Fitch Ratings has assigned an 'AAA' rating to the following Virginia Beach, VA (the city) revenue bonds:
--$23.5 million storm water utility revenue bonds, Series 2015.
In addition, Fitch affirms the following ratings:
--Approximately $23.4 million outstanding storm water utility bonds at 'AAA'.
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
EXCEPTIONALLY STRONG FINANCIAL PROFILE: The system is conservatively managed, consistently demonstrating strong financial metrics with exceptional debt service coverage (DSC) and annual free cash flow, 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 utility bill with a history of strong collections.
SOMEWHAT ELEVATED FEES/MANAGEABLE CAPITAL: The city has approved annual fee increases since 2008, leading to monthly charges that are 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.
VERY LOW SYSTEM LEVERAGE: Outstanding system debt is very low. The capital plan, driven by storm water quality enhancements and infrastructure rehabilitation, is expected to be funded from internal sources and some additional debt.
STABLE, DIVERSIFYING ECONOMY: The economy, traditionally concentrated in the military and tourism sectors, continues to diversify and has remained relatively stable with low unemployment levels. The system's customer base has also been stable and continues to display strong wealth and income indicators.
RATING SENSITIVITIES
RATING STABILITY EXPECTED: The rating is sensitive to shifts in various credit fundamentals including financial and debt management, implementation of the capital program and regulatory compliance. The Stable Outlook reflects Fitch's belief that such changes are unlikely over the next several years.
CREDIT PROFILE
WELL-MANAGED SYSTEM
The city'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 5,000 outfalls to various surface waters throughout the region. The system serves the entire incorporated city limits of the city, covering approximately 450,000 residents and approximately 131,000 customer accounts in fiscal 2014. 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 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. In addition, unpaid fees and interest constitute a lien against the property, ranking on parity with liens for unpaid taxes, including real estate taxes.
For fiscal 2015, the storm water fee totals roughly $13 per month, which is somewhat high relative to neighboring storm systems. However, the system is entirely self-supporting. Additionally, the substantial excess cash flow provides resources to fund historically aggressive capital upgrade and maintenance of the system while maintaining low leverage. Since fiscal 2008, the city has spent on average an exceptionally strong 6x the rate of depreciation for capital renewal.
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, 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 2014, the system generated 9.7x DSC, and the system's liquidity position remains solid with over $15 million in unrestricted cash and investments (equivalent to nearly 400 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 remains below 10% in fiscal 2014 and debt per customer was just $196. Debt carrying costs are also a very low 6% of total gross revenues. The system's six-year, $95 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 $36 million in additional debt over the CIP forecast. The system has plenty of capacity to absorb the potential issuance of additional bonds.
STABLE AND DIVERSIFYING ECONOMY
The city of Virginia Beach (GOs rated 'AAA' by Fitch) is the Commonwealth's largest city (by population) and helps anchor the Hampton Roads region. The economy has traditionally been concentrated in the military and tourism sectors. As such they both remain significant to the employment base. Several military bases, including the U.S. Navy's East Coast Master Jet Base located within the city, provide significant economic activity to the region with an annual payroll of $2.5 billion and over 34,000 military and civilian employment in 2014.
The service sector leads all non-military employment in gross wages and accounts for nearly 50% of civilian jobs within the city. Tourism continues to play a major role in the local economy as evidenced by increased hotel and meals tax receipts in 2014 to over $83 million. The city's largest private employers are diverse and include major healthcare/hospital providers, manufacturing, food and beverage retailers, and financial and insurance firms. 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, remains low at 4.8% in October 2014. 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 2014);
--'U.S. Water and Sewer Revenue Bond Rating Criteria' (July 2013);
--'2015 Water and Sewer Medians' (December 2014);
--'2015 Outlook: Water and Sewer Sector' (December 2014).
Applicable Criteria and Related Research:
Revenue-Supported Rating Criteria
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=750012
U.S. Water and Sewer Revenue Bond Rating Criteria
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=715275
2015 Water and Sewer Medians
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=818409
2015 Outlook: Water and Sewer Sector
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=818410
Additional Disclosure
Solicitation Status
http://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=964655
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