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MOODY'S ASSIGNS Aa1 RATING TO UPPER OCCOQUAN SEWERAGE AUTHORITY'S (VA) $84.3 MILLION REVENUE BONDS, SERIES 2010

08 Dec 2010

Aa1 Applies to $504.3 Million of Outstanding Debt, Including Current Offering

Water/Sewer
VA

Moody's Rating

ISSUE

RATING

Regional Sewerage System Revenue Bonds, Series of 2010A (Tax-Exempt)

Aa1

  Sale Amount

$12,500,000

  Expected Sale Date

12/15/10

  Rating Description

Revenue Bonds

 

Regional Sewerage System Revenue Bonds, Series of 2010B (Taxable Build America Bonds)

Aa1

  Sale Amount

$71,855,000

  Expected Sale Date

12/15/10

  Rating Description

Revenue

 

Opinion

NEW YORK, Dec 8, 2010 -- Moody's Investors Service has assigned a Aa1 rating to Upper Occoquan Sewage Authority's (UOSA) (VA) $84.3 million Regional Sewerage System Revenue Bonds, Series of 2010. Concurrently, Moody's has affirmed the Aa1 rating assigned to approximately $421.7 million of outstanding parity debt.

RATINGS RATIONALE

The Aa1 rating incorporates satisfactory legal security for the bonds; stability and diversity in Northern Virginia's local economy and UOSA's service area; and strong composite credit quality of the member jurisdictions, notably Fairfax County (GO rated Aaa, sewer revenue bonds rated Aa2) which is responsible for nearly 60% of UOSA's debt. Fairfax's sewer bonds are considered to be a senior obligation to UOSA's debt service assessments, both payable from system sewer revenues. Also factored into the rating is the authority's adequate financial position, high debt ratio, and narrow debt service coverage. Proceeds of the bonds, which are secured by a pledge of system net revenues, will fund a variety of projects included in the authority's $386 million 12-year capital improvement plan, including expansion of its delivery system, nutrient removal projects and other plant improvements.

AUTHORITY OBLIGATIONS SUPPORTED BY PARTICIPANT CONTRACTS

The Upper Occoquan Sewage Authority provides wholesale wastewater treatment to four Northern Virginia municipalities: Fairfax County, Prince William County (GO rated Aaa, sewer revenue bonds rated Aa1), and the cities of Manassas (GO rated Aa1) and Manassas Park (GO rated A1/negative outlook). The participants have entered into a service agreement and signed unconditional take or pay contracts with the authority which obligate them to fund all required payments, including a proportional share of annual debt service. The authority bills the participants quarterly for operations and maintenance expenses based on actual usage; and for debt service, in proportion to the participants' share of treatment plant capacity. These charges are unsecured contractual obligations of each participant, payable from each member's sewerage system revenues. The service agreement does not restrict the rights of the participants to establish any priority of payment with regards to UOSA debt or other system obligations; however, each system must collect sufficient sewerage system revenues to make payments required to UOSA. Upon issuance of the 2010 bonds, debt service will be billed approximately according to the following allocations: Fairfax County (57.38%), Prince William County (29.85%), City of Manassas (8.14%) and City of Manassas Park (4.63%). Based on covenants of Fairfax County's sewer revenue bonds which require explicit action to declare other obligations of the system as parity to said bonds and the fact that to date no action has been taken with regards to its UOSA obligation, Fairfax considers UOSA payments as subordinate to its revenue bonds. The three remaining participants treat UOSA charges as part of system operations and maintenance.

Bondholder legal protections include a Debt Service Reserve Fund (DSRF) and a Reserve Maintenance Fund (RMF) available to finance replacements and improvements that cost more than $5,000 and do not increase system capacity. The DSRF for each bond series is funded at the lesser of (i) maximum annual debt service in any fiscal year; (ii) 125% of average annual debt service in any fiscal year; and (iii) 10% of the par amount of the bonds. The DSRF currently equals $63 million and is funded with sureties and cash. There is no requirement to substitute cash or provider should the current providers' credit ratings are downgraded or if the provider becomes insolvent. The current issue includes $7 million in proceeds which will increase DSRF funding to $70 million, roughly 25% of which is cash. The legal structure includes a mechanism for replenishment of these two funds should a default by any participant result in a shortfall in either fund. If a participant defaults on its share of debt service, that shortfall amount would be drawn from the DSRF. UOSA would then bill the participants to restore the shortfall based on the debt service allocation denoted in the previous paragraph. Payment of the non-defaulting participants would restore most of the shortfall in the DSRF. The balance of the shortfall would come from the RMF, which would in turn be partially restored by billings to the non-defaulting participants. So long as the largest participant, Fairfax County, does not default, this replenishment mechanism would prevent any interruption of payments to bondholders in the event of default by any, or a combination, of the other three participants. In the event Fairfax County were to default on its obligations, the step-up of the other participants combined with available funds, UOSA would be able to meet its debt service obligations for three consecutive years before defaulting.

AUTHORITY IS INTEGRAL TO NORTHERN VIRGINIA WATER SUPPLY

Created in 1971 to address concerns regarding water quality in the Occoquan Basin, UOSA is critical to the region's water supply. UOSA's advanced water reclamation plant discharges into the Occoquan Reservoir, a principal water supply source of the Fairfax County Water Authority (revenue bonds rated Aaa/negative outlook), which provides drinking water to 1.7 million people in Northern Virginia, including residents of Fairfax and Prince William Counties. UOSA's treatment capacity was recently expanded to 54 MGD, which comfortably accommodates fiscal 2010 average daily flows of 31.6 MGD (59% of capacity). The footprint of the facility allows for additional capacity expansion up to 85 MGD to accommodate future system growth. Average daily flow has been relatively steady for the last three years. Due to anticipated future growth, Prince William County and the City of Manassas may need additional capacity beyond their allocated share of the 54 MGD. In the near term, Prince William and Manassas have procured additional capacity from Fairfax County's allocation. However, this does not change the debt service allocation attributable to Fairfax County on previously issued debt.

HIGH DEBT BURDEN WITH MODERATE CIP AND FUTURE BORROWING PLANS

UOSA's fiscal 2010 debt ratio is high at 81.5%, reflecting the wholesale nature of the system and the significant investment in the plant. Moody's believes this debt position is manageable given the participants' substantial combined resources, particularly those of the Fairfax County Sewer System (see below). Amortization of the Authority's debt is below average, with 27% of principal retired within 10 years, reflecting UOSA's decision to maintain annual debt service at approximately $36 million annually through 2029. Of note, all debt is retired by 2043. The Authority's fiscal 2010 through fiscal 2021 capital improvement plan (CIP) totals $386 million, comprised of projects related to delivery system expansion (30%), plant upgrades (11%), the Commonwealth of Virginia's mandated Chesapeake Bay restoration program (24%) and various maintenance projects (35%). Projects are expected to be primarily funded with two additional bond issues in FY13 ($46 million), FY16 ($75 million) and FY19 ($54 million), although the authority is seeking grants to offset needed borrowing. UOSA's debt is all fixed-rate and the authority has not entered into any derivative agreements.

SLOWER GROWTH EXPECTED IN LARGE AND WEALTHY SERVICE AREA

The member jurisdictions comprise an important part of the regional Washington D.C. (GO rated Aa2/stable outlook) economy. Fairfax County's $242 billion tax base has performed well during the recession, stabilized by its economic diversity and a resilient housing market, as well as considerable commercial activity including high-technology, telecommunications, defense, health care and financial services firms. Prince William County's tax base, fully valued at $64 billion, had grown steadily at a strong annual rate averaging 9.2% from 2004 to 2009, however values, primarily in the residential sector, have dropped 25% in 2010. Values have also declined in the cities of Manassas and Manassas Park, with annual average growth dropping to -3.3% and 3.1%, respectively, from 2005 to 2010 after a period of strong expansion. The service area benefits from very high wealth levels and consistently low unemployment rates. Median Family Income levels in Fairfax and Prince William counties are 170% and 132% of the state median, respectively; and are 130% and 113% of the state median, respectively, in the cities of Manassas and Manassas Park. Unemployment rates in the service area have risen during the recession but generally remain below state and national levels, ranging from 4.6% in Fairfax County, 5.4% in Prince William County, 5.7% in Manassas Park and 6.9% in Manassas, as compared with the state's 6.5% unemployment rate as of October 2010. Substantial population growth in the service area between 1990 and 2000 (21.2%, as compared with 14.4% growth in the state population) has driven strong customer base growth. Since 1995, annual growth in sewer connections has grown at 2.44% annually, with 85% of new connections occurring in Fairfax or Prince William Counties.

