Richmond. The county serves approximately 106,000 water and 89,000 wastewater customers, with customer counts growing at an average of roughly 1% annually over the past five years.

CONSISTENTLY SOLID FINANCIAL PERFORMANCE

The system's financial profile is solid and was boosted by declining debt service costs in fiscal 2012 as three of the county's series' of bonds matured in fiscal 2011. Consistently sound financial operations combined with low debt levels has resulted in very strong DSC levels ranging from 5.8x to 8x from fiscal years 2012 to 2015 (4x to 5.9x, excluding connection fees). The system's five-year forecast projects all-in DSC in excess of 7.5x between fiscal years 2016 and 2020.

Liquidity remained robust, with over 1,700 DCOH available for operations at the end of fiscal 2015. Fitch expects liquidity to remain high, despite some planned use of available reserves for capital improvement projects, given that the county's management has demonstrated consistent and extensive financial and capital planning.

RATE FLEXIBILITY

Both water and wastewater user rates have increased by about 5% annually since 2011 and will likely increase by similar amounts in the future, pending annual approval by the board of supervisors. The average residential customer consumes 6,732 gallons of water per month (gpm) and the associated bill of $57.18 equates to only 0.9% of MHI. Assuming no changes in water use or wealth levels, the resulting combined water and wastewater bill is expected to remain comfortably below Fitch's affordability threshold of 2% of MHI.

LOW DEBT BURDEN WITH MANAGEABLE CAPITAL NEEDS

The system's debt burden is minimal. In fiscal 2015, the system's total debt equated to just $367 per customer and comprised a very low 9% of net plant. Carrying costs are also low, with fiscal 2015 annual debt service equal to just 8% of gross revenues. These metrics compare very favorably to the 'AAA' respective medians of $1,093, debt per capita, 26% debt to net plant, and 18% carrying costs.

The fiscal 2017-2021 capital improvement plan (CIP) totals $380.8 million, including $148.5 million that represents funding the rate stabilization reserve. Excluding the reserve, projects total $232.3 million to support water and wastewater system renewal and replacement, securing future water resources, and expansion of wastewater treatment capacity. Water projects comprise 54% of the CIP and wastewater 31%. The remaining 15% is mainly for advanced metering infrastructure. Overall, the CIP is manageable and is currently planned to be entirely funded on a pay-go basis but management may decide to debt fund a portion of the CIP.

Based on the outcome of an on-going Virginia Department of Environmental Quality (DEQ) study, the system's future wastewater expansion capital costs could increase. The study seeks to assess the existing water quality standards for the James River Basin - a Chesapeake Bay tributary - to determine if the current allowable levels of nutrient loading are protective for the local water quality. Positively, the county already achieves very low effluent waste loads due to the implementation of a stringent biological nutrient removal program thereby limiting any impact on current operations. Nevertheless, management is closely monitoring the DEQ study's progress and management does not anticipate significant impact to its facilities as a result of this study.

STRONG 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.

The local economy is diverse and is supported by high-tech synthetic fibers manufacturing, retail food distribution, and health care. The county's employment rate has grown an average of 1.6% annually over the past five years. The county unemployment rate at 3.8% in March 2016 was better than the state's 4.2% and national 5.1% for the same period. Income levels are 12% and 36% above the state and national levels, respectively.

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

Applicable Criteria

Revenue-Supported Rating Criteria (pub. 16 Jun 2014)

https://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=750012

U.S. Water and Sewer Revenue Bond Rating Criteria (pub. 03 Sep 2015)

https://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=869223

Additional Disclosures

Dodd-Frank Rating Information Disclosure Form

https://www.fitchratings.com/creditdesk/press_releases/content/ridf_frame.cfm?pr_id=1005640

Solicitation Status

https://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=1005640

Endorsement Policy

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

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Contacts

Fitch Ratings
Primary Analyst
Gabriela Gutierrez, CPA
Director
+1-512-215-3731
Fitch Ratings, Inc.
111 Congress Avenue, Suite 2010
Austin, TX 78701
or
Secondary Analyst
Major Parkhurst
Director
+1-512-215-3729
or
Committee Chairperson
Dennis Pidherny
Managing Director
+1-212-908-0738
or
Media Relations:
Elizabeth Fogerty, +1-212-908-0526
elizabeth.fogerty@fitchratings.com

Contacts

Fitch Ratings
Primary Analyst
Gabriela Gutierrez, CPA
Director
+1-512-215-3731
Fitch Ratings, Inc.
111 Congress Avenue, Suite 2010
Austin, TX 78701
or
Secondary Analyst
Major Parkhurst
Director
+1-512-215-3729
or
Committee Chairperson
Dennis Pidherny
Managing Director
+1-212-908-0738
or
Media Relations:
Elizabeth Fogerty, +1-212-908-0526
elizabeth.fogerty@fitchratings.com