Fitch Rates Tallahassee, FL's Consolidated Utility Systems Rev Bonds 'AA+'; Outlook Stable

NEW YORK--(BUSINESS WIRE)--Fitch Ratings assigns an 'AA+' rating to the following Tallahassee, FL revenue bonds:

--$111 million consolidated utility systems revenue bonds, series 2010A (Federally Taxable - Build America Bonds [BABs]);

--$32 million consolidated utility systems revenue bonds, series 2010B.

The bonds are scheduled for negotiated sale on Sept. x, 2010 with proceeds being used to complete mandated capital projects and fund additional capital needs of the water and sewer systems.

In addition, Fitch takes the following actions:

--Approximately $211 million consolidated utility systems revenue bonds affirmed at 'AA+'.

The Rating Outlook is Stable.

RATING RATIONALE:

--The financial profile of the consolidated utility systems is marked by consistently strong debt service coverage and healthy cash balances.

--Water supply is ample for the foreseeable future, and water and sewer treatment capacity is sufficient relative to current and projected demand.

--The cost of mandated capital projects over the next several years will result in above average system leveraging and diminished flexibility over the medium term.

--Sizeable rate hikes in recent years have resulted in above average user charges relative to income levels for the service area.

--Legal provisions are sound.

KEY RATING DRIVERS:

--Containment of mandated capital costs and compliance with annual milestones associated with implementing required projects is key to the current rating.

--Maintenance of financial flexibility will be needed to meet rising debt service costs over the next several years.

SECURITY:

The bonds are secured by net revenues of the city's water and sewer utilities, gross revenues of the city's stormwater drainage system, and system development charges derived from each system. While the city does not currently levy special assessments for the systems' purposes, in the event the city levies such special assessments, they will become pledged revenues and part of the security for the systems' revenue bonds.

CREDIT SUMMARY:

Located in the northern Florida panhandle, Tallahassee serves as the state capital as well as the county seat. As such, the city's economy is anchored by government employment and bolstered by a strong higher education presence attributable to two large public universities. The city's economic stability consistently translates into below average annual unemployment rates and below average income levels relative to the county, state and nation, reflecting the large proportion of students and government workers.

The consolidated utility systems provide water and sewer service to the city's estimated population of 172,500 as well as portions of neighboring Leon and Wakulla Counties. Stormwater service is also provided. The city maintains exclusive authority to provide water and sewer services to all customers within the corporate city limits. Customer growth has been relatively flat over the last several years, hovering right around 75,400 water customers and almost 70,000 sewer accounts, the vast majority of which are residential. The financial forecast for the consolidated systems assumes minimal customer growth over the next five years and no increase in consumption. Unlike other parts of Florida pressured by supply limitations, Tallahassee operates with an abundant water source drawn from the Floridan Aquifer that is expected to be sufficient through 2025, at least. Water withdrawal permits are good through 2011, and treatment capacity for both the water and sewer systems remains sufficient.

Five-year operating permits granted by the Florida Department of Environmental Protection (FDEP) for the city's two wastewater treatment facilities were secured in 2008. The permits incorporate the terms of a settlement agreement reached in 2006 by the city, the Florida Wildlife Federation, Wakulla County and a resident of the service area who filed a joint lawsuit that challenged water quality standards included in the prior permit. Terms of the agreement require the system to implement advanced wastewater treatment (AWT) capabilities at both of the city's wastewater treatment facilities. Implementation began in 2007 and completion is required by 2014. The cost is estimated at $227 million and is included the current multi-year capital plan.

Financial operations are a credit strength, marked by strong debt service coverage and good cash balances. The system finished fiscal 2009 with about 360 days cash on hand, and pledged revenues together with legally available system development charges covered annual debt service (ADS) on parity debt by a strong 2.8 times (x). Excluding revenue derived from system development charges in fiscal 2009, ADS coverage was still high at 2.6x. The financial forecast for the consolidated systems shows ADS coverage staying comfortably above 2.0x through fiscal 2015. The strong ADS coverage ratios include the use of available system development charges and receipt of BABs subsidies related to the series 2010A bonds, although coverage net of development charges and the BABs subsidy is also quite strong.

Water and sewer rates remain manageable, despite multiple sizeable increases in recent years. Rates within the city are established by the City Commission, which imposes a surcharge of 50% for customers outside of the city limits. To support the costly AWT program, sewer rates were increased by a total of 25% from fiscals 2006-2009, and by an additional 14.1% in fiscal 2010. Charges for water were left unchanged for a number of years until fiscal 2009 when rates were boosted by almost 13%. As a result, the current average monthly water and sewer bill equals almost 2% of the city's median household income, which Fitch considers above average. For fiscal 2011, sewer rates will be held constant while water rates will be increased by 11%. Going forward, the city plans to implement an automatic annual increase equal to CPI beginning in fiscal 2012, which Fitch views favorably.

Capital financing, totaling $267 million over the next five years, is needed primarily to continue implementing the AWT projects. While system leveraging has gone up considerably with the current and most recent (2007) borrowings, Fitch believes capital needs will begin to decline substantially beyond the current five-year outlook, assuming the system meets scheduled milestones associated with the AWT program. Dedicated CIP funding sources include the current bond offering, an additional borrowing of $21 million in parity debt planned for fiscal 2015, and current cash reserves to fund the balance of the plan.

Additional information is available at www.fitchratings.com.

Related Research:

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

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

For information on Build America Bonds, visit www.fitchratings.com/BABs.

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=548606

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