Fitch Ratings has assigned a 'AA' rating to the following city of
Richmond, VA revenue bonds:
--$500 million public utility revenue and refunding bonds, series 2016A.
The bonds are expected to sell via negotiation during the week of Nov.
14.
Proceeds of the series 2016A bonds will be used to current and/or
advance refund outstanding series 2007A, 2009A and 2013B for debt
service savings, finance various capital improvements (or reimburse the
city for amounts previously spent on capital investments) and pay
issuance costs.
In addition, Fitch affirms the following ratings:
--$670 million outstanding (prior to the refunding) public utility
revenue bonds at 'AA'.
The Rating Outlook is Stable.
SECURITY
The bonds are secured by and payable from the net operating revenues of
the city of Richmond's water, sewer and gas utility systems (together,
the system).
KEY RATING DRIVERS
REGIONAL SERVICE PROVIDER: The city plays an important role as a large
regional water, sewer, and natural gas service provider to a broad and
mainly residential customer base.
CAPITAL CITY, ECONOMIC HUB: The local economy consists of a diverse mix
of employment including manufacturing, retail, services, distribution,
and banking. The presence of the commonwealth's main state offices, as
well as several institutions of higher education adds to employment
diversity.
HEALTHY FINANCES: System finances are well-managed. Revenue bond
coverage has been strong and liquidity is robust. Financial results are
projected to remain sound despite weaker results in fiscal 2016 and
expectations for additional debt over the next five years.
ELEVATED DEBT BURDEN, HIGH RATES: Debt remains high and the capital
improvement plan (CIP) is comprehensive. The combined monthly
residential bill for water and sewer service is very high and additional
rate increases appear necessary to fund the CIP. The city expects to
issue additional debt, ensuring debt ratios and user charges remain high
for the foreseeable future.
SUFFICIENT SUPPLY AND TREATMENT CAPACITY: Water supply is ample and
water and wastewater treatment capacity is sufficient for demand, which
has experienced slight declines over time, consistent with the national
trend. The city is in compliance with a state order to reduce its
combined sewer overflows.
RATING SENSITIVITIES
COST RECOVERY AND SUSTAINED PERFORMANCE: The rating on Richmond's public
utility system's bonds will remain stable as long as long-term costs
continue to be recovered and historical margins sustained. A change in
policy direction or failure to increase rates that impacts the
sufficiency of cost recovery and pressures coverage metrics could lead
to rating pressure going forward.
HIGHER-THAN-EXPECTED LEVERAGE: The system's debt burden is anticipated
to rise over the next five years to still manageable levels, but above
those of similarly rated peer utility systems. Additional bonding
greater than current CIP estimates could place downward pressure on the
rating.
CREDIT PROFILE
Richmond (GOs rated 'AA+') owns and operates a combined utility system
consisting of natural gas distribution, potable water treatment and
distribution, and wastewater collection, treatment and disposal. Each of
the utilities is operated as a separate self-supporting enterprise under
the auspices of the department of public works. Service is provided to a
mostly residential and mostly retail customer base.
REGIONAL SERVICE PROVIDER WITH STRONG ECONOMIC UNDERPINNINGS
The water and sewer utilities serve roughly 63,000 water and 60,000
sewer customers and an estimated additional 80,000 additional retail
customers through wholesale water supply agreements with Henrico,
Hanover and Chesterfield Counties. In total, the system served a
population base of over 700,000 area residents.
The natural gas utility provides service to about 112,000 direct retail
customers, including customers living in adjacent counties. Natural gas
is purchased on a wholesale basis from three suppliers who deliver gas
to the city's eight gate stations through major transmission pipelines.
As the capital of the commonwealth of Virginia, Richmond is the hub of
economic activity for a growing metropolitan area. State and federal
employment provide stability to the city's economy, and large employers,
including several large health systems and multi-national financial
firms offer significant employment opportunities. At 4.7% in August
2016, the city's unemployment rate continues to trend positively. Income
levels remain comparatively low, although system collection rates remain
strong.
HEALTHY FINANCES
Financial results remain sound, characterized by strong debt service
coverage (DSC) of senior lien revenue bonds and improved liquidity over
the past two fiscal years. For fiscal 2015, Fitch-calculated DSC was
again strong at 2.7x from all available revenues, and coverage of all
debt, including general obligation bonds issued on behalf of the system,
increased to 1.9x, which is an improvement over the system's 1.6x
historical level. Unaudited results for fiscal 2016 show a decline in
net revenues available for debt service, and lower but still solid DSC
of 2.1x on the senior bonds and 1.5x all-in.
