Fitch Ratings has assigned a first time rating of 'AAA' to the Fairfax County Water Authority's (FCWA, or the authority) water revenue bonds. The authority plans to issue approximately $170,495,000 water revenue and refunding revenue bonds, series 2002, the week of March 4 through negotiation with a syndicate led by UBS PaineWebber. About $60 million of the issue will provide new money for FCWA's capital program; the remainder will refund a portion of the authority's series 1992 bonds. Fitch also rates the authority's $264 million in outstanding parity debt 'AAA'.
The 'AAA' rating reflects the authority's exceptional financial flexibility; compliance with water quality regulations; ample water supply; sound long-term planning; low rates combined with a wealthy and growing service area; and moderate debt levels with modest capital needs. Debt service coverage is well above targeted levels, which in turn exceed the average legal requirements. Coverage from operating revenues alone is solid, and non-operating revenues provide substantial funding for capital projects and allow the authority to maintain an unusually high cash position, even for 'AAA'-rated utilities. Water rates are the lowest in the District of Columbia metropolitan area, and only moderate increases are projected.
The water system serves about 1.2 million customers in and around Fairfax County, whose general obligation bonds Fitch rates 'AAA'. The county appoints the authority's ten members, who have sole authority over rates, debt issuance, and operations. The county is located southwest of Washington, D.C. and has a growing population estimated at 983,013, of whom about 58% are retail customers. Wealth levels are very high; 2000 census data indicate that Fairfax has the highest median household income of any U.S. county. The strong, diverse economic and employment base includes a large presence in the health care, technology, and financial services sectors. The unemployment rate remains under 3% although it increased from 1.2% in 2000 to an estimated 2% in 2001. The Dec. 2001 rate was 2.7%, compared to 1.0% in December 2000. The labor force and number of employed residents continue to grow.
Wholesale customers, which provided 35% of operating revenues and 23% of total revenues in 2001 (fiscal years ended Dec. 31), include the Virginia-American Water Company (which supplies water to the city of Alexandria and a portion of Prince William County), the Prince William Service Authority, the federal government's Fort Belvoir Military Reservation, Dulles Airport, the town of Herndon, and the Loudoun County Sanitary Authority. Fitch rates the general obligation bonds of Prince William and Loudoun Counties and the town of Herndon 'AA+', and airport system revenue bonds of the Metropolitan Washington Airports Authority (MWAA), which operates Dulles Airport, 'AA-'. MWAA's revenue bonds were placed on Rating Watch with negative implications following Sept. 11.
Raw water and treatment capacity are ample, and capacity needs for the rapidly-growing wholesale customer base is funded by those customers over 5-30 year terms. Construction of the Griffith Water Treatment Plant, with expected completion at the end of 2002, will replace existing, less efficient facilities. The new facility, along with the Corbalis plant, will provide water quality superior to U.S. Environmental Protection Agency requirements. Both facilities are expandable. Also under construction is a second intake at the Potomac River, which provides 56% of the system's water, to increase reliability and redundancy. The State of Maryland, which approves permits to withdraw water from the Potomac, initially denied a permit to construct the intake, but a series of Maryland court decisions approved the permit and the intake should be completed by year-end. Future issues related to Maryland's authority over Potomac River water are only a minor concern, as they have not to date affected FCWA's ability to provide sufficient water to its customers.
Debt service coverage from available revenues has been strong, at 2.6x-3.0x over the last five years. Even excluding availability fees and interest income, which together provided 28% of 2001 revenues, coverage has been solid, ranging from 1.4x to 1.8x over the last five years. Coverage of maximum annual debt service, including series 2002 bonds, is a high 2.6x from 2001 revenues. A ten-year strategic financial model indicates that coverage will fall below the FCWA's minimum target of 1.5x in 2011, assuming very conservative assumptions about customer growth and rate increases, and assuming an additional $120 million in debt. Fitch believes that growth will exceed projections, and that the authority has ample flexibility to make adjustments to meet the target coverage level over the ten-year time horizon.
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