Fitch Affirms Bristol Virginia Utilities Authority Util Sys Rev Bonds at
'A-'; Outlook Stable
NEW YORK -- December 28, 2012
Fitch Ratings affirms the 'A-' rating on Bristol Virginia Utilities
Authority's (BVUA or the authority) implied utility system revenues bonds.
BVUA's rating takes into account approximately $43.4 million of outstanding
Utility System Revenue Bonds, but is assigned to implied obligations since
none of the outstanding debt is publicly held.
The Rating Outlook is Stable.
BVUA's utility system revenue bonds are secured by a pledge of net revenues of
the water, wastewater and electric systems and the telecommunications system,
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 in southwest
Virginia. The electric distribution system contributes approximately 67% and
36% of the Authority's fiscal 2012 revenue and funds available for debt
service (FADS), whereas the telecommunications division accounts for 24% and
50% of revenue and FADS.
Strong Contribution from Telecommunications Division: The telecommunications
division, doing business as OptiNet, provides telephone, cable and internet
services to the greater Bristol area. While OptiNet is self-supporting, the
competitive nature of telecommunication services provides an additional level
Strong Financial Metrics: Financial metrics of the consolidated system have
been strong and above rating category medians. However, OptiNet operations are
significantly less predictable and reliable compared to BVUA's other
Stable long-term power supply: BVUA's power is supplied through a 20-year,
all-requirements contract with Tennessee Valley Authority (TVA, rated 'AAA'
with a Negative Outlook by Fitch). The long-term contract, which expires in
2028, eliminates virtually all power supply uncertainty and volatility.
Competitive Rates: BVUA's rates across all sectors compare favorably to
neighboring utilities and telecommunication companies. Water and wastewater
retail rates are notably low for the region, providing ample flexibility for
planned rate increases. Creation of a self-regulating board in 2010 is viewed
positively by Fitch.
Weak Service Territory: Economic indicators of the City of Bristol currently
and historically have lagged both the state and the nation, with per capita
income at 70% of the national average. Recent economic development points
toward improvements in the commercial and industrial sectors.
WHAT COULD TRIGGER A RATING ACTION
Increased Contribution from Traditional Utility Divisions: An increased
reliance on income and cash flow generated by the electric, water and
wastewater divisions, as opposed to OptiNet, would be viewed favorably.
BVUA provides retail electric, water, wastewater and telecommunication
services to the City of Bristol, Virginia (the city) and portions of the
surrounding counties. The city historically operated the utility system;
however, in 2010 BVUA assumed ownership and oversight of all the utility's
divisions, in part to facilitate future expansion. Recent rate actions have
been supportive of utility system operations.
The electric distribution system, BVUA's largest division, serves 17,443
customers and in fiscal 2012 contributed approximately 67% and 36% of the
Authority's revenue and funds available for debt service (FADS). Wholesale
power is supplied by TVA pursuant to a long-term, all-requirements contract.
The telecommunications division, doing business as OptiNet, represents the
authority's fastest growing segment, accounting for 24% and 50% of the
authority's fiscal 2012 revenue and FADS. OptiNet operations include cable,
internet and phone services. According to management, OptiNet was the first
municipal utility in the U.S. to offer video, voice and data services over a
fiber-to-the premise system.
OptiNet is self-sustaining, based on current rates and charges, and serves
over 11,000 customers. BVUA's ability to attract and maintain
telecommunication customers is subject to direct competition from other
regional service providers. Due to the competitive nature of the
telecommunications market, Fitch believes that the OptiNet operations increase
the business risk profile of BVUA, and is a meaningful rating factor. This
risk is partially mitigated by the positive track record of operating the
cable and internet system over the last 9 years.
LONG-TERM POWER SUPPLY
Wholesale power is currently supplied pursuant to a 20-year, all-requirements
contract with TVA. The contract began on Jan. 1, 2008, prior to, BVUA was
procuring power from American Electric Power Company at market rates. The TVA
contract decreases the volatility and uncertainty that was previously
surrounding the authority's power supply.
As a TVA customer, BVUA's retail electric rates allow for the pass through of
TVA wholesale rate changes; however, base rate changes need review and
approval by BVUA's board and by TVA. All of TVA's 157 distribution customers
are subject to this same oversight, which is designed to ensure rate parity
among the TVA distributors.
BVUA has reported relatively strong financial metrics on a fully consolidated
basis. Fitch-calculated DSC of 4.78x for fiscal 2012 compares favorably to the
'A-' peer median of 2.39x, as does coverage of full obligations of 1.71x,
compared to the median of 1.40x. Liquidity has been relatively stable over the
last three years, at between 90 to 100 days cash on hand at each fiscal
While consolidated financial performance is strong, the system relies heavily
on earnings and cash flow from the telecommunications division, which is a
more unpredictable revenue stream than those provided by the other utility
divisions. OptiNet's exposure to competitive pressures and a non-monopolistic
and unreliable stream of revenue creates additional risk. Financial forecasts
assume continued sound operations of each of the four systems and reasonable
Additional information is available at 'www.fitchratings.com'. The ratings
above were solicited by, or on behalf of, the issuer, and therefore, Fitch has
been compensated for the provision of the ratings.
In addition to the sources of information identified in Fitch's
Revenue-Supported Rating Criteria, this action was additionally informed by
information from Creditscope.
Applicable Criteria and Related Research:
--'U.S. Public Power Rating Criteria' (Jan. 11, 2012);
--'U.S. Public Power Peer Study - June 2012' (June 15, 2012);
--'U.S. Public Power Distribution Systems' (Nov. 17, 2011).
Applicable Criteria and Related Research:
U.S. Public Power Rating Criteria
U.S. Public Power Peer Study -- June 2012
U.S. Public Power Distribution Systems
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New York, NY 10004
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