Dec 5 - Fitch Ratings takes the following action on Hampton Roads Sanitation
District, Virginia's (the district) bonds:
--Approximately $130 million wastewater revenue bonds, series 2012A rated 'AA+';
--Approximately $215 million wastewater revenue refunding bonds, series 2012B
--Approximately $23 million subordinate wastewater revenue refunding bonds,
series 2012 rated 'AA'.
The 2012A bond proceeds will be used to fund system-wide capital improvements.
Series 2012B proceeds will refund various maturities of the outstanding series
2008 and series 2011 bonds for interest savings. The subordinate series 2012
proceeds will refund various outstanding Virginia Resource Authority loans, also
for interest savings.
The bonds are scheduled for negotiated sale the week of Dec. 10.
In addition, Fitch affirms the following ratings:
--Approximately $500 million in wastewater revenue bonds at 'AA+';
--Approximately $25 million subordinate wastewater revenue bonds, series 2011 at
The Rating Outlook is Stable.
The bonds are secured by the net revenues of the district after payment of
operating and maintenance expenses. The senior bonds have a first lien on net
revenues and the subordinate bonds have a second (junior) lien on such revenues.
The senior bonds have a provision for a 'springing' debt service reserve fund.
The subordinate bonds do not require a debt service reserve.
KEY RATING DRIVERS
SOLID FINANCIAL PERFORMANCE: Strong financial management continues to produce
solid excess cash flows and debt service coverage. Pro forma projections show a
stable to slightly improving financial profile with projected rate increases.
LARGE REGIONAL SERVICE PROVIDER: The district provides sewer treatment and
disposal services to Virginia's Hampton Roads Region and its 1.7 million
residents through 458,000 retail accounts. The district covers 670 square miles,
serving nine cities, eight counties and several large military installations.
SIZABLE CAPITAL PROGRAM; MANAGEABLE DEBT: The district's prudent long-term
capital planning shows significant capital needs. The debt burden has been on
the rise and with the expected issuance of additional bonds over the next
several years, debt ratios will rise further but are expected to remain
RATE FLEXIBILITY: Rates remain affordable despite sizable increases over the
past several years. The district's willingness and ability to consistently raise
rates to service additional debt is a credit positive although long-term
rate-raising flexibility may be limited.
FAVORABLE INTERNAL LIQUIDITY: The 'F1+' rating on the series 2011 subordinate
bonds reflects the district's strong overall credit fundamentals and its ability
to cover the maximum potential liquidity demands of the subordinate lien
variable-rate bonds in the event of a failed remarketing.
WHAT COULD TRIGGER A RATING ACTION
SIGNIFICANT DECLINE IN FINANCIAL RESULTS AND LIQUIDITY: Fitch expects the
district will continue to show sound financial results and ample liquidity, both
for the provision of self-liquidity debt and for daily working capital. A
deviation from this course would likely cause downward rating pressure.
SOLID SYSTEM FUNDAMENTALS AND CUSTOMER BASE
The district is a large regional wastewater interception, treatment and disposal
system created by referendum in 1940 to abate water pollution in the Hampton
Roads region. The system consists of nine major treatment plants and four
smaller treatment facilities located throughout the service area with total
treatment capacity of 249 million gallons per day (mgd). Total average daily
flow in fiscal 2012 was 147 mgd, leaving plenty of long-term treatment capacity.
The district maintains sole rate-setting authority, with charges resulting only
from the provision of interception and treatment service. Rates are moderate but
have been on the rise to offset increasing debt service. Monthly rates remain
affordable at roughly $30 for residential customers assuming 1,000 cubic feet of
use in 2012, or 0.6% of median household income. An 8% rate increase was adopted
for fiscal 2013 and Fitch expects rates will trend higher as the district's
large capital program is administered, with annual increases projected to be
between 4% and 8% through the current five-year forecast period.
SOUND FINANCIAL OPERATIONS
Strong financial operating results continue with $65 million in net cash flow at
fiscal year-end 2011, providing 2.3x debt service coverage (DSC) of senior lien
bonds and 1.7x DSC of all bonds. Audited fiscal 2012 results show a slight
decline in DSC due to a large one-time expensing of capital items. However, DSC
was still solid at 2.1x on the senior bonds and 1.5x all-in. When excluding the
capital spending, DSC was 2.6x and 1.9x on senior and all bonds, respectively.
