Fitch Assigns Upper Occoquan Sewage Authority (Virginia) Revs 'AA'.
The 'AA' rating reflects UOSA's critical role in regional water supply efforts and the authority's strong and diverse service area. Another important factor in the credit consideration are the step-up provisions that provide for continued bond performance in the event of a default by one or more member jurisdictions, coupled with the high credit quality of UOSA's largest member - Fairfax County (sewer revenue bonds and general obligation (GO) bonds rated 'AAA' by Fitch) - whose continued performance would ensure timely bond payments. Offsetting considerations include the legal structure of the step-up provisions, which limits the step-up by non-defaulting members to replenishment of UOSA's debt service reserve fund (DSRF) and reserve maintenance fund (RMF), as well as the likelihood that Fairfax County's required step-up allocation may decline somewhat with future issuances related to the authority's sizeable capital improvement plan (CIP).
Located in the southwestern portion of the Washington D.C. metropolitan area, UOSA provides wholesale wastewater treatment service to around 345,000 people in the cities of Manassas and Manassas Park as well as portions of Fairfax County and Prince William County (GO bonds of both counties rated 'AAA' by Fitch) located within the Occoquan Reservoir (the reservoir) drainage basin. The reservoir serves as a significant drinking water source for northern Virginia, and since its creation in 1971, UOSA has fulfilled a vital role both in protecting the water quality of the reservoir and in boosting its overall safe yield, particularly during dry periods when natural flows are reduced. The authority's average treated flows are around 30 million gallons per day, which is just 8% of typical flows into the reservoir, but can rise to 80% of total inflows during drought conditions.
Pursuant to the service agreement between UOSA and its members, UOSA agrees to collect and treat wastewater flows from its members while billing them no less than quarterly for authority operating, debt service, and replacement expenses. In turn, each member agrees to fix and collect sufficient charges from their respective sewer systems sufficient to make required UOSA payments. The agreement allows members to create delegated authorities to collect and bill for sewage on their behalf and correspondingly make required payments to UOSA, although the signatories to the service agreement remain obligated for UOSA payments in the event the designated agency fails to perform. Prince William County has created the Prince William County Service Authority (PWCSA) to act as its agent for such purposes; Fitch does not rate PWCSA's sewer revenue bonds.
To date, there have been no defaults by members. However, should one occur it is expected that a draw on the DSRF would be necessary to meet UOSA's debt service obligations, at which point non-defaulting members would be billed an amount to replenish the DSRF based on their required percentage allocation, which corresponds to their debt service percentage allocation. Should the DSRF fall below the required reserve amount, UOSA may replenish the DSRF from available RMF monies, which would also trigger billings to members for their allocated replenishment portion of the RMF. Based on this structure, the bonds could continue to perform to maturity even if Fairfax County is the only non-defaulting member over the life of the bonds. Fitch views this scenario as remote, but it demonstrates the strength of the make-up provisions afforded bondholders under the bond trust and member service agreements. Fitch considers these step-up provisions somewhat weaker than other comparable legal structures where members are required to directly make up debt service shortfalls prior to tapping a DSRF or supplemental reserve but notes that the overall structure is still sound. Another credit consideration is that there is no restriction or required designation of priority for member payments to UOSA within the member system's own flow of funds. As a result, members may elect to treat their UOSA payments as high of a priority as operating expenses, or as low as subordinate to their own debt obligations; Fairfax County currently treats its UOSA payments as a subordinate obligation.
The authority's $395 million fiscal years 2008-2014 CIP is large relative to the number of end users but appears manageable. Since its creation, UOSA has experienced nearly continuous stages of expansion, but after completion of the current CIP limited expansion should be required through build out. In addition, the CIP addresses significantly all major near- and medium-term needs not related to expansion, including required treatment enhancements to protect the Chesapeake Bay. As a result, annual capital needs beyond fiscal 2014 should decline considerably and focus mainly on ongoing system repair and rehabilitation. As the authority issues additional bonds to fund the CIP it is projected that Fairfax County's payment allocations relative to other members will decline somewhat as certain projects are constructed to meet growth needs of other members. However, Fitch does not expect that this will impact the credit quality of UOSA's bonds.