Fitch Rates City of Sarasota, FL's Water & Sewer System Rev and Rfdg Bonds 'AA-'; Outlook Stable

NEW YORK--(BUSINESS WIRE)--Fitch Ratings assigns an 'AA-' rating to the following City of Sarasota, FL water and sewer system revenue bonds:

--Approximately $33.7 million series 2010A water and sewer system revenue refunding bonds, and series 2010B (Federally Taxable - Build America Bonds - Direct Subsidy) water and sewer system revenue bonds.

The bonds are expected to sell via negotiated sale on Aug. 31, 2010, and are secured by a pledge of the water and sewer system's net operating revenues. Bond proceeds will be used to finance the cost of utility system improvements, refund approximately $5.5 million of series 1993 bonds for savings, fund a debt service reserve, and pay costs of issuance.

In addition, Fitch affirms the following ratings:

--$50 million outstanding (prior to the refunding) City of Sarasota water and sewer system revenue bonds, affirmed at 'AA-'.

The Rating Outlook is Stable.

RATING RATIONALE:

--System capacity remains solid, and moderate capital needs will address repair and replacement projects.

--System leverage is projected to be above average after issuance; however, rapid debt amortization helps offsets this weakness.

--The service area is mostly residential, and the customer base is diverse. Despite an increase in inactive accounts, there has not been an appreciable increase in bad debt expense.

--Rates are high but generally in line with neighboring utilities. Additional proposed rate increases will drive rates higher still, raising flexibility concerns going forward.

--While financial performance of late (FY 2009 and FY 2010 projected) has weakened, financial metrics are expected to improve significantly over the next few years with planned rate increases and lower annual debt service expense.

KEY RATING DRIVERS:

--Improved financial performance, including measured improvement in debt service overage ratios as projected, will remain an important rating driver.

--While not expected, if additional rate increases are necessary beyond those forecasted, rate affordability and overall financial flexibility could become a credit concern.

--A moderate debt profile must be maintained while still addressing system capital needs.

SECURITY:

The bonds are secured by a pledge of the net revenues of the water and sewer system. Revenues include all receipts and revenues derived from the operation of the system.

CREDIT SUMMARY:

The City of Sarasota (general obligation bonds rated 'AA+' by Fitch) is a mature and mostly residential community of 53,000 located on the central Gulf Coast of Florida, approximately 35 miles south of St Petersburg, FL. The system provides water supply, treatment and delivery, and wastewater collection and treatment services to over 18,800 mostly residential water and nearly 17,000 wastewater customer accounts as of fiscal 2010. The service area is mature, and system capacity is sufficient to meet the system's long-term needs. Customer growth is expected to be minimal going forward, though management expects the roughly 800 inactive customer accounts to be re-absorbed over the next four years. Water supply is provided by several groundwater sources (wells) from the Floridan Aquifer, and with total permitted withdrawal capacity of 13.7 million gallons per day (mgd), available water supply is more than twice the current average demand. The system is currently in the process of renewing its permit with the Southwest Florida Water Management District (SWFWMD) for one of its two main well-fields (the Downtown Well-Field); however, no changes to the withdrawal capacity are anticipated. Water and wastewater treatment capacity is also solid, though the capital plan will address upgrades and improvements to the aging distribution and collection assets, as well as the treatment facilities.

Financial operations in fiscal 2009 provided adequate debt service coverage and liquidity, although like many Florida utilities the system has been experiencing reduced demand and revenues resulting from the weakened housing market and overall economy (among other factors) over the past few years. FY 2009 all-in debt service coverage of 1.32 times (x) and liquidity of 126 days cash on hand are the lowest demonstrated by the system over the past four years. However, pro forma financial results show significant improvement in financial performance due to the expected adoption of rate increases, declining debt service, and lower operation and maintenance expense. By FY 2012, debt service coverage is projected to surpass 2.0x, which Fitch considers to be closer to the average for the rating category (which is 2.8x). Fitch notes the system's solid capacity as a credit strength, limiting the system's long-term capital needs and allowing it to use excess annual margins to upgrade its aging infrastructure.

The system's debt profile will be above average after issuance with outstanding debt per customer increasing to $2,127 in 2011 (from $1,408 in 2009) and debt per capita approaching $1,300 (versus $894 in 2009). Rapid principal amortization helps offset this as nearly 50% of principal will be retired over the next five years (exclusive of this financing). In addition, debt ratios peak in 2011 and then steadily decline to roughly where they were in fiscal 2009. An $80 million five-year capital program is manageable and will be mostly funded from renewal and replacement funds and cash. The combined monthly bill for 6,000 gallons is above average at $82; however, Fitch notes the majority of customer use less than 6,000 gallons. Rates are expected to rise through the forecast period, though lower volume users are expected to be only modestly impacted.

Applicable criteria available on Fitch's web site at 'www.fitchratings.com':

--'Revenue-Supported Rating Criteria', dated (Dec. 29, 2009);

--'Water and Sewer Revenue Bond Rating Guidelines', dated (Aug. 6, 2008).

Additional information is available at 'www.fitchratings.com'.

Related Research:

Water and Sewer Revenue Bond Rating Guidelines

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=395918

Revenue-Supported Rating Criteria

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=493154

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