News Column

Fitch Affirms Virginia Beach, VA Storm Revs at 'AAA'; Outlook Stable

May 29, 2014

NEW YORK--(BUSINESS WIRE)-- Fitch Ratings affirms its 'AAA' ratings on the following Virginia Beach, VA's revenue bonds:

--Approximately $25 million in outstanding storm water utility system (various series) revenue bonds.

The Rating Outlook is Stable.

SECURITY

The bonds are secured by a senior lien pledge of the net revenues of the city's storm water system (the system).

KEY RATING DRIVERS

STRONG FINANCIAL PROFILE: The system is conservatively managed, consistently demonstrating strong financial performance with exceptional debt service coverage (DSC) and free cash flows, and solid liquidity.

STABLE REVENUE BASE: Storm water fees are independently established by the city and are based on an equivalent residential unit's impervious surface area, resulting in a very stable revenue stream. In addition, the fees are collected as part of the city's water and sewer bill with a history of strong collections.

FEES ARE SOMEWHAT HIGH: The city has approved fairly sizable multi-year fee increases since 2008, leading to monthly charges that are slightly higher than neighboring storm systems. However, the system is self-supporting and the increases provide robust resources for the capital program, which Fitch views positively. Additional fee increases have been approved for 2015.

VERY LOW SYSTEM LEVERAGE: Outstanding debt for the system is very low, and the capital plan, which is driven by storm water quality enhancements and infrastructure rehabilitation, is expected to be funded from internal sources and some additional debt, although debt ratios are projected to remain very manageable.

STABLE SERVICE AREA ECONOMY: The economy, traditionally concentrated in the military and tourism sectors, continues to diversify and has remained relatively stable. As a result, the system's large and mostly residential customer base has also been stable, and continues to display strong demographic indicators.

RATING SENSITIVITIES

RATING STABILITY EXPECTED: The rating is sensitive to shifts in various credit fundamentals including financial performance, capital and debt needs and regulatory performance. The Stable Outlook reflects Fitch's belief that such changes are unlikely over the next several years.

CREDIT PROFILE

WELL-MANAGED SYSTEM

Virginia Beach's storm water collection system includes a combination of pipes and canals, open ditches, ponds, lakes, and pump stations for storm water management. The system also contains over 4,500 outfalls to various surface water sources throughout the region. The system serves the entire incorporated city limits of the city, covering approximately 450,000 residents and 130,000 customer accounts in 2013. The system benefits from fairly straightforward operations and conservative management.

STABLE REVENUE BASE, FULL RATE-RAISING AUTHORITY

Storm water fees are determined based on a property's impervious surface area, which is equal to 2,269 square feet per equivalent residential unit (ERU). Fees are set by the city council and have been significantly and incrementally increased since fiscal 2008. Bills are sent bi-monthly and are coupled with the customer's water and sewer utility bill. Delinquent accounts are subject to water service suspension; however, the system has historically achieved very high collection rates and any partial payments are applied first to the storm system. In addition, ranking is on parity with liens for unpaid taxes, including real estate taxes.

For fiscal 2014, the storm water fee totals roughly $12.50 per month, which is somewhat high relative to neighboring storm systems. However, the system is entirely self-supporting and the excess cash flows allow for a limited debt burden while producing ample cash flows for historically aggressive capital upgrade and maintenance. Since fiscal 2008, the city has spent on average approximately 6.0x the rate of depreciation for capital upgrade and replacement, which is exceptionally strong.

The fee increases were implemented to offset the city's decision to discontinue the annual transfer from the Virginia Department of Transportation (VDOT) to reimburse the city's general fund for roadway drainage and maintenance activities performed by the system. The city stepped down these transfers, before stopping them entirely in fiscal 2012. These revenues are not considered pledged revenues and have not been included in the DSC calculations, although such revenues were available for capital program spending. Fitch expects the system will remain fully self-supporting.

STRONG FINANCIAL PROFILE

The rate increases have extended a streak of strong operating revenue growth, especially over the past two fiscal years. Historically strong financial margins have produced very strong DSC and free cash flows, and, along with the system's very low debt burden and strong service area economy, provide the underpinning for the system's 'AAA' rating. For fiscal 2013, the system generated nearly 8.0x coverage of all debt service from net operating revenues. The system's liquidity position remains solid despite a decline in cash due to a change in accounting for cash reserved for capital expenses. Nevertheless, the system held over $11 million in unrestricted cash as of fiscal 2013, which is equivalent to nearly 300 days cash on hand.

