OREANDA-NEWS. Fitch Ratings affirms the ratings on Fairfax County Water Authority, VA's (Fairfax Water, or the authority) approximately \$500 million in outstanding water revenue bonds at 'AAA'.

The Rating Outlook is Stable.

SECURITY

The bonds are secured by a senior lien pledge of the net revenues of the authority, including availability fees.

KEY RATING DRIVERS

STRONG SERVICE AREA: Fairfax Water is a sizable regional water agency providing treated water to a large, mature, and affluent service area. Demographic indicators are well above average and the employment base, which is part of the Washington D.C. metropolitan area, remains strong.

LARGE RETAIL AND WHOLESALE PROVIDER: The authority serves 280,000 direct retail customers and an almost equally large number of retail connections on a wholesale basis. The 10 largest wholesale customers comprise roughly 30% of total operating revenues, although no single customer comprises more than 11%.

SIGNIFICANT FINANCIAL FLEXIBILITY: Strong liquidity and rate raising capacity remain significant credit strengths and have helped mitigate only adequate historical debt service coverage (DSC). Retail rates are among the lowest in the region and, despite anticipated increases, are expected to remain very affordable.

STRONG MANAGEMENT PRACTICES: Financial and other policies are well-defined and capital reinvestment and long-term resource planning efforts are robust.

MANAGEABLE DEBT PROFILE: Sound capital planning and investment has resulted in state-of-the-art facilities and ample and diverse water supply and treatment capacity. Debt ratios are low and capital needs remain manageable.

RATING SENSITIVITIES

RATING STABILITY EXPECTED: The rating is sensitive to shifts in various credit characteristics including strong financial management and operating performance, manageable capital needs and low debt burden. The Stable Rating Outlook reflects Fitch's expectation that such shifts are unlikely over the next several years.

CREDIT PROFILE

Fairfax Water is a large and independent water agency governed by a 10-member board with staggering three-year terms. Day-to-day operations are administered by a strong and seasoned senior management team.

LARGE REGIONAL SUPPLIER; STRONG DEMOGRAPHICS

The authority is a major regional service provider coordinating water resources and delivery at low costs. The authority serves roughly 280,000 direct retail water accounts in Fairfax County (general obligation and sewer utility system bonds rated 'AAA' by Fitch) and several wholesale customers located in or adjacent to the county in the southern and western portions of the Washington D.C. metro area. In total, the authority serves approximately 1.8 million residents, and approximately 500,000 retail accounts (including retail base of wholesale customers). Retail customers are predominantly residential, and no single wholesale customer comprised more than 11% of total operating revenues in fiscal 2014.

The retail service area is large (350 square miles), economically diverse, and affluent, benefiting from its location near Washington D.C., with high wealth levels and low unemployment. The county's unemployment rate remained low at just 3.9% in October 2014, well below the national average. Proximity to Washington D.C., a highly educated labor force, and extensive transportation network, provides for an established business base of federal contractors and high-tech companies. Breadth in the local job market is evidenced by significant employment in health-related, financial and other professional services, manufacturing, and retail. Median household income (MHI) is also very high at more than twice the national average.

Fairfax Water completed the consolidation of all water service within the county with the purchase of the retail distribution systems of the cities of Fairfax and Falls Church in early 2014. The acquisitions resulted in roughly 46,000 retail accounts and a positive net cash infusion totaling about \$8 million. Fairfax Water does not assume any of the debt of the acquired systems, and the pension obligations associated with the acquired employees are essentially neutral. Management expects net positive cash flows from the acquisitions given the authority's ability to deliver low cost water to the new customer base with minimal operating and capital expenses.

STRONG LIQUIDITY AND LOW RATES PROVIDE FLEXIBILITY

Liquidity remains strong despite a decline in cash over the past few years. Current unrestricted cash and investments totaled approximately \$42 million as of fiscal 2013, equivalent to 218 days' cash on hand (DCOH). In addition, the system's large unrestricted non-current investment fund balance totaling \$124 million increased liquidity to 871 DCOH in fiscal 2013 and provides significant support for the authority's planned pay-as-you-go capital spending. Despite the planned use of cash to fund the majority of the capital improvement plan (CIP), Fitch expects strong liquidity will be maintained.

Ample liquidity helps offset the somewhat lower historical DSC; between fiscal 2009 and fiscal 2013, DSC has ranged between 1.4x-1.7x. DSC grew to 3.4x in fiscal 2014 (estimated) due to a combination of a net gain in income from the acquisition of the Falls Church and Fairfax systems and a one-time payment from an existing wholesale customer for additional capacity.

Financial margins are expected to continue to improve due to increased impact fees from continued development of Tyson's Corner and management's plans to raise rates between 4%-6% annually over the next five years. The improved margins are expected to allow Fairfax Water to achieve its stated policy goal of at least 2.0x DSC by fiscal 2020 and to provide sufficient excess revenues for anticipated pay-as-you-go resources for capital spending.

Despite planned rate increases, rates should remain affordable. The average monthly residential bill, assuming 8,000 gallons of use, is just \$24 in fiscal 2015, which is very affordable at just 0.3% of MHI, providing ample flexibility.

AMPLE CAPACITY; MANAGEABLE CAPITAL NEEDS

Raw surface water is derived from several sources, the majority of which is from the Potomac and Occoquan Rivers. With the acquisition of the Falls Church system, the authority acquired an additional 31 million gallons per day (mgd) of treated water capacity from the Washington Aqueduct. Water resources are ample on a combined basis, providing the authority with significant long-term resources. Raw water is treated at one of two relatively new treatment facilities with a combined capacity to treat up to 345 mgd. Average flows totaled 163 mgd in fiscal 2014.

Both plants have expansion capabilities, though there are currently no plans to expand. Total treatment capacity is well in excess of average daily flow and the capacity requirements of wholesale customers. Fairfax Water has an aggressive asset maintenance plan, and a large but manageable CIP. The five-year CIP totals \$370 million through fiscal 2019 and is expected to be about 80% cash funded. Additional parity bonds totaling \$80 million are anticipated in fiscals 2017 and 2019.

LARGELY PAY-GO CAPITAL PROGRAM KEEPS LEVERAGE LOW

The authority's debt profile is manageable and debt ratios are generally in line with 'AAA' rating medians. Debt per customer was \$1,167 in fiscal 2013, including the additional retail accounts of Fairfax Water's wholesale customers. Ratios are even lower in fiscal 2014 when the retail customers of the cities of Fairfax and Falls Church are included. Debt per capita, which also encompasses a portion of the residential base served by the wholesale customers, was very low at just \$318. The planned issuance of additional bonds over the current five-year CIP horizon is not expected to affect debt ratios.

The authority's single-employer defined benefit pension plan had an unfunded actuarial accrued liability (UAAL) as of January 2014 of \$132 million (or a 60% funded ratio), which is low. A combination of investment losses and a lower assumed investment return (was previously 8.5%) led to the high unfunded liability beginning in 2008. Since then, a combination of stronger investment returns, plan changes and slightly over-funded pension payments relative to the actuarially required contribution has improved funding levels to some extent. This trend is expected to continue.