The city's updated financial forecast for the system indicates better
results driven mainly by a temporary decrease in annual debt service due
to some extent by the 2016 refunding. The 2016A bonds are anticipated to
provide significant annual debt service savings of roughly $5 million.
DSC reaches 2.9x on the senior bonds in 2017, while all-in coverage
totals 1.8x.
In the following years, the high coverage projected in 2017 slowly
moderates throughout the rest of the forecast as annual debt service
(ADS) normalizes and new debt is issued (in 2019). The updated forecast
is slightly healthier than the forecast provided to Fitch in early 2015,
likely a result of the debt service savings from the refunding and
expectations of future rate increases.
Liquidity has significantly improved over the past few years. Since
fiscal 2013, unrestricted cash and equivalents has increased by slightly
more than $100 million. The system ended fiscal 2015 with approximately
$177 million, or 320 days cash on hand (DCOH). When the cost of
purchased natural gas, which is passed on dollar for dollar directly to
the customer, is netted out of the calculation, liquidity improves to a
more robust 535 DCOH. Fitch expects the city will maintain sound
liquidity levels going forward. Continued solid financial management is
key to long-term rating stability.
HIGH AND RISING DEBT BURDEN
The majority of the system's outstanding debt consists of long-term,
fixed-rate parity revenue bonds secured by the system's net revenues.
The system also pays the debt service for an approximately $145 million
of general obligation bonds and fixed-rate state loans.
Despite a decline in total debt outstanding over the past several years,
the debt burden remains elevated, pressuring the system's solid credit
profile. In 2015, outstanding debt was equal to an elevated $2,714 per
customer when direct customers of all three systems as well as an
estimate of retail customers served through bulk contract are included -
which is well above the median for retail-only utility systems rated in
the 'AA' category of $2,050. Debt-to-net-plant, at 72% in 2015 is also
above the median for retail systems (50%). However, debt carrying costs
are a more reasonable 20% of fiscal 2015 gross revenues.
The debt burden is expected to rise as a result of the current issuance,
which includes approximately $150 million in new money, and the addition
of approximately $300 million in new debt beginning in 2019. Fitch
projects debt per customer will increase to roughly $3,100 by the end of
the forecasted capital program. However, the city's longstanding track
record of successfully managing a large capital program while
maintaining a strong financial profile helps mitigate the high debt
burden. Fitch expects this to continue.
HIGH USER CHARGES COULD DIMINISH FINANCIAL FLEXIBILITY
Customer bills include base and volumetric charges, and a purchased
natural gas cost adjustment mechanism to offset commodity price
volatility. Base charges represent a significant portion of the monthly
bill, providing a level of predictability to the revenue base. Rates
have been on the rise and are high relative to neighboring systems and
to median household income (MHI).
In 2016, the average residential water and wastewater customer's bill
assuming 5,200 gallons of water per month was $99 for combined service,
which is high at 2.9% of MHI. Fitch expects that combined charges above
2% of MHI for consumption totaling 7,500 gallons per month - which is
the national average - may be financially burdensome from an
affordability standpoint. If residential customers in Richmond consumed
7,500 gallons per month, charges would be closer to 4% of MHI.
The city has local rate-setting authority, an important consideration
given additional rate increases are likely necessary to meet the
system's ongoing capital needs. City council has consistently approved
rate increases as needed historically. Nonetheless, Fitch acknowledges
the potential for reduced consumption as well as rate-raising
flexibility as rates continue to rise.
LARGE, MAINLY DEBT-FUNDED CAPITAL PROGRAM
The system's five-year $711 million capital improvement program (CIP) is
comprehensive, funding necessary system upkeep while ensuring compliance
with state and federal mandates. Roughly 42% of the CIP consists of
sewer system projects, including wastewater treatment plant upgrades and
collection system repair and replacement, while the remainder of the CIP
is will fund various water system upgrades (42% of the total) and
natural gas projects. In addition, the city will continue to fund
projects to mitigate combined sewer overflows (CSO). Including the 2016
bonds, the CIP is projected to be roughly 70% debt-financed.
Additional information is available at 'www.fitchratings.com'.
Applicable Criteria
Revenue-Supported Rating Criteria (pub. 16 Jun 2014)
https://www.fitchratings.com/site/re/750012
U.S. Water and Sewer Revenue Bond Rating Criteria (pub. 03 Sep 2015)
https://www.fitchratings.com/site/re/869223
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https://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=1014566
Endorsement Policy
https://www.fitchratings.com/regulatory
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