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New Issue:

MOODY'S ASSIGNS A1 RATING TO THE CITY OF HOPEWELL'S (VA) $6 MILLION SEWER SYSTEM BONDS

Global Credit Research - 22 Nov 2010

County
VA

Moody's Rating

ISSUE

RATING

Sewer System Revenue Bonds

A1

  Sale Amount

$6,000,000

  Expected Sale Date

11/18/10

  Rating Description

$6 million Sewer revenue Bonds, Series 2010

 

Opinion

NEW YORK, Nov 22, 2010 -- Moody's Investors Service has assigned an A1 rating to the City of Hopewell's (VA) $6 million Sewer System Revenue Bonds, Series 2010.

RATINGS RATIONALE

The bonds are secured by the net revenue pledge of the city's sewer service fund. The bonds will finance the costs of system improvements, including the relocation and expansion of the city's Primary Sewer Plant, construction of new pumping stations, as well as new interceptor sewer lines. Assignment of the A1 issuer rating incorporates the relatively small customer base dominated by contracts with other governmental entities, strong cash position and adequate coverage projections based on conservative revenue assumptions.

SYSTEM SERVES STABLE ECONOMY; LARGEST CUSTOMERS ARE GOVERNMENTAL ENTITIES

Located approximately 25 miles southeast of Richmond (G.O. rated Aa2/stable outlook) the enterprise serves 9,000 retail customers (92% residential) within the City of Hopewell (G.O. rated Aa3) as well as portions of surrounding jurisdictions and a federal corrections facility. The system consists of over 130 miles of sewer lines, 21 pump stations and a 6.8 million gallon per day treatment plant. The original primary wastewater treatment plant was constructed in 1958 and provides primary treatment and disinfection. Wastewater is then pumped to a larger regional treatment facility (also owned and operated by the city) where it is combined with industrial wastewater for secondary treatment and disposal. Importantly, the current issue is secured solely by the revenues of the primary treatment plant.

Over half of system revenues derive from contractual commitments with Fort Lee Army Base, Prince George County (G.O. rated Aa2) and a federal corrections institution. The contract with Fort Lee, originally signed in 1971 and later amended, entitles the Army to up to 2.5 MGD of the plant's capacity and guarantees a minimum flow of 30 million gallons per month. Under the terms of the contract, which exists in perpetuity, Fort Lee pays a proportionate share of operations and maintenance of the primary plant and 18% of operations and maintenance of pump stations and sewer lines. As a result of the 2005 Base Realignment and Closure Commission's recommendations Fort Lee is projected to gain approximately 13,000 new personnel by 2011 which in turn should increase flow to the primary plant and provide a reliable revenue stream going forward. The agreement with Prince George County, in place through 2023, allows the county to discharge up to 2 MGD at formula-driven rates with periodic adjustments based on rate studies undertaken by the city. Finally, the agreement with the Bureau of Prisons, originally signed in 1979 and most recently amended in 2000, provides for a maximum volume of 0.48 MGD with billing based on a proportionate share of treatment, maintenance and overhead costs. While this agreement is currently slated to expire December 31, 2011 management is confident that the contract will be extended given the longstanding relationship and a lack of alternatives for treatment.

STRONG LIQUIDITY TO BE MAINTAINED; ADEQUATE PROJECTED COVERAGE

With no other outstanding long-term debt and moderate capital expenditures, rate adjustments over the past twenty years have been sporadic and relatively modest. However in anticipation of this current debt issue and $17.85 million in bond anticipation notes that were issued in calendar year 2009, which will be refinanced as long-term debt in fiscal 2012, management enacted a substantial 69% rate increase in calendar year 2009. Despite this large percentage increase the resulting average residential bill of $18.40 per month remains very competitive within the region and represents only 70% of the statewide average indicating additional rate raising flexibility. The lack of significant capital expenditures has contributed to the enterprise amassing a substantial cash position, averaging over five years of operations and maintenance costs since at least 2006. In addition, in fiscal 2010, management established a rate stabilization fund of $2.1 million from the additional revenues collected as a result of the rate increase, to act as a debt service reserve fund for the current and future issues.

