OREANDA-NEWS. Fitch Ratings has assigned an 'AAA' rating to the following Loudoun County Sanitation Authority, VA (Loudoun Water) revenue bonds:

--$120 million water and sewer system revenue and refunding bonds, series 2015.

The bonds are scheduled to sell via competition the week of Aug. 3. Proceeds will be used to fund system-wide capital improvements, refund all or a portion of the authority's outstanding series 2007 bonds for savings, provide for any required funding for the debt service reserve and pay issuance costs. Savings will be taken annually with no extension to maturities.

In addition, Fitch affirms the following ratings:

--$242 million in outstanding water and sewer revenue bonds (prior to the refunding) at 'AAA'.

The Rating Outlook is Stable.

SECURITY

The bonds are payable from a senior lien on Loudoun Water's net water and sewer revenues, including interest income and availability fees.

KEY RATING DRIVERS

AFFLUENT SERVICE AREA, ROBUST ECONOMY: Loudoun Water provides water and sewer services to a growing and affluent service area within the Washington D.C. metropolitan area. The local economy remains strong with low unemployment, above-average income, a highly educated labor pool, and continued residential and commercial development.

SOUND CAPITAL AND RESOURCE PLANNING: The system is well-managed with a comprehensive capital program that includes additional long-term water supply, preliminary spending for expanded wastewater treatment capacity and various other system-wide renewal and upgrade projects.

STRONG FINANCES, LOW RATES: Financial performance remains strong and liquidity is exceptional. Significant rate increases following a decline in construction activity during 2008-2010, followed by smaller increases over the past few years, led to strengthened financial metrics and free cash flow. Rates are very low despite the increases.

ELEVATED, MANAGEABLE DEBT BURDEN: Debt is somewhat elevated for the rating, but manageable given the high wealth levels and low rates. Expectations for additional debt to fund a sizable five-year capital plan will increase leverage, but Fitch expects the debt profile will remain manageable.

RATING SENSITIVITIES

RATING STABILITY EXPECTED: The rating remains sensitive to shifts in various fundamental credit factors including financial and operating performance, overall debt levels, and rate and capital management. Fitch expects little change in the authority's strong credit profile.

CREDIT PROFILE

Loudoun County is located approximately 25 miles west of Washington D.C. adjacent to both Fairfax County, VA and Montgomery County, MD (both carry 'AAA' general obligation ratings from Fitch). Loudoun Water serves approximately 71,000 retail customers, with a service area population of approximately 220,000.

GROWING AND WEALTHY SERVICE AREA NEAR WASHINGTON D.C.
Loudoun Water's service area includes all of Loudoun County (more than 500 square miles) except several incorporated towns within the county that operate their own independent systems. The customer base is mostly residential and affluent, and with its remaining undeveloped land and strong ties economically to nearby Washington-Dulles International Airport and Washington D.C., the area continues its transformation into a wealthy suburban bedroom community.

SOUND SYSTEM OPERATIONS AND LONG TERM PLANNING
Loudoun Water purchases most of its water and sewer services from large regional providers via long-term contractual agreements. Fairfax County Water Authority (Fairfax Water) provides the bulk of the authority's potable water supply, up to 50 million gallons per day (mgd), with the remaining provided by local sources purchased from the city of Fairfax in early 2014. Loudoun Water purchased all of the raw water storage and treatment facilities, water pipelines, and the raw water supplied by Goose Creek reservoir (7 mgd) from the city of Fairfax for about $30 million.

Expectations for significant additional customer growth have focused management's capital planning efforts on future water supply and treatment capacity. The capital improvement plan (CIP) is sizable at more than $560 million through 2019, with the bulk of the plan focused on developing new raw water supply from the Potomac River. Along with construction of a new water intake and transmission lines, the authority will also construct a new water treatment plant (WTP) and storage facilities.

The new Potomac supply, which is being constructed in phases, will provide sufficient excess capacity to meet customer growth through build-out over the next 30 years. The new WTP, expected to be completed in 2017, will initially be constructed with a design capacity of 20 mgd, but is expected to be expanded to 40 mgd as the service area matures. In the event additional water is needed over the long term, the new plant can be expanded to 70 mgd. Loudoun Water expects to continue to purchase a portion of its supply from Fairfax Water.

