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

NEW YORK--(BUSINESS WIRE)--Fitch Ratings assigns an 'AA-' rating to the following city of Sarasota, Florida revenue bonds:

--Approximately $22 million series 2011 water and sewer system (the system) revenue refunding bonds.

The bonds are expected to sell via negotiation on July 13th.

Bond proceeds will be used to refund the city's series 2002B and series 2008 bonds for savings.

In addition, Fitch takes the following rating action on the system's outstanding parity bonds:

--Approximately $50 million, series 2002, series 2002B (prior to the refunding), series 2004, series 2005, and series 2010 affirmed at 'AA-';

The Rating Outlook is Stable.

RATING RATIONALE:

--The system maintains sufficient capacity, which allows capital needs to be moderate and focus on repair and replacement projects.

--A high debt burden is somewhat offset by above average debt amortization and lack of additional bonding plans over the near term.

--The service area is mostly residential and the customer base is diverse; however the economy remains tied to economically sensitive employment in real estate and tourism.

--Despite an increase in account inactivity, there has not been an appreciable increase in bad debts.

--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 system financial performance has weakened somewhat over the past several years, financial metrics are expected to improve significantly as rate increases are implemented and annual debt service declines (DS peaked in 2010). By fiscal 2012, the system expects to generate over 2.0x DS coverage.

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.

--Moderation in the debt profile is expected as the system meets its modest capital needs with annual pay-go funding.

SECURITY:

The bonds are secured by a pledge of the net revenues of the water and sewer system. The 2011 bonds are not expected to be issued with a debt service reserve fund.

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 18,900 water and 17,000 wastewater customer accounts in 2011. The mostly residential customer base is diverse, and with minimal future customer growth expected, system capacity is sufficient to meet the system's long-term needs.

The system's water supply is derived from several groundwater sources (wells) from the Floridan Aquifer. Total permitted withdrawal capacity of 13.7 million gallons per day (mgd) is more than twice the current average demand. Water and wastewater treatment capacity is also sufficient, limiting future capital demands to upgrade and replacement of aging distribution and collection assets.

The financial profile weakened somewhat over the past several years as the system, like many Florida utilities, experienced a reduction in demand and revenues resulting from a weak economy and strained housing market (among other factors). A decline in fiscal 2009 operating revenues resulted in lower, but still adequate debt service coverage of 1.3 times (x). In fiscal 2010, while operating revenues increased, debt service coverage was lower at 1.2x due to a spike in debt service expense for the year as the city elected to pre-pay and redeem the remaining maturities related to the 1998 bonds. Without the pre-payment, annual debt service coverage would have been satisfactory at 1.5x.

Liquidity, which had declined to a low of 126 days cash on hand in 2009 has also rebounded, as expected, to a more comfortable 240 days cash in fiscal 2010. Pro forma financial results provided by management remain largely unchanged since Fitch's last review in mid 2010; although the city is expecting a positive variance in fiscal 2011 revenues for the system over previous projections. A combination of additional rate increases, returning customers, and lower annual debt service is expected to significantly improve the system's financial metrics over the next few years. By FY 2012, debt service coverage is projected to surpass 2.0x, which Fitch considers to be a positive development as the system's financial metrics move closer to the average for the rating category.

The system's debt profile is above average, but should moderate as no additional bonding is expected over the next several years. At almost $2,200 per customer and $1,300 per capita, debt ratios are above Fitch's medians for the rating category. A combination of above average principal amortization and no plans for additional debt helps offset the above average debt burden. The 5-year capital improvement program is very manageable and aided by a one-time influx of $20 million from the sale of system-owned land (formerly used for effluent discharge, but is now unnecessary as the system has developed its re-use system). The capital plan, which will focus on repair, renewal and maintenance projects, is expected to be mostly funded from renewal and replacement funds and cash. The combined monthly residential bill for 6,000 gallons is above average at $82, and while Fitch notes the majority of customer use less than 6,000 gallons, rates are expected to rise further through the forecast period.

Legal provisions are considered sound with a rate covenant that requires net revenues to be sufficient to provide an amount equal in each fiscal year at least equal to the greater of 125% of the maximum annual debt service (MADS), or 100% of all required deposits into the funds and accounts pursuant to the bond resolution (including any debt service reserve replenishment, R&R deposits, etc). To issue additional bonds, adjusted net revenues from the most recent audited fiscal year must be 125% of MADS. However, additional bonds may be issued without complying with the test if the proposed principal of the new bonds is less than 10% of revenues in the prior fiscal year.

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

In addition to the sources of information identified in the 'U.S. Revenue-Supported Rating Criteria', dated 8 Oct. 2010, this action was additionally informed by information from IHS Global Insight.

Applicable Criteria and Related Research:

--'U.S. Revenue-Supported Rating Criteria' (June 20, 2011);

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

--'2011 Water and Wastewater Medians' (Jan. 18, 2011);

--'2011 Outlook: Water and Wastewater Sector' (Jan. 18, 2011).

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

Applicable Criteria and Related Research:

Revenue-Supported Rating Criteria

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=637130

Water and Sewer Revenue Bond Rating Guidelines

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

2011 Water and Wastewater Medians

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=593285

2011 Outlook: Water and Wastewater Sector

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=593286

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