The newly-adopted rate structure projections indicate adequate debt service coverage with revenues providing 4.5 times coverage in the first year of principal repayment of this issuance without the rate stabilization funds and over 7.4 times coverage including the rate stabilization fund. Due to rising debt service caused by the $18 million refunding of the city's outstanding BAN in fiscal 2012, coverage declines to only 1.9 time coverage by 2014 without the rate stabilization fund. As a result of the decreasing coverage, the city has said they will readdress implementing another rate increase around 2015. Projections contain reasonable cost growth assumptions and no additional rate increases.

DEBT TO BE MANAGEABLE

Including the $18 million BAN refunding in 2012 the system's debt ratio would increase to approximately 134% but is expected to remain manageable given a projected 30-year amortization schedule. While the city had originally planned to issue $12 million to fund proposed capital improvements, due to low construction bids the county was able to realized a $6 million savings on the current issue and has no additional debt plans for the medium term. Longer term, Hopewell may issue additional debt for continued improvements to the sewer system, as well as for nutrient removal projects although the timing and amount of future issuance remains uncertain.

ADEQUATE LEGAL PROVISIONS

The bonds are secured by a pledge of net revenues derived from the primary treatment plant. The 2010 Bonds carry a debt service reserve fund to be sized at MADS and funded with bond proceeds. The rate covenant is satisfactory, requiring net revenues of at least 1.15 times annual debt service or net revenues plus the rate stabilization fund providing 1.5 times MADS.

WHAT COULD MAKE THE RATING GO UP:

-Better debt service coverage

-Significant growth in customer base

WHAT COULD MAKE THE RATING GO DOWN:

-Significant increase in debt

-Loss of contractual agreement with the Bureau of Prisons

KEY STATISTICS:

Pledge: Net Revenues of Primary Treatment Plant

Number of Customers: 9,000

FY09 Gross Revenues: $4.6M

FY09 Operating Ratio: 79.9%

FY09 Unrestricted reserves as a % of O&M: 452.3%

Projected 2014 Debt Service Coverage without Rate Stabilization Fund: 1.9x

Projected 2014 Debt Service Coverage with Rate Stabilization Fund: 3.2x

Pro forma Debt Ratio: 134%

Projected Principal Repayment (10 years): 17.9%

Projected Principal Repayment (20 years): 48.2%

The principal methodology used in this rating was Analytical Framework For Water And Sewer System Ratings published in August 1999.

REGULATORY DISCLOSURES

Information sources used to prepare the credit rating are the following: parties involved in the ratings and public information.

Moody's Investors Service considers the quality of information available on the credit satisfactory for the purposes of assigning a credit rating.

Moody's adopts all necessary measures so that the information it uses in assigning a credit rating is of sufficient quality and from sources Moody's considers to be reliable including, when appropriate, independent third-party sources. However, Moody's is not an auditor and cannot in every instance independently verify or validate information received in the rating process.

Please see ratings tab on the issuer/entity page on Moodys.com for the last rating action and the rating history.

The date on which some Credit Ratings were first released goes back to a time before Moody's Investors Service's Credit Ratings were fully digitized and accurate data may not be available. Consequently, Moody's Investors Service provides a date that it believes is the most reliable and accurate based on the information that is available to it. Please see the ratings disclosure page on our website www.moodys.com for further information.

Please see the Credit Policy page on Moodys.com for the methodologies used in determining ratings, further information on the meaning of each rating category and the definition of default and recovery.

Analysts

Jennifer Rinaca
Analyst
Public Finance Group
Moody's Investors Service

Susan Kendall
Backup Analyst
Public Finance Group
Moody's Investors Service

Julie Beglin
Senior Credit Officer
Public Finance Group
Moody's Investors Service

Contacts

Journalists: (212) 553-0376
Research Clients: (212) 553-1653


Moody's Investors Service
250 Greenwich Street
New York, NY 10007
USA

MOODY'S ASSIGNS A1 RATING TO THE CITY OF HOPEWELL'S (VA) $6 MILLION SEWER SYSTEM BONDS
No Related Data.
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