Fitch Ratings assigns an 'AA' rating to Hampton Roads Sanitation District, Virginia's, (the district) $208.6 million wastewater system revenue bonds, series 2008. The bonds are scheduled to sell on March 12 through a negotiated sale. Bond proceeds will refund outstanding short-term notes as well as provide financing for various wastewater capacity expansion and improvement projects to the district's facilities. Fitch also assigns an initial underlying 'AA' rating to approximately $35.9 million in outstanding parity debt. The bonds are secured by a senior lien on net revenues of the district. The Rating Outlook is Stable.
The 'AA' rating is based primarily on the district's low debt burden, sound capital planning efforts and funding strategies, and prudent financial management evidenced by consistently strong debt service coverage and healthy liquidity levels. 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. The district's credit strengths are somewhat tempered by a large multi-year capital plan requiring a notable increase in debt and sizeable annual rate increases forecasted over the next five years. Further, uncertainty related to recently imposed regulatory obligations that could require future capital investment on the part of the district could potentially develop into a credit risk, though Fitch believes that any impact on the district would likely be limited and therefore manageable.
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 strong debt service coverage and healthy liquidity levels. The district finished fiscal 2007 with a solid 266 days of cash on hand, and coverage on annual debt service on parity debt, which carries a senior-lien on net revenues, was very strong at 7.2 times (x). Debt service coverage on all outstanding debt obligations, including subordinated debt issued through the Virginia Resources Authority (VRA), was also high at 3.0x in fiscal 2007.While the current issuance will more than double the district's outstanding debt amount, Fitch believes capacity exists to comfortably support the additional indebtedness without constraining operations. Conservative financial projections through fiscal 2012 show debt service coverage on all outstanding obligations declining from 3.0x in fiscal 2008 to a still solid level of 1.9x in 2012. The financial forecast includes a notable increase in debt and sizeable annual rate increases needed to support the district's capital improvement plan (CIP). While rates are forecasted to rise significantly, Fitch believes system charges on average are affordable relative to median household income levels.
Capital financing, totaling $757.3 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. The balance of funding will consist of long-term revenue borrowings on both a senior and subordinated basis.
Fitch's rating definitions and the terms of use of such ratings are available on the agency's public site, www.fitchratings.com. Published ratings, criteria and methodologies are available from this site, at all times. Fitch's code of conduct, confidentiality, conflicts of interest, affiliate firewall, compliance and other relevant policies and procedures are also available from the 'Code of Conduct' section of this site.
Contacts:
Christopher Hessenthaler, 212-908-0773, New York
Doug
Scott, 512-215-3725, Austin
or
Media Relations:
Cindy
Stoller, 212-908-0526, New York
