Fitch Affirms Upper Occoquan Sewage Authority (Virginia) Revs at 'AA+'; Outlook Stable.
--Approximately $421.7 million regional sewerage system revenue bonds, affirmed at 'AA+'.
The Rating Outlook is Stable.
--High credit quality of the largest members.
--UOSA performs a critical role in the protection of regional water supplies.
--Legal structure, although somewhat weaker than comparable structures, provides sound bondholder protections.
--The service area is strong and diverse; unemployment rates are well below state and national levels.
KEY RATING DRIVER(S):
--Maintenance of sound financial results will be important to maintaining the rating level.
--Successful management of the authority's comprehensive capital improvement plan (CIP) will be important to keep costs from escalating.
The bonds are secured by net sewer system revenues which consist of charges from members pursuant to a member agency service agreement.
Located in the southwestern portion of the Washington D.C. metropolitan area, UOSA provides wholesale wastewater treatment service to around 275,000 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 debt service reserve fund (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 reserve maintenance fund (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 $310 million fiscal years 2010-2016 capital improvement plan (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 its 12-year CIP (totaling $414 million), 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.
Applicable criteria available on Fitch's website at www.fitchratings.com:
--'Revenue-Supported Rating Criteria, (Dec. 29, 2009);
--'Water and Sewer Revenue Bond Rating Guidelines', (Aug. 6, 2008).
Additional information is available at www.fitchratings.com.
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|Date:||Jul 23, 2010|
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