Fitch Affirms Pasco County, FL's Water & Sewer Rev Bonds at 'AA'; Outlook Stable

NEW YORK--(BUSINESS WIRE)--Fitch Ratings takes the following rating action on Pasco County, FL's revenue bonds, as part of its continuous surveillance effort:

--Approximately $217 million, series 2006, series 2009A, and series 2009B affirmed at 'AA'.

The Rating Outlook is Stable.

SECURITY

The bonds are secured by the net revenues of the county's water and sewer system (the system) and legally available impact fees. The bonds are further secured by a cash-funded debt service reserve.

CREDIT SUMMARY

The rating reflects the system's solid financial performance, manageable debt burden and capital needs, and adequate system capacity. System growth has leveled from previously strong rates, somewhat alleviating expansion-related capital pressures. Pay-go capital funding has lowered reserves but has also kept debt ratios moderate.

KEY RATING DRIVERS

--Financial Margins Still Solid: Debt service coverage margins are lower than historical levels but remain solid through fiscal 2010. A weakened financial position is due largely to the use of cash for capital projects. Additional pay-go funding is expected.

--Adequate System Capacity: The system has adequate treatment capacity and reliable water supply derived from a combination of local sources and Tampa Bay Water (TBW). TBW's proactive capital planning and ample long-term water supply benefits the system.

--Manageable Debt Position: Debt ratios are in line with other similarly rated systems. A possible issuance of additional bonds in 2013 is not expected to significantly change the overall debt profile.

--Affordable Rates: Combined rates remain affordable for a service area that has below average income levels, and projected rate increases are expected to be manageable.

--Somewhat Limited Economy: The service area economy is somewhat limited with below average income levels and above average unemployment.

--Adequate Legal Covenants: Legal provisions are adequate with a 1.25 times (x) rate covenant debt service coverage requirement from net revenues and legally available impact fees. The ABT requires 1.25x maximum annual debt service coverage from net revenues and impact fees.

CREDIT PROFILE

The system's service area encompasses unincorporated portions of Pasco County, which is located on the central part of the West Coast of Florida, approximately 30 miles northwest of Tampa. The system serves roughly half of the estimated 437,000 county residents through 95,000 water and 79,000 sewer accounts. An above-average number of retirees and a largely agricultural-based economy contribute to the county's below average income levels, which equal 75% of state and national levels. The county's unemployment rate of 11.6% as of April 2011, while improved, remains above the state and national figures.

Previously strong residential construction trends led to 5.5% annual customer growth in the system during the housing boom. These trends have largely reversed over the past few years, and despite availability of developable land, customer growth trends are expected to be roughly 1% going forward.

The system purchases approximately 60% of its potable water needs from TBW through an interlocal agreement with the balance derived from its own groundwater sources. Under a master supply contract, six member governments (Hillsborough, Pasco, and Pinellas counties and the cities of New Port Richey, St. Petersburg, and Tampa) make several, not joint, operating expense payments to TBW for highly essential water supplies.

The payments to TBW are made before debt service payments to holders of respective member's utility system bonds. Most of the members are highly rated by Fitch, and TBW itself is rated 'AA+'. Pasco County accounted for roughly 14% of TBW's sales in 2010. TBW's resources are ample, and a decline in regional consumption has pushed the need for additional supply many years out. A total of 10 wastewater treatment plants provide the system with 35.5 mgd of sewer treatment capacity, which compares favorably to the average daily flow of 17 mgd in 2010.

A doubling of system debt since fiscal 2006 coupled with a decline in connection charges has pressured the system's historically strong finances. Debt service coverage in fiscal 2006 was over 4.0x, and nearly 3.0x excluding connection fees. A systematic rise in debt service to almost $16 million in fiscal 2009 (from $9.5 million in 2006) resulted in a decline in coverage to a below average, but adequate 1.6x in fiscal 2009 (and 1.4x excluding connection fees). Debt service peaked in fiscal 2010; however an increase in operating revenues improved coverage to 2.0x (1.8x without connection fees), which is considered solid for the rating.

Financial projections provided by the county show a decline in debt service coverage in fiscal 2011 before a return to levels above 2.0x by fiscal 2012. The potential issuance of additional debt may bring coverage down to a below average, but still acceptable 1.7x by 2014. The projections assume minimal customer growth and moderate annual rate increases of roughly 2% for water, and 7% for sewer.

The system ended fiscal 2010 with just $11.7 million in unrestricted cash (down from $20.3 million in fiscal 2008), equating to just 70 days of operations. When adding renewal and replacement fund balances, liquidity increases to a still below average 100 days.

The low cash position is partially offset by the system's use of cash for capital projects, which helps keep debt ratios manageable. The county expects to continue to fund a portion of its capital plan on a pay-go basis, which will likely keep liquidity levels below average for some time. Over the forecast period, the county projects adding $1.5 million annually to its current liquidity position from increased rate revenues.

The debt burden is moderate at $1,300 per customer and $937 per capita. The five-year capital improvement plan through 2016 is manageable at $166 million and will be funded with a combination of prior bond proceeds, impact fees, cash, and a possible $50 million new issue in 2013. With much of the system's water supply provided by TBW, capital needs related to the water system are minimal. The majority of the plan will focus on reclaimed water and sewer projects.

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

Applicable Criteria and Related Research:

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

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

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

--'2011 Outlook: Water and Wastewater Sector', dated 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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