Fitch Rates Fairfax County Water Authority, Virginia's Revenue Bonds 'AAA'

Business Wire, June 3, 2004

Business Editors

WASHINGTON--(BUSINESS WIRE)--June 3, 2004

Fitch Ratings assigns an 'AAA' rating to the Fairfax County Water Authority's (FCWA) approximately $99.4 million water revenue bonds, series 2004. The bonds, which are dated as of delivery, are scheduled for negotiated sale with Morgan Stanley during the week of June 14. The bonds are secured by a net revenue pledge of the water system. Fitch also affirms its 'AAA' rating on FCWA's $420.2 million of outstanding parity water revenue bonds. Bond proceeds will finance the construction of backup power supply resources at FCWA installations, a need that became evident during recent supply interruptions related to Hurricane Isabel.

The 'AAA' rating reflects FCWA's exceptional financial flexibility; compliance with water quality regulations; ample water supply; sound long-term planning; and moderate debt levels with modest capital needs. Debt service coverage is comfortably above targeted levels, which, in turn, exceed legal requirements that are relatively weak. Coverage from operating revenues alone is solid, and non-operating revenues provide substantial funding for capital projects and allow FCWA to maintain low rates and an unusually high cash position, even for 'AAA' rated utilities. Water rates are the lowest in the District of Columbia (D.C.) metropolitan area, and only moderate increases are projected. The Rating Outlook is Stable.

The water system serves about 1.2 million customers in and around Fairfax County, (general obligation bonds rated 'AAA' by Fitch). The county board of supervisors appoints FCWA's ten members, who have sole authority over rates, debt issuance, and operations. The county is located southwest of D.C. and has a growing population estimated at just over one million, of whom about 58% are retail customers. Wealth levels are very high; 2000 census data indicate that Fairfax has the highest median household income of any U.S. county. The county unemployment rate remains well below state and national averages at 2% for March 2004.

Wholesale customers, which provided 27% of operating revenues in 2003, include Virginia-American Water Company (which supplies water to the City of Alexandria and a portion of Prince William County), the Prince William Service Authority, the federal government's Fort Belvoir Military Reservation, Dulles International Airport, the Town of Herndon, and the Loudoun County Sanitation Authority. The wholesale portion of FCWA's service area reflects a similarly strong, if somewhat lesser, income and economic profile.

Raw water and treatment capacity are ample, and capacity needs for the rapidly growing wholesale customer base are funded by those customers over five-to-30-year terms. Construction of the Frederick P. Griffith, Jr. Water Treatment Plant, with expected completion now expected later this year, will replace three existing, less efficient facilities. The general contractor has filed two claims against FCWA with respect to the Griffith plant but FCWA does not expect they will materially affect financial operations.

The new plant, along with the James J. Corbalis plant, will provide water quality superior to U.S. Environmental Protection Agency requirements. Both facilities are expandable; the Corbalis plant's capacity will be increased by 50 to 75 million gallons per day by 2008. A second intake at the Potomac River, which provides 59% of the system's water, was recently constructed to increase reliability and redundancy. A December 2003 U.S. Supreme Court ruling surrounding Virginia water withdrawals from the Potomac was favorable to the commonwealth, reducing future Potomac supply risks for FCWA. Potomac withdrawals must still be coordinated with other area utilities and with the U.S. Army Corps of Engineers by regional compact.

Debt service coverage from available revenues has been strong, at 2.1 times (x)-3.2x over the past five years. Even excluding availability fees and interest income, which together provided 37% of 2003 net revenues, coverage has been solid, ranging from 1.3x-1.8x. Wet weather negatively affected margins in 2003, reducing water demand and delaying home construction, lowering availability charge collections. Housing permits are up nearly 290% to date in 2004. Coverage of maximum annual debt service (MADS) is 1.63x from 2003 revenues. A 10-year strategic financial model indicates that coverage will stay above FCWA's minimum target of 1.5x, using very conservative assumptions about customer growth and rate increases. Base service charges were raised 3.1% for 2004, while the availability charge was increased 6.5%.

With this financing, FCWA's $602 million capital program, as currently conceived, will be fully funded through 2013. The sizable share of capital funding from existing and projected cash balances all but eliminates future borrowing plans beyond the present offering. FCWA closed 2003 with cash reserves in excess of $280 million, equal to seven years of annual operating expenses.