NARROW DEBT SERVICE COVERAGE PROVIDED BY PARTICIPANT SEWERAGE SYSTEMS; FAIRFAX SEWER SYSTEM REPRESENTS MAJORITY OF

The Authority's net revenues have generated narrow debt service coverage averaging 1.16 times since fiscal 2006, including 1.17 times debt service coverage in fiscal 2010. The fiscal 2011 budget has increased a modest 0.12% over the prior year, with debt service and operations and maintenance claiming 49% and 45% of the total budget, respectively. First quarter fiscal 2011 results indicate expenditures are trending 9.2% below budget and revenues performing close to budgeted projections. UOSA's liquidity is strong; the authority maintains a Reserve Maintenance Fund of over $4 million and with 180 days of operating cash on hand comfortably exceeds its targets of roughly 60 days' expenditures. While the Authority maintains narrow debt service coverage, the rating also reflects Fairfax County's sound financial position. Moody's notes, however, that Fairfax County relies heavily on economically sensitive availability fees to pay its obligations, which include debt service payments on UOSA debt. Although this reliance on non-recurring revenues creates a vulnerability, this risk is mitigated by the Fairfax system's demonstrated history of adopting sufficient rate increases, adjusting its capital expenditures and the county's contractual obligation to fund all required payments to UOSA.

Moody's believes Fairfax County Sewer System net revenues will continue to provide solid coverage of senior lien debt service requirements, which has averaged a strong 6.3 times coverage between fiscal years 2003 and 2009, including availability fees, and 3.06 times excluding such fees. In fiscal 2010, waning availability fee revenues dropped senior lien coverage to 3.2 times (2.7 times without availability fees). Total debt service coverage, including subordinate debt, was 1.72 times, or 1.46 times without availability fees. The system's net working capital position is healthy at 79% fiscal 2009 operating expenses. Fairfax has a demonstrated history of annual rate increases, and future regular rate increases could be necessary to maintain favorable operations as growth in connection fees continues to remain sluggish.

WHAT COULD MOVE THE RATING-UP:

Stronger long-term credit quality of participants

WHAT COULD MOVE THE RATING-DOWN:

Lower credit quality of participants

Increase in debt ratio

Decline in liquidity

Additional environmental regulation causing significant capital investment

KEY STATISTICS:

Type of System: Regional wholesale sewage treatment

Population (UOSA service area): 278,000

Population (UOSA member jurisdictions): 1.5 million

Sewer connections (UOSA service area): 99,123

Sewer connections (member sewer systems): 456,073

Security: Revenues of four member sewer systems under unconditional take-or-pay contracts

Debt Service Allocation (including Series 2010 Bonds):

Fairfax County (GO rated Aaa, sewer revenue bonds rated Aa1): 57%

Prince William County (GO rated Aaa, sewer revenue bonds rated Aa1): 30%

City of Manassas (GO rated Aa3): 8%

City of Manassas Park (GO rated A1/negative outlook): 5%

FY 2010 Debt Service Coverage (UOSA): 1.17 times

FY2010 Debt Ratio (UOSA): 81.5%

FY2010 Operating Ratio (UOSA): 42.7%

FY2009 Debt Service Coverage (Fairfax County): 1.25 times

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, parties not involved in the ratings, public information, confidential and proprietary Moody's Investors Service information, and confidential and proprietary Moody's Analytics 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

Susan Kendall
Analyst
Public Finance Group
Moody's Investors Service

Jennifer Rinaca
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
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MOODY'S ASSIGNS Aa1 RATING TO UPPER OCCOQUAN SEWERAGE AUTHORITY'S (VA) $84.3 MILLION REVENUE BONDS, SERIES 2010
No Related Data.
© 2019 Moody’s Corporation, Moody’s Investors Service, Inc., Moody’s Analytics, Inc. and/or their licensors and affiliates (collectively, “MOODY’S”). All rights reserved.

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