OREANDA-NEWS. November 18, 2015. Fitch Ratings has affirmed the 'A-' rating on Bristol Virginia Utilities Authority's (BVUA) implied utility system revenue bonds. BVUA's rating takes into account approximately \\$39.5 million of outstanding utility system revenue bonds but is assigned to implied obligations given that none of the outstanding debt is publically held.

The Rating Outlook has been revised to Stable.

SECURITY

BVUA's utility system revenue bonds are secured by a pledge of net revenues of the water, wastewater, electric and telecommunication systems, all of which are owned and operated by the authority.

KEY RATING DRIVERS

COMBINED UTILITY SYSTEM: BVUA owns and operates a combined electric distribution, water, wastewater and telecommunications system. While the electric system is the largest in regards to topline revenues, the telecommunications division, doing business as OptiNet, provides the largest portion of funds available for debt service (FADS). Together, the two divisions account for 86% of FADS.

GOVERNANCE CONCERNS, UNCERTAINTY: The Outlook revision to Stable from Positive reflects concern surrounding the recent indictment of BVUA's Chief Financial Officer (CFO) on tax and fraud charges, as well as the conviction of several former employees and officials on a variety of federal charges. Upward rating movement is no longer expected, given the ongoing legal proceedings and Fitch's concerns over governance.

METRICS REMAIN STRONG: Consolidated financial metrics are robust and should continue to strengthen due to the sustained expansion of OptiNet and the continued implementation rate increases across services. However, the extent to which the recent legal proceedings will reduce the authority's rate flexibility and strain future financial performance remain uncertain.

STABLE POWER SUPPLY: BVUA's power is supplied through a 20-year, all-requirements contract with Tennessee Valley Authority (TVA, rated 'AAA' with a Stable Outlook). The long-term contract, expiring in 2028, eliminates the majority of power supply uncertainty and volatility.

COMPETITIVE RATES: Rates across all sectors compare favorably to neighboring utilities and telecommunication companies. Water and wastewater retail rates remain competitive, even after multiple rate increases. OptiNet's rates are generally substantially below competitors, across services.

WEAK SERVICE TERRITORY: Economic indicators of the City of Bristol (the city) currently and historically have lagged both the state and the nation, with per capita income at 68% of the national average and unemployment the state and nation. However, recent economic development points toward the potential for improvement in the commercial sector.

RATING SENSITIVITIES

FINANCIAL OR GOVERNANCE REPERCUSSIONS: A deterioration in the Bristol Virginia Utilities Authority's rate flexibility and financial metrics as a result of ongoing legal proceedings, or a determination by Fitch that concerns related to governance have not been satisfactorily rectified, could result in downward rating pressure.

CREDIT PROFILE

BVUA provides retail electric, water, wastewater and telecommunication services to the City of Bristol, Virginia and portions of the surrounding counties. The city is located in southwestern Virginia, on the Virginia-Tennessee border, and has experienced steady, albeit very low, population growth of 0.25% per annum, on average, since 2000. BVUA was created in 2010 as a political subdivision of the State of Virginia and assumed ownership and oversight of all of the city's utility divisions.

FEDERAL INDICTMENTS OF CURRENT AND FORMER OFFICIALS

BVUA's CFO was charged on Oct. 26, 3015 with a variety of tax and fraud charges in a 15-count federal indictment. The CFO is still employed by BVUA and performing all required duties as stipulated in her employment contract. The charges came to light as part of the Washington County, Virginia Commonwealth Attorney's office investigation into allegations of misuse of public funds.

The CFO is the first active employee to be involved in criminal proceedings. Prior proceedings include BVUA's former CEO, two vice presidents, a former chairman of the board and a contractor working with BVUA, all of whom have been convicted by negotiated guilty pleas and have been sentenced and/or required to pay restitution to BVUA and the federal government.

Currently Fitch does not expected there to be any immediate negative financial impact on BVUA from the allegations and proceedings. However, the circumstances could lead to rate pressure and a weakening in financial performance and metrics, which could lead to downward rating pressure. Fitch will be looking for stability within senior management and among board members, as well as a continued focus on strategic planning and governance, which is essential to maintaining the rating.

STRONG FINANCIAL PROFILE

Prior to the creation of BVUA in 2010, financial performance of the combined utility was volatile, largely due to the establishment of the OptiNet division and city council's reluctance to increase rates. Financial performance in recent years has stabilized at a very robust level, with topline debt service coverage (DSC) of 5.09x in fiscal 2015. Coverage of full obligations is similarly strong, averaging 1.7x since 2009. These levels are much stronger than the 'A-' peer medians of 1.41x DSC and of 1.19x coverage of full obligations.

While consolidated metrics are strong, the system relies heavily on the more unpredictable revenue stream of OptiNet. OptiNet's exposure to competitive pressures and its potentially unreliable revenue stream creates additional risk. However, even without OptiNet income, metrics are strong and outperform the 'A-' medians.

For additional information, please see Fitch's press release dated Dec. 12, 2014.