Fitch Ratings assigns an 'AA' rating to Hampton Roads Sanitation District, Virginia's, (the district) $45.4 million wastewater system revenue bonds, series 2009A, and $100.7 million wastewater system revenue bonds, series 2009B (taxable - Build America Bonds). The bonds are scheduled for negotiated sale the week of Nov. 3, 2009 with proceeds being used to fund various wastewater capacity expansion and improvement projects to the district's facilities. At this time, Fitch also affirms the 'AA' rating on the district's $347 million in outstanding parity bonds. The Rating Outlook is Stable.
The 'AA' rating is based primarily on the district's solid debt service coverage, healthy liquidity, and numerous policies that govern fiscal management and demonstrate prudent financial management. The rating also considers the district's demonstrated ability to operate efficiently as a regional wastewater enterprise providing an essential service to a diverse and stable service area. Credit strengths are somewhat tempered by a multi-year capital plan that will necessitate a notable increase in debt over the next five years, which Fitch believes will diminish debt service coverage levels going forward, require sizeable annual rate increases, and reduce the district's overall flexibility to a more moderate level.
The district was created in 1940 by the state's general assembly as a separate legal entity charged with interception, treatment, and disposal of wastewater generated throughout the service area. The majority of wastewater collection remains the responsibility of the various cities, counties, and military establishments within the district's service area. The district is governed by an eight-member commission appointed by the governor for staggered four year terms without limitation. The district's nine major wastewater treatment plants provide a total of 230 million gallons daily (mgd) of treatment capacity and serve an estimated 1.6 million people residing in nine cities, eight counties, and portions of existing military establishments. Municipalities in the district's service area comprise the majority of the Virginia Beach-Norfolk-Newport News Metropolitan Statistical Area (MSA). Income levels throughout the expansive and slowly growing service area typically measure slightly below state and national levels, while unemployment rates generally mirror the state's and fall comfortably below the national figure. The district maintains sole rating-setting authority, with charges resulting only from the provision of interception and treatment service.
Financial operations are a credit strength marked by consistently solid debt service coverage and healthy liquidity levels. The district finished fiscal 2009 with a solid 314 days of cash on hand, and coverage of annual debt service on parity debt, which carries a senior-lien on net revenues, was very strong at 3.0 times (x). Newly adopted policies prudently require annual coverage on all debt of at least 1.25x and a minimum cash balance of at least 270 days cash. Debt service coverage on all outstanding debt obligations, including subordinated debt issued through the Virginia Resources Authority (VRA), was also solid at 1.9x in fiscal 2009. Facility charges related to system growth declined by almost 40% in fiscal 2009, reflecting a sharp downturn in residential home construction. Excluding the growth-related charges, coverage of all outstanding debt service was 1.7x in fiscal 2009. Fitch believes financial projections through fiscal 2014 are conservative with debt service coverage on all outstanding obligations, excluding facility charges, declining annually to almost 1.6x. The fiscal 2010 budget prudently assumes an additional 31% drop in facility charges while moderate annual increases each year after are included in the district's financial forecast.
Financial projections include annual borrowings for capital projects and sizeable yearly rate increases needed to support new debt. Rates were increased 15% annually in fiscal years 2008 and 2009, and by an additional 11% in fiscal 2010. Despite the rate hikes, Fitch believes system charges on average are affordable relative to median household income levels. Capital financing totaling $672 million over the next five years is needed primarily to address rehabilitation, upgrade, and expansion of existing facilities - including an overall increase of 33 mgd of treatment capacity. While a portion of the CIP is aimed at expanding nutrient removal capability, historically the district has been proactive in implementing capital improvements designed to protect the Chesapeake Bay. Rate increases are prudently set to allow for 15% of the CIP to be cash-funded, although the district expects to fund almost 30% on a pay-go basis. The balance of funding will consist of long-term annual revenue bond offerings and potential VRA loans.
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Contacts:
Fitch Ratings
Christopher Hessenthaler, 212-908-0773, New York
Doug
Scott, 512-215-3725, Austin
or
Media Relations:
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Stoller, 212-908-0526, New York
Email: cindy.stoller@fitchratings.com
