TEXT - Fitch affirms Virginia's Upper Occoquan Sewer Auth revs
Dec 3 - Fitch Ratings takes the following rating action on Upper Occoquan Sewage Authority, Virginia's bonds: --Approximately $500 million outstanding sewerage system revenue bonds affirmed at 'AA+'. The Rating Outlook is Stable. SECURITY The bonds are secured by net sewer system revenues, which consist of member charges pursuant to the member agency service agreement. KEY RATING DRIVERS IMPORTANT REGIONAL SERVICE PROVIDER: The Upper Occoquan Sewage Authority (UOSA) was created to acquire, construct, operate and maintain sewage pollution abatement facilities to protect the Occoquan Watershed and facilitate regional water supply. The Occoquan Reservoir (the reservoir) serves as a significant drinking water source for the region. SATISFACTORY PAYMENT STRUCTURE: The bonds are secured by payments from its four members, which include step-up provisions in case of member defaults; however, the step-ups are limited to replenishment of the debt service reserve (DSR) and the reserve maintenance fund (RMF) based on each member's pre-determined replenishment allocations. STRONG MEMBER CREDIT QUALITY: The rating is based on the very high credit quality of UOSA's two largest members: Fairfax County (sewer system revenue bonds rated 'AAA' with a Stable Outlook by Fitch) and Prince William County Service Authority. Sufficient step-up support from each ensures long-term bond repayment in the unlikely event of default by one or both of the other members and further supports UOSA's rating. STRONG SERVICE AREA CHARACTERISTICS: UOSA serves the economically deep and diverse suburban communities of the southwestern Washington D.C. metropolitan area. Demographic indicators are above average and the economy remains strong. CREDIT PROFILE CRITICAL ROLE IN WATER POLLUTION CONTROL & ABATEMENT UOSA provides wholesale wastewater treatment service to approximately 320,000 residents, located within the Occoquan River drainage basin, which serves as a significant drinking water source for roughly 1.7 million residents of northern Virginia. Since its creation in 1971, UOSA has fulfilled a vital role both in protecting the water quality of the reservoir and in boosting its overall safe yield, particularly during dry periods when natural flows are reduced. The authority's average treated flows remain steady at around 31 million gallons per day (mgd), which is just 5% of typical flows into the reservoir, but can rise to 80% of total inflows during drought conditions. STRONG CREDIT FUNDAMENTALS OF MEMBER AGENCIES UOSA's four member agencies include Fairfax County and Prince William County (both county's GO bonds are rated 'AAA' by Fitch), and the cities of Manassas and Manassas Park. Fairfax County's sewer system revenue bonds are also rated 'AAA', while the other member's utility systems are not publicly rated by Fitch. These two members provide 87% of the debt service reserve fund replenishment on a combined basis. Pursuant to the service agreement (the agreement) between UOSA and its members, UOSA agrees to collect and treat wastewater flows from its members while billing them no less than quarterly for authority operating, debt service, and replacement expenses. In turn, each member agrees to fix and collect sufficient charges from their respective sewer utilities in amounts at least sufficient to make required UOSA payments. Prince William County created the Prince William County Service Authority (PWCSA) to act as its agent for sewer collection and billing purposes. Fitch does not rate PWCSA's utility system revenue bonds, but the system's strong financial metrics, favorable debt profile, affordable rates and strong service area demographics, suggest PWCSA displays very strong credit fundamentals. SOLID MEMBER PAYMENTS STRUCTURE & STEP-UP Fitch believes a member default is remote. However, should one occur a draw on the DSRF would likely be necessary to meet UOSA's current debt service obligations. This would trigger non-defaulting members to be billed to replenish the DSRF based on their required percentage allocation, which corresponds to their debt service percentage allocation for the original bonds. The allocation is 55% for Fairfax County and 32% for PWCSA, for a total DSRF replenishment from these two members of 87%. If the DSRF falls below the required reserve amount (defined to be MADS), UOSA may replenish the DSRF from available RMF moneys, which would also trigger billings to members for their allocated replenishment portion of the RMF (based on plant capacity allocations, discussed below). Based on this structure and the strong credit quality of the two largest members, the bonds could continue to perform to maturity in the event that Manassas and Manassas Park, the two smaller (and non-Fitch-rated) members, were to default and such defaults were to continue for the life of the bonds. Members are allotted a specific allocation of treatment capacity at UOSA's plant. Currently, Fairfax County has the largest allocation at just more than 51%, while PWCSA, Manassas, and Manassas Park's allocations are about 29%, 14%, and 5%, respectively. The service agreement does not obligate, require, or restrict the rights of the members to establish any priority for the UOSA payments relative to the members' own system expenses or obligations, and the step-up provisions are considered to be somewhat weaker than other comparable legal structures, where members are required to directly make up debt service shortfalls prior to tapping a DSRF (or supplemental reserve). However, Fitch notes that given the size and strength of the two largest members and the partially cash-funded debt service reserve funds, the overall structure is still sound. SOUND OPERATIONS & MANAGEABLE CAPITAL IMPROVEMENTS UOSA's 54 mgd advance treatment plant retains ample treatment capacity to meet the member's relatively stable average combined daily flow of about 32 mgd. Discharge to the Occoquan River is permitted through the Virginia Department of Environmental Quality through the plant's recently renewed five-year national pollutant discharge elimination system (NPDES) permit. The capital improvement plan totals roughly $125 million through 2017 and includes nutrient reduction projects (Chesapeake Bay clean-up requirements), renewal and replacement of infrastructure and delivery system expansion to accommodate eventual build-out of the service area. The capital plan is considered moderate and is not expected to increase the authority's high but manageable debt position. Management projects issuing $30 million in additional debt in fiscal 2014. Total outstanding debt of $480 million is a somewhat high 102% of net capital assets, and $1,400 per capita. However, Fitch notes the members are required to pay 100% of the authority's debt service as part of their member payments. STABLE FINANCIAL PERFORMANCE MAINTAINED UOSA's finances are somewhat typical of a wholesale provider; somewhat limited but stable cash flows and debt service coverage, and solid liquidity. The authority ended fiscal 2012 with approximately $44 million in net revenues available for debt service, providing nearly 1.3x coverage of annual debt service. A solid liquidity position was improved slightly to 173 days of operating expenses on hand, from roughly 150 days in fiscal 2011.
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