LOW DEBT BURDEN, CAPITAL PLAN REMAINS MANAGEABLE

The debt burden remains very low and is a significant credit strength for the system. Debt-to-net plant fell below 10% in fiscal 2013 and debt per customer was just $199. Debt carrying costs are also a very manageable 7% of gross revenues. The system's six-year, $80 million capital improvement program (CIP) is manageable as the city implements water quality and pollution control initiatives required by the Chesapeake Bay Program. The CIP is projected to be mostly cash-funded, which is achievable given the system's large cash flow margins. Debt ratios are projected to remain low despite the potential for approximately $30 million in additional debt over the next several years as the system has plenty of capacity to absorb the potential issuance of additional bonds.

STABLE AND DIVERSIFYING ECONOMY

The city of Virginia Beach (GO bonds rated 'AAA' by Fitch) is the Commonwealth's largest city and helps anchor the Hampton Roads region. The economy has traditionally been concentrated in the military and tourism sectors, and both remain significant to the employment base. Several military bases, including the east coast's master jet base, provide significant economic activity to the region with an annual payroll of $2.1 billion and over 32,000 jobs.

Fitch expects Federal sequestration cuts to have a modest impact on the city, though a broader impact on the region given the higher level of military-related ship repair and maintenance activities taking place outside of the city. However, efforts to diversify the economy continue as the city works to attract service industries including professional services, telecommunications and marine-related services. The city's unemployment rate, which has historically fared better than that of the Commonwealth and the nation, improved to 4.9% in February 2014 from 6% two years earlier reflecting gains in both employment and the labor force. Median household income in Virginia Beach is slightly above the Commonwealth, and about 125% of the national average.

Additional information is available at 'www.fitchratings.com'.

In addition to the sources of information identified in Fitch's Revenue-Supported Rating Criteria, this action was additionally informed by information from Creditscope.

Applicable Criteria and Related Research:

--'Revenue-Supported Rating Criteria' (June 2013);

--'U.S. Water and Sewer Revenue Bond Rating Criteria' (July 2013);

--'2014 Water and Sewer Medians' (Dec. 2013);

--'2014 Outlook: Water and Sewer Sector' (Dec. 2013).

Applicable Criteria and Related Research:

2014 Outlook: Water and Sewer Sector

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=724357

2014 Water and Sewer Medians

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=724358

U.S. Water and Sewer Revenue Bond Rating Criteria

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=715275

Revenue-Supported Rating Criteria

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=709499

Additional Disclosure

Solicitation Status

http://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=832176

ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: HTTP://FITCHRATINGS.COM/UNDERSTANDINGCREDITRATINGS. IN ADDITION, RATING DEFINITIONS AND THE TERMS OF USE OF SUCH RATINGS ARE AVAILABLE ON THE AGENCY'S PUBLIC WEBSITE 'WWW.FITCHRATINGS.COM'. PUBLISHED RATINGS, CRITERIA AND METHODOLOGIES ARE AVAILABLE FROM THIS SITE AT ALL TIMES. FITCH'S CODE OF CONDUCT, CONFIDENTIALITY, CONFLICTS OF INTEREST, AFFILIATE FIREWALL, COMPLIANCE AND OTHER RELEVANT POLICIES AND PROCEDURES ARE ALSO AVAILABLE FROM THE 'CODE OF CONDUCT' SECTION OF THIS SITE. FITCH MAY HAVE PROVIDED ANOTHER PERMISSIBLE SERVICE TO THE RATED ENTITY OR ITS RELATED THIRD PARTIES. DETAILS OF THIS SERVICE FOR RATINGS FOR WHICH THE LEAD ANALYST IS BASED IN AN EU-REGISTERED ENTITY CAN BE FOUND ON THE ENTITY SUMMARY PAGE FOR THIS ISSUER ON THE FITCH WEBSITE.



Fitch Ratings

Primary Analyst

Andrew DeStefano

Director

+1-212-908-0284

Fitch Ratings, Inc.

33 Whitehall Street

New York, NY 10004

or

Secondary Analyst

Eva Rippeteau

Associate Director

+1-212-908-9105

or

Committee Chairperson

Karen Ribble

Senior Director

+1-415-732-5611

or

Media Relations

Elizabeth Fogerty, +1 212-908-0526

elizabeth.fogerty@fitchratings.com

Source: Fitch Ratings


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