Fitch Affirms Chesterfield County, VA Water & Sewer Revs at 'AAA'; Outlook Stable
--\$77.6 million water and sewer system revenue bonds, series 2007 and 2009.
The Rating Outlook is Stable.
The bonds are secured by a pledge of the county's net water and wastewater system (the system) revenues.
KEY RATING DRIVERS
EXCELLENT FINANCIAL PROFILE: System financial performance is exceptional, evidenced by elevated debt service coverage (DSC) and liquidity levels. Approved rate increases support continued strong financial results.
LOW DEBT; MANAGEABLE CAPITAL PLAN: Debt ratios all around are low and expected to remain favorable as no additional debt is currently contemplated. Capital needs appear manageable and are expected to be sufficiently funded by recurring revenues.
AFFORDABLE RATES: In spite of planned annual rate increases over the next several years, user charges should remain well below Fitch's 2% of median household income (MHI) affordability threshold.
SOUND ECONOMIC FUNDAMENTALS: The system provides an essential service to an economically broad, diverse and affluent service area.
STABILITY EXPECTED: The rating is sensitive to shifts in fundamental credit characteristics including the system's strong debt and financial profiles. The Stable Outlook reflects Fitch's expectation that such shifts are unlikely.
CONTINUED STRONG FINANCIAL PERFORMANCE
The system's financial profile remains very solid. Consistently sound financial operations have led to strong DSC levels and very high cash balances, each exceeding 2.5x and 1,100 days of cash on hand, respectively, since at least fiscal 2010. Fiscal 2014 net revenues yielded 7.5x DSC. DSC is forecast to remain above 5.8x through fiscal 2019. Liquidity is also expected to remain robust.
AFFORDABLE RATES LEND FLEXIBILITY
Both water and wastewater user rates will increase annually by an average of 5% through fiscal 2017. The average residential customer consumes 5,000 gallons of water per month (gpm) and the associated bill of \$45 equates to 0.7% of MHI. When compared to the national average of 7,500 gpm, the bill is closer to \$55 and equates to 0.9% of MHI. In either scenario, the monthly bill falls comfortably below Fitch's affordability threshold of 2% of MHI.
LOW DEBT BURDEN AND CAPITAL COSTS
The system's debt burden is minimal. In fiscal 2014 the system's total debt equated to just \$394 per customer and comprised a very low 10% of net plant. Carrying costs are also low, with fiscal 2014 annual debt service equal to just 9% of gross revenues. These metrics compare very favorably to the 'AAA' respective medians of \$1,259, 26% and 16%. Debt amortization is rapid with principal payout at 60% in 10 years and 100% in 20 years.
The fiscal 2015-2019 capital improvement plan (CIP) totals \$365 million and is anticipated to be funded completely from pay-as-you-go sources. The current CIP costs are roughly 42% higher than those provided during Fitch's 2013 review and are attributable to the inclusion of the onset of significant funding for the Proctor's Creek wastewater treatment plant (WWTP) expansion. This project will expand the county's largest WWTP treatment capacity from 27 million gallons per day (mgd) to 54 mgd, with a master plan anticipated to commence in 2017. The county anticipates spending \$80.8 million on this project within the next 10 years, and \$340 million over the life of the project.
Additional CIP funding will support substantial water and wastewater system renewal, replacement, expansion and repair as well as contribute to the system's contingency and rate stabilization reserves. An on-going Virginia Department of Environmental Quality (DEQ) study seeking to assess the existing water quality standards for the James River Basin - a Chesapeake Bay tributary - to determine if the current allowable levels of nutrient loading are protective for the local water quality is still underway. Based on the outcome, the system's wastewater system capital costs could increase. Positively, the county already achieves very low effluent waste loads due to the implementation of a stringent biological nutrient removal program. Nevertheless, management is closely monitoring the DEQ study's progress.
STRONG SYSTEM AND SERVICE AREA
The system treats water from a county-owned reservoir and purchases treated water from the Appomattox River Water Authority and the city of Richmond. The county owns and operates two WWTPs and sends wastewater from the northern portion of the county to Richmond in exchange for the treatment of a portion of Richmond's wastewater by a service agreement between the two localities. A service agreement with the South Central Wastewater Authority provides a small amount of additional wastewater treatment capacity. All of the facilities are reportedly in good to excellent condition and provide ample treatment capacity. In addition, the county's water supply is reportedly sufficient through 2050. Further, there are no outstanding regulatory or permitting issues.
Chesterfield County encompasses roughly 446 square miles in east-central Virginia in suburban Richmond. The county serves approximately 105,000 water and 88,000 wastewater customers, with customer counts growing at an average of roughly 1% annually over the past five years. The local economy is diverse and is supported by high-tech synthetic fibers manufacturing, retail food distribution, and health care. The county's employment rate has grown 1.2% annually on average over the past 10 years and the unemployment rate was a low 4.4% in November 2014. Income levels are 13% and 36% above the state and national levels, respectively.