Overall liquidity improved in fiscal 2012 and is considered strong at over 400
days cash on hand.
Updated pro forma financial results provided by the district show DSC at no less
than 1.9x on the senior bonds and 1.5x all-in, which is consistent with previous
projected results provided to Fitch. Fitch expects the district will maintain
solid financial metrics.
AMPLE LIQUIDITY TO SUPPORT VARIABLE RATE BONDS
The series 2011 variable rate demand bonds do not have a direct-pay letter of
credit to pay bondholders in the event of a failed remarketing. However,
district cash and investments are more than sufficient to meet self-liquidity
needs for the variable rate demand bonds and are well in excess of Fitch's
criteria. The district's discretionary resources for self-liquidity meet Fitch's
criteria for the 'F1+' rating in that liquid resources cover the maximum
potential liquidity requirement (the full principal amount of the variable rate
demand bonds outstanding, or $25 million) by at least 125%.
The district had nearly $140 million in total cash and investments as of Oct.
31, 2012, of which $116 million is set-aside by the district in a separate
pooled investment portfolio and will be the primary source for self-liquidity.
After applying Fitch's discount rates to the various investment categories, the
approximately $111 million pool provides over 400% coverage of the potential
liquidity demand for the subordinate bonds. The investment securities are
concentrated in U.S. Treasuries (37%), Federal Agencies (36%), and corporate
bonds (roughly 10%), and 100% of the securities are available for same-day
CAPITAL NEEDS REMAIN SIGNIFICANT
The district's 10-year, $1.16 billion capital improvement plan (CIP) is sizable
and will continue to address regulatory requirements, including nutrient
reduction and sanitary sewer overflows. Significant outlays for system-wide
renewal and rehabilitation of aging infrastructure is also planned. Including
the new money series 2012A bonds to be issued, approximately 66% of the CIP will
The district expects to sell bonds again after the current issuance, roughly
annually beginning in fiscal 2015. The district expects to issue an additional
$166 million in bonds between fiscal 2015 and fiscal 2017 and then another
roughly $320 million between fiscals 2018 and 2022.
RISING DEBT BURDEN NOT YET A CREDIT CONCERN
District debt has been on the rise. Since fiscal 2008, total debt outstanding
has increased by 60%. As of fiscal 2012, outstanding bonds totaled approximately
$590 million, leading to higher but still manageable debt ratios. Debt to net
plant was an above average 66%. However, debt per customer was below average at
$1,356 as well as debt per capita, which was $365. Projected debt issuance
during the forecast period will bring debt per customer to roughly $1,800, which
is only slightly above the current median for the rating category.
The fixed cost burden has also increased fairly substantially over the past five
years. However, annual debt service still comprises a manageable 23% of gross
system revenues. Fitch projects the system's debt burden will increase only
slightly as a result of this issuance, but is concerned longer-term debt needs
will lead to a significantly higher debt and fixed cost burden. The district's
ability to manage its operating and capital costs and maintain a solid financial
profile will remain important rating considerations.
Additional information is available at 'www.fitchratings.com'. The ratings above
were solicited by, or on behalf of, the issuer, and therefore, Fitch has been
compensated for the provision of the ratings.
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 12, 2012);
--'U.S. Water and Sewer Revenue Bond Rating Criteria' (Aug. 3, 2012);
--'Criteria for Assigning Short-Term Rating Based on Internal Liquidity' (June
--'2013 Water and Sewer Medians' (Dec. 5, 2012);
--'2013 Outlook: Water and Sewer Sector' (Dec. 5, 2012).
For information on Build America Bonds, visit www.fitchratings.com/BABs.
Applicable Criteria and Related Research:
Revenue-Supported Rating Criteria
U.S. Water and Sewer Revenue Bond Rating Criteria
Criteria for Assigning Short-Term Ratings Based on Internal Liquidity
2013 Water and Sewer Medians
2013 Outlook: Water and Sewer Sector