The Rating Outlook is revised to Stable from Positive.
The bonds are secured by a senior lien pledge of the net revenues of the city's water and sewer system (the system), including available connection fees.
KEY RATING DRIVERS
STRONG FINANCES, LOW DEBT SUPPORT RATING UPGRADE: The rating upgrade to 'AAA' from 'AA+' reflects the trend of very strong financial performance, and a moderating debt position. In addition, the system is capable of recovering the full cost of service, including capital spending needs and annual debt service (ADS), from existing rates.
AMPLE SYSTEM CAPACITY AND SUPPLY: The system benefits from a diverse and ample water supply consisting of system-owned surface water and back-up supply from Tampa Bay Water (TBW; rated 'AA+' by Fitch), a highly rated regional wholesale water supplier, and ample treatment capacity. Existing infrastructure is in a state of good repair and future capital needs focus on system renewal and replacement (R&R).
CONSERVATIVELY MANAGED DEBT: The debt burden continues to improve and capital needs are manageable. The city anticipates funding the capital program entirely from internal sources over the next five years, which is feasible given the sizable annual free cash flow (FCF). Debt carrying costs are low and existing debt amortizes rapidly.
FULL COST RECOVERY FROM RATES: Sizeable multi-year rate adjustments beginning in fiscal 2008 have greatly improved the system's revenue position and resulted in a trend of healthy debt service coverage (DSC) and FCF levels. Despite these increases, utility charges remain affordable. No rate increases are anticipated over the five year forecast.
LIQUIDITY TO REMAIN STRONG: The system's liquidity position continues to improve, providing significant financial flexibility. As of fiscal year-end 2013, the system's unrestricted cash and investments equated to 587 days of operations. Fitch expects healthy reserves will be maintained given the projected strong margins.
ONGOING ECONOMIC RECOVERY:
WELL MANAGED SYSTEM: Fitch expects the system's credit profile will remain strong given both historic and anticipated strong financial performance. The lack of additional debt plans is expected to yield continued improved debt metrics.
The city of
CONSERVATIVE FINANCIAL AND DEBT MANAGEMENT KEY TO RATING UPGRADE
Financial management of the system remains very strong evidenced by vastly improved financial margins and DSC in each of the past four fiscal years. After a dip in operating income in fiscal 2009, a result of recessionary pressures and a drop in demand, the system posted solid margins again beginning in fiscal 2010 due largely to multi-year rate increases adopted for both the water and sewer utilities. Rate increases helped produce an additional
In fiscal 2013, senior lien DSC totaled a very healthy 4.3x, and all-in coverage, which includes subordinate lien state revolving fund loans, a still robust 3.2x. The city makes annual transfers to the general fund in the form of payments in lieu of taxes and franchise fees. Historically, the transfers have averaged 7% of gross revenues. A rise in operating revenues coupled with an increase in the franchise fee (from 4.6% in 2012 to the current capped 6%) resulted in a 50% increase in the transfer beginning in fiscal 2013, to
Fitch notes the 2013 transfer was equivalent to a somewhat high 10% of gross revenues; nevertheless, coverage of all fixed payments (including the transfers) totaled a still very strong 2.6x, slightly outpacing the median all-in coverage ratio for 'AAA' water and sewer utilities of 2.4x (also including transfers). The system is able to afford the current city transfers and still fund operations, debt service and necessary capital needs from current rates. However, additional transfers for general fund operations could adversely impact financial performance and/or the system's ability to internally fund its capital program.
Liquidity is strong despite judicious pay-as-you-go capital funding and annual general fund transfers. Since fiscal 2008, the system has spent over
A financial pro forma provided by the city's engineering consultant shows continued strong expected financial performance with all-in DSC above 2.8x (and above 2.3x including transfers) through fiscal 2017. Coverage will improve even further from these very healthy levels with a decline in ADS due to the maturity of several series of outstanding bonds, providing the system with significant out-year flexibility. By fiscal 2018, all-in DSC increases to 4.4x, and coverage of debt and transfers increases to 3.4x. The projections appear reasonable and include limited revenue growth, no rate increases and no additional debt. The capital plan calls for sizable annual pay-as-you-go funding, though strong excess annual cash flow should preserve the system's strong liquidity position.
DEBT BURDEN TRENDING LOWER WITH INTERNALLY-FUNDED CIP
The system has a total of approximately
In fiscal 2013, debt totaled a manageable 29% of net fixed assets and
The five-year capital improvement plan (CIP), totaling
SOLID OPERATING PROFILE AND LONG-TERM CAPACITY
In fiscal 2013, the system served roughly 500,000 residents through 127,000 water and 105,000 sewer connections. The customer base is roughly 90% residential and diverse with the leading 10 commercial customers for both systems, led by the
The system's operating profile remains strong. Ample and diverse water supply and strong water and sewer treatment capacity are considered long-term credit strengths. Water is primarily derived from a city-owned reservoir from the
TBW provides the system with a supplemental source of finished water during periods of high demand (or drought), and is required to provide/sell the system as much water as it needs. The city is not obligated to purchase a minimum amount of water from TBW, and in fact purchases very little from TBW at present. However,
The sewer system provides collection, advanced treatment, and disposal services. Treatment capacity at the system's main plant is 96 mgd, well above the average fiscal 2013 year daily flow of 61 mgd. The treatment plant's National Pollutant Discharge Elimination System permit is valid through
LARGE REGIONAL ECONOMY DEMONSTRATING RECOVERY
Additional information is available at 'www.fitchratings.com'.
In addition to the sources of information identified in Fitch's Revenue-Supported Rating Criteria, this action was additionally informed by information from CreditScope.
--'Revenue-Supported Rating Criteria' (
--'U.S. Water and Sewer Revenue Bond Rating Criteria' (
--'2014 Water and Sewer Medians' (
--'2014 Outlook: Water and Sewer Sector' (
Revenue-Supported Rating Criteria
U.S. Water and Sewer Revenue Bond Rating Criteria
2014 Water and Sewer Medians
2014 Outlook: Water and Sewer Sector
Source: Fitch Ratings
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