July 2 - Fitch Ratings has assigned the following rating to Fairfax County, Virginia (the county): --Approximately $91.2 million sewer system revenue bonds, series 2012, rated ‘AAA’. The bonds are expected to price via competitive bidding process the week of July 24, 2012. Proceeds will be used to pay for capital improvements related to the county-owned facilities and certain wastewater treatment plants (WWTP) that provide service to the county; make a deposit to the debt service reserve; and pay for costs of issuance. In addition, Fitch affirms approximately $232 million in outstanding sewer parity revenue bonds at ‘AAA’. The Rating Outlook is Stable. SECURITY The bonds are secured by a pledge of net revenues of the county’s sewer system (the system), including availability fees. KEY RATING DRIVERS STRONG FINANCIAL PERFORMANCE: The system has historically registered strong financial performance highlighted by solid financial metrics, including strong coverage of debt service and very good liquidity. ELEVATED BUT MANAGEABLE DEBT BURDEN: Debt levels are above average for the rating category, but the debt load is manageable. AFFORDABLE RATES: Rates are currently affordable especially given the above average income characteristics of the area. Rates should remain affordable despite anticipated rate increases through 2016. AMPLE TREATMENT CAPACITY: The system maintains ample wastewater treatment capacity and system flexibility at its county-owned treatment plant and through other WWTPs which treat county flows by contract. STRONG FINANCIAL PLANNING: Management has demonstrated extensive financial and capital planning. SOLID SERVICE AREA ECONOMY: A mature, nearly built-out service area with above average income levels and a sound local economy provide stability for capital and financial forecasting. WHAT COULD TRIGGER A RATING ACTION DETERIORATION OF FINANCIAL POSITION: Preservation of the system’s solid financial profile in light of increasing debt load and capital costs will be key to maintaining the current rating. CREDIT PROFILE The system’s service area encompasses 234 square miles, about 60% of the county’s total land mass, and serves more than 85% of the 396,000 households and nearly all the businesses in the county. The system also treats flows from Arlington and Loudoun Counties, Fort Belvoir, the cities of Fairfax and Falls Church, and towns of Herndon and Vienna (all pursuant to perpetual service contracts). The service area lies in the Potomac River Watershed, a tributary shed of the Chesapeake Bay Basin. The customer base is diverse with none of the largest users accounting for more than 0.5% of total operating revenues. AMPLE SYSTEM CAPACITY The county operates an integrated sewer system where approximately 40% of total system flows are treated at one county-owned facility and the balance of treatment is met by separate service agreements with various surrounding jurisdictions. This includes the District of Columbia Water and Sewer Authority (rated ‘AA-’ with a Stable Outlook by Fitch) and Upper Occoquan Sewage Authority (UOSA; rated ‘AA+’ with a Stable Outlook by Fitch). The system is in compliance with all state and federal regulations and currently has a discharge permit valid through September 2013. System demand for 2012 equals 98.5 million gallons a day (mgd), with capacity from its own county owned plant as well the county treatment by contracted partners totaling 157 mgd. The remaining capacity of over 35% is considered more than sufficient for the largely built out service area. Given the integrated nature of the system, there is also the flexibility to transfer flows to other WWTPs as demand may dictate. STRONG FINANCIAL PROFILE Strong financial management and sound capital planning efforts have resulted in a low rate structure and strong financial metrics, providing the system with ample flexibility. Liquidity is good as unrestricted cash reserves equate to well over 600 days of cash for operations for fiscal year 2011, exceeding the system’s policy required minimum of 90 days working capital. Including availability fees, coverage of both senior lien debt service and total annual debt service remained strong in fiscal 2011 at 4.8 times (x) and 1.9x, respectively. Excluding availability fees, coverage of senior lien debt was still high at 4.1x and total annual debt service at 1.6X. Since 2009, when coverage excluding availability fees fell below 1.0x, the system has been working to reduce its reliance on the more volatile and non-recurring revenue source. That being said, availability fees for fiscal year 2012 are anticipated to be very strong at approximately $30 million. HIGH WEALTH LEVELS PROVIDE FOR VERY AFFORDABLE RATES In 2010, the system implemented a fixed service charge rate to improve the stability of the revenue stream. Along with the institution of a fixed rate component the system adopted a series of volumetric rate increases ranging from 10% to 17% which allowed the system to maintain its strong financial profile while debt service costs rose. Management is anticipating additional rate increases averaging 6.7% annually through fiscal 2017. Given the high income levels for the service area coupled with an average monthly sewer bill currently equal to a very low 0.4% of the county’s median household income (MHI), Fitch believes ratepayers will be able to comfortably absorb the increase in charges. INCREASING DEBT BURDEN System leveraging is above average for the rating category. Debt per capita is currently at $624 and will grow to over $800 in 2012 after taking into account the series 2012 bonds, compared to the ‘AAA’ rating category median of $298 per capita. The system has approximately $333 million in outstanding subordinate lien debt as well. Loans from the Virginia Resources Authority for its proportional share of improvements to the Alexandria wastewater treatment plant and a contractual obligation to UOSA for the expansion of and improvements to its wastewater treatment facilities make up the junior lien debt. CAPITAL SPENDING DRIVEN BY MODERIZATION AND REGULATION The system’s five-year capital improvement plan (CIP) has a projected cost of just over $480 million through 2017. Management attributes $365.5 million of the CIP to modernizing plant processes and meeting new state and federal regulations, the most notable being the Chesapeake Bay Program. The Chesapeake Bay Program is a regional partnership that includes requirements on wastewater treatment facilities to reduce nutrient levels in an effort to protect the Chesapeake Bay. Approximately 38% of planned spending is for upgrades and improvements to the county’s treatment facility, 36% designated for capital improvements to the treatment plants owned by other jurisdictions serving the county, and the remaining 26% for improvements and upgrades to the collection system. Approximately 66% of the CIP will be funded with cash and the remainder will be debt financed through long-term revenue bonds, including this borrowing as well as another issue planned for 2016 of roughly the same size. MATURE, STABLE SERVICE AREA The county economy continues to perform strongly, benefiting from its proximity to Washington, D.C. and increased federal spending, which insulated the region from the worst of the recession. The county’s unemployment rate remains well below that of the state (5.6%) and nation (8.2%), at 3.9% in May of 2012, a slight decline from 4.1% over the last year. The strong local job market is complemented by one of the more highly educated labor forces in the nation, contributing to median household income two times the national average.