Fitch Rates Upper Occoquan Sewage Auth, VA's Regional Sewerage System Revs 'AA+'; Outlook Stable

Fitch Ratings assigns an 'AA+' rating to the following Upper Occoquan Sewage Authority, VA (UOSA) revenue bonds:

--Approximately $220 million regional sewerage system revenue refunding bonds, series 2014.

The bonds are expected to sell via competition on Dec. 9. Proceeds will be used to advance-refund all or a portion of UOSA's outstanding series 2007A and 2007B bonds for interest savings, cash-fund the debt service reserve fund, and pay issuance costs.

In addition, Fitch affirms the following sewerage system bonds:

--Approximately $500 million (pre-refunding) in outstanding sewerage system revenue bonds at 'AA+'.

The Rating Outlook is Stable.

SECURITY

The bonds are secured by the net sewer system revenues, which consist of member charges pursuant to the member agency service agreement.

KEY RATING DRIVERS

IMPORTANT REGIONAL SERVICE PROVIDER: UOSA was created to acquire, construct, operate and maintain sewage pollution abatement facilities to protect the Occoquan Watershed and facilitate regional water supply. The Occoquan Reservoir serves as a significant drinking water source for the region.

SATISFACTORY PAYMENT STRUCTURE: The bonds are secured by payments from its four members, which include step-up provisions in case of member defaults. The step-ups are limited to proportionate replenishment of the debt service reserve (DSR) and the reserve maintenance fund (RMF), which provides adequate protection to bondholders.

STRONG MEMBER CREDIT QUALITY: The rating is based on the very high credit quality of UOSA's two largest members: Fairfax County (sewer system revenue bonds rated 'AAA' by Fitch), and Prince William County Service Authority (PWCSA). Sufficient step-up support from each ensures long-term bond repayment in the unlikely event of default by one or both of UOSA's other members.

STRONG SERVICE AREA CHARACTERISTICS: UOSA serves the economically deep and diverse suburban communities of the southwestern Washington D.C. metropolitan area. Demographic indicators are above average and the economy remains strong.

RATING SENSITIVITIES

RATING LINKED TO TWO LARGEST MEMBERS: The rating remains sensitive to the credit strength of Fairfax County's sewer system and PWCSA, which combined make up 80% or more of the current DSR and RMF step-up allocations. Any deterioration in credit quality of either entity could impact the rating.

CREDIT PROFILE

CRITICAL ROLE IN WATER POLLUTION CONTROL & ABATEMENT

UOSA provides wholesale wastewater treatment service to approximately 300,000 residents, located within the Occoquan River drainage basin, which serves as a significant drinking water source for roughly 2 million residents of northern Virginia. 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 totaled 34 million gallons per day (mgd) in fiscal 2014, which is just 8% of typical flows into the reservoir, but can rise to 80% of total inflows during drought conditions.

STRONG CREDIT FUNDAMENTALS OF MEMBER AGENCIES

UOSA's four member agencies are Fairfax County and Prince William County (both county's GO bonds are rated 'AAA'), and the cities of Manassas and Manassas Park. Fairfax County's sewer system revenue bonds are also rated 'AAA', while the other member's utility systems are not publicly rated by Fitch. The two larger members (Fairfax County and PWCSA) provide roughly 86% of the debt service reserve fund replenishment on a combined basis, and about 80% of the replenishment for the reserve maintenance fund (RMF), which is also available to pay debt service.

Pursuant to the service agreement (the 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 capital replacement expenses. In turn, each member agrees to fix and collect sufficient charges from their respective sewer utilities in amounts at least sufficient to make required UOSA payments.

Prince William County created the PWCSA to act as its agent for sewer collection and billing purposes. Fitch does not rate PWCSA's utility system revenue bonds, but the system's strong financial metrics, favorable debt profile, affordable rates and strong service area demographics indicate very strong credit fundamentals.

SOLID MEMBER PAYMENTS STRUCTURE & STEP-UP

Fitch believes a member default is remote. However, should one occur a draw on the DSR would be necessary to meet current debt service obligations, triggering non-defaulting members to be billed to replenish the DSR based on their debt service percentage allocations. The allocation for Fairfax County is 53.2% and 32.6% for PWCSA (after issuance), for a total DSR replenishment from these two members of approximately 86%.

If the DSR falls below the required reserve amount, UOSA may replenish the DSR from available RMF moneys, which would also trigger billings to members for their allocated replenishment portion of the RMF; members are allotted a specific allocation of treatment capacity at UOSA's plant. Fairfax County has the largest allocation at just more than 51%, while PWCSA, Manassas, and Manassas Park's allocations are about 29%, 14%, and 5%, respectively.

Based on this structure and the strong credit quality of the two largest members, the bonds could continue to perform to maturity in the event that Manassas and Manassas Park, the two smaller (and non-Fitch-rated) members, were to default and such defaults were to continue for the life of the bonds.

The service agreement does not obligate, require, or restrict the rights of the members to establish any priority for the UOSA payments relative to the members' own system expenses or obligations, and the step-up provisions are considered to be 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). However, given the size and strength of the two largest members and the mostly cash-funded debt service reserve funds, the overall structure is still sound.

SOUND OPERATIONS & MANAGEABLE CAPITAL IMPROVEMENTS

UOSA's 54 mgd advance treatment plant retains ample treatment capacity to meet the member's relatively stable average combined daily flow of about 34 mgd in fiscal year 2014. Discharge to the Occoquan River is permitted through the Virginia Department of Environmental Quality through the plant's recently renewed five-year national pollutant discharge elimination system (NPDES) permit. The capital improvement plan (CIP) totals roughly $157 million through 2021 and includes nutrient reduction projects (Chesapeake Bay clean-up requirements), renewal and replacement of infrastructure and a small amount of system expansion to accommodate eventual build-out of the service area.

The capital plan is considered moderate and is not expected to increase the authority's high but manageable debt position. Management projects the majority of the CIP will be funded with additional bonds beginning with a small issuance in late 2015, followed by larger issuances ($50-$60 million) in 2017 and 2019. Total outstanding debt of about $514 million in fiscal 2014 is a somewhat high 101% of net capital assets and $1,655 per capita. However, the debt burden is more typical of a wholesale provider and members are required to pay 100% of the authority's debt service as part of their member payments.

STABLE FINANCIAL PERFORMANCE MAINTAINED

UOSA's finances are also typical of a wholesale provider and are characterized by somewhat limited but stable cash flows and debt service coverage, and solid liquidity. The authority ended fiscal 2014 with approximately $40.7 million in net revenues available for debt service, providing nearly 1.2x coverage of annual debt service. Liquidity remains solid 172 days cash on hand in fiscal 2014.

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);

--'2014 Water and Sewer Medians' (December 2013);

--'2014 Outlook: Water and Sewer Sector' (December 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=750012

Additional Disclosure

Solicitation Status

http://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=934235

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