NEW YORK--(BUSINESS WIRE)--Fitch Ratings has affirmed the 'A-' rating on Bristol Virginia Utilities Authority's (BVUA) implied utility system revenue bonds. BVUA's rating takes into account approximately $40.9 million of outstanding utility system revenue bonds but is assigned to implied obligations given that none of the outstanding debt is publically held.
The Rating Outlook is Positive.
BVUA's utility system revenue bonds are secured by a pledge of net revenues of the water, wastewater, electric and telecommunication systems, 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. While the electric system is the largest in regards to topline revenues, the telecommunications division, doing business as OptiNet, provides the largest portion of funds available for debt service (FADS). Together, the two divisions account for 86% of FADS.
METRICS CONTINUE TO STRENGTHEN: The Outlook revision to Positive reflects the continued strengthening of BVUA's financial metrics due to the sustained expansion of OptiNet and water and wastewater increases implemented in fiscal 2012 and 2013. While the competitive nature of telecommunication services provides an additional level of risk, BVUA's metrics remain strong and well above rating category medians, even without the benefit of OptiNet income.
STABLE POWER SUPPLY: BVUA's power is supplied through a 20-year, all-requirements contract with Tennessee Valley Authority (TVA, rated 'AAA' with a Stable Outlook by Fitch). The long-term contract, which expires in 2028, eliminates the majority of 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 remain competitive, even after multiple rate increases. OptiNet's rates are generally substantially below competitors, across services.
WEAK SERVICE TERRITORY: Economic indicators of the City of Bristol (the city) currently and historically have lagged both the state and the nation, with per capita income at 68% of the national average and unemployment above the state and nation. However, recent economic development points toward the potential for improvement in the commercial sector.
GOVERNANCE STABILITY: Fitch will look for stability at the upper management level, as BVUA transitions to a new CEO after repeated management turnover. Continued focus on strong financial performance and competitively positioning BVUA will be viewed favorably and likely result in a rating upgrade.
INCREASED TRADITIONAL UTILITY CONTRIBUTION: An increased contribution to income and cash flow from electric, water and wastewater operations, as opposed to OptiNet, would likely support upward rating movement.
BVUA provides retail electric, water, wastewater and telecommunication services to the city and portions of the surrounding counties. The city is located in southwestern Virginia, on the Virginia-Tennessee border, and has experienced steady, albeit very low, population growth of 0.25% per annum, on average since 2000.
The city historically operated the utility system; however, in 2010 BVUA assumed ownership and oversight of all the utility divisions, in part to facilitate future expansion and needed rate increases. The electric distribution system is the largest based on revenues and customers served. However, the telecommunications division provides a larger proportion of FADS. In addition, OptiNet represents the authority's fastest growing segment, as customer accounts have grown, on average, 5% per year since 2009.
STRENGTHENING FINANCIAL PROFILE
Prior to the creation of BVUA in 2010, financial performance of the combined utility was volatile, largely due to the establishment of the OptiNet division and city council's reluctance to increase rates. Financial performance in recent years has stabilized at a very robust level, with topline debt service coverage (DSC) reaching 5.56x in fiscal 2014. Coverage of full obligations is similarly strong, averaging 1.7x since 2009. These levels are much stronger than the 'A-' peer medians of 1.61x DSC and of 1.22x coverage of full obligations.
While consolidated metrics are strong, the system relies heavily on the more unpredictable revenue stream of OptiNet. OptiNet's exposure to competitive pressures and its potentially unreliable revenue stream creates additional risk. However, even without OptiNet income, metrics are strong and outperform the 'A-' medians.
OptiNet is self-sustaining, based on current rates and charges. 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, internet and telephone system over the last 11 years and the standalone strength of the authority's other utility systems.
RECENT UNPREDICTABILITY WITH GOVERNANCE
A new CEO was selected by BVUA's board and began his tenure on Nov. 3, 2014. The appointment comes after a year of turnover at the upper management level. BVUA's longstanding CEO resigned unexpectedly in Sept. 2013, which was then followed by the resignation of the interim CEO in September 2014. Fitch will be looking for greater stability within senior management and for the continuance of strategic planning and financial policies in line with historical guidelines.
BVUA is currently under investigation by the Washington County, Virginia Commonwealth Attorney's office due to allegations of misuse of public funds. The investigation arose from the use of expense accounts, without having a formal policy in place. The consequences of the investigation are currently unclear however management believes that any outcome of the investigation will not be materially detrimental to BVUA.
Additional information is available at 'www.fitchratings.com'.
Applicable Criteria and Related Research:
--'U.S. Public Power Peer Study -- June 2014' (June 13, 2014);
--'U.S. Public Power Peer Study Addendum - June 2014' (June 13, 2014);
--'U.S. Public Power Rating Criteria' (March 18, 2014);
--'2015 Outlook: U.S. Public Power and Electric Cooperative Sector' (Dec. 10, 2014).
Applicable Criteria and Related Research:
U.S. Public Power Peer Study -- June 2014
U.S. Public Power Peer Study Addendum - June 2014
U.S. Public Power Rating Criteria
2015 Outlook: U.S. Public Power and Electric Cooperative Sector (Steady as She Goes)