The District of Columbia Water and Sewer Authority (DC Water) and Loudoun Water's Broad Run water reclamation facility provide wastewater treatment. DC Water provides the authority with 13.8 mgd of capacity at its Blue Plains treatment plant. With the completion of the Broad Run facility in 2008 and its 11 mgd initial design capacity, the authority has significant intermediate term capacity to meet its approximately 16 mgd in annual flows. The Broad Run plant can be expanded to meet the authority's long-term treatment needs.

Expansion of the solids treatment system is included in the current five-year capital plan ($20 million) while the remaining expansion is expected to take place in the 2020-2024 timeframe.

STRONG FINANCIAL PROFILE, SIGNIFICANT GROWTH-RELATED FEES
Loudoun Water's historically strong financial performance experienced recessionary pressures in fiscals 2008 and 2009 as development in the county slowed, leading to reduced one-time development-related fees and lower financial margins and debt service coverage (DSC). However, DSC rebounded in fiscal 2010 to a solid 3.1x from all pledged revenues and 1.7x excluding availability charges. A combination of rate increases and strong customer growth further improved financial metrics in fiscal 2011.

A solid rebound in growth led to an increase in availability fees collected over the past three years. However, Loudoun Water is less reliant on customer growth than it once was, and in fiscal 2014 all-in DSC from all revenues totaled 4.6x, and 2.2x excluding availability fees.

Updated pro forma finances provided by the authority show a decline in DSC from current levels to a still strong 3.3x from all revenues in fiscal 2018 but just 1.2x excluding availability fees. The pro forma includes attainable customer growth projections (3,500-4,000 new connections annually), debt service from the 2015 bonds as well as additional debt, and conservative assumptions for growth in operating expenses. Fitch believes Loudoun Water will continue to outperform the projections with DSC at or above their internal 1.5x policy target.

AFFORDABLE RATES, MANAGEABLE INCREASES EXPECTED
Rates were increased fairly significantly in 2010-2012 following a decline in construction activity (and availability fees) and lower financial metrics. More modest 3% annual rate increases followed in fiscals 2013-2015. Rates remain very affordable despite the recent increases, in part due to the historically strong availability fee collections, with the average residential customer bill of approximately $194 per quarter (based on 21,000 gallons of use) at just 0.6% of median household income.

The rate increases helped restore financial margins to previously strong levels, while maintaining ample liquidity and lowering Loudoun Water's reliance on one-time fees. Liquidity, measured by days cash on hand from $162 million in unrestricted cash and investments, remains exceptional at 1,439 days in fiscal 2014. Robust liquidity combined with low rates provides Loudoun Water with exceptional financial flexibility.

DEBT BURDEN TO REMAIN MANAGEABLE, CIP FOCUSED ON WATER SUPPLY
Loudoun Water's debt profile is somewhat mixed with some metrics above the medians for this rating. Debt per customer rose to $2,123 after the previous new money issuance in 2013, which is below peak fiscal 2008 levels but still well-above the $1,259 median for water and sewer utilities rated 'AAA' by Fitch. However, debt to net plant was low at just 24%, due in part to the significant developer contributions received over the years. Debt to funds available for debt service was also low at just 3.0x in fiscal 2014, comparing favorably to the median of 3.6x for similarly-rated systems.

As of fiscal 2014, the vast majority of Loudoun Water's roughly $280 million in total outstanding debt is comprised of fixed-rate, long-term bonds. The series 2015 bonds will also be issued as long-term, fixed rate parity obligations scheduled to mature in 2044. After issuance, annual debt service will be level before stepping down in 2030, although amortization will remain somewhat slow with just 36% retired over the next 10 years.

The series 2005 bonds are variable rate demand obligations with a current par outstanding of $18 million, or just 6% of total debt outstanding after issuance. These bonds are un-hedged (i.e. there is no interest rate swap). Instead, the authority utilizes its large unrestricted balance sheet as a hedging source. Liquidity for the 2005 bonds is provided by Bank of America, N.A. (rated 'A+' by Fitch) until 2016. Management expects to extend or contract with a new liquidity provider later this year.

Loudoun Water's five-year CIP is sizable with approximately 44% of spending to fund the new water supply. The CIP is expected to be approximately 35% bond-funded (including the 2015 bonds) with additional new money issuances in 2017 and 2019. Capital spending will also be funded from a large pool of non-current investments the authority has amassed from availability fees collected from new construction, totaling $135 million in fiscal 2014.

Fitch projects the anticipated additional debt ($120 million) will raise leverage ratios over the next five years. However, the very low rates, substantial liquidity, and the size and affluence of the customer base offset the marginal expected rise in the debt burden.