AUSTIN--()--Fitch Ratings affirms the 'A+' rating on the following Sanford, Florida (the city) bonds:
--$2.89 million water and sewer refunding revenues bonds, series 2003.
The Rating Outlook is Stable.
The bonds are payable from a senior lien on and pledge of the net revenues of the city's utility system (the system). The bonds are also secured by a standard cash-funded debt service reserve fund (DSRF).
KEY RATING DRIVERS
RATES HIKES BOOST FINANCIAL PERFORMANCE: Following two years of above average rate hikes, system finances rebounded to with marked improvement in coverage levels and liquidity.
REGULATORY NEEDS DRIVE UP DEBT: Capital needs increased by nearly 30% over the prior plan due to consent decree related projects. Sixty percent of the plan will be funded with state revolving loans, which will add to the already high debt burden.
ADEQUATE RATE FLEXIBILITY: Rates are affordable despite several years of over 10% rate increases.
LENIENT LEGAL PROVISIONS: Legal provisions are below average compared to typical utility system's Fitch rates. The rate covenant test requires 1.2x including impact fees.
SUFFICIENT CAPACITY THROUGH BUILD OUT: Due to the relatively built out nature of the system, water and wastewater capacity is sufficient to meet demand.
BALANCING CAPITAL NEEDS WITH DEBT: Continued progress toward consent decree requirements without excessive future borrowing will be important to minimizing additional fixed costs.
Located in the geographic center of Florida and situated north of Orlando, the utility provides retail water and sewer service residents within the city and some unincorporated areas of Seminole County. The system serves over 15,000 water and reclaimed water customers and roughly 14,000 wastewater customers.
ADEQUATE SUPPLY AND TREATMENT CAPACITY
Groundwater supply is managed by the St. Johns River Water Management District (SJRWMD). The system's consumptive use permit, which expires in 2026, allows for up to 9.6 million gallons daily (mgd) to be drawn from four well fields in the Floridan Aquifier. While this level of withdrawal is sufficient to meet the average demand of 6.2 mgd for 2012, the city has partnered with other water suppliers and the SJRWMD as part of the Central Florida Water Initiative to seek alternative water supplies. Sewer flows are treated at two water reclamation plants with a combined capacity of 9.3 mgd, also sufficient to meet the 2012 demand of 6.4 mgd.
REGULATORY NEEDS DRIVE CAPITAL PLAN
The sewer system is under a consent order to reduce nitrogen levels at its North Water Reclamation Facility and has until February 2014 to meet the requirement. The city's five-year capital improvement plan, which totals almost $42 million, includes $9 million in projects needed to address the consent order. The fiscal 2012-2016 CIP is 29% higher than the prior plan, largely due to regulatory needs. The city plans to fund the current CIP through the use of cash reserves and state revolving fund (SRF) loans.
The system has received approval for a $15 million SRF loan and anticipates receiving another $11 million SRF loan by 2014, which will increase the debt burden by 30%. Utility debt per capita is moderately high at $813, and will grow to $1,100, twice the 'A' median category level of $521 by 2013. Fitch's concern over the high debt levels is partially mitigated by the above average principal amortization at 40% and 99% in 10 and 20 years, respectively.
RATE INCREASES SPUR FINANCIAL IMPROVEMENT
In reaction to the weak fiscal 2008 results, which produced all-in coverage of just over 1.0x, management adopted a 12% water rate increase for fiscal 2009, a 15% rate increase for both water and sewer for fiscal 2010 and another 9.5% increase for water and 7% increase for sewer in 2013. Coverage has steadily improved to 2.0x for fiscal 2011 and unaudited fiscal 2012.
FORECASTS INDICATE GROWING DEBT, DECLINING COVERAGE
Management provided forecasts, which appear reasonable, indicate coverage levels of 1.5x to 1.3x on an all-in basis through the 2016 forecast period. The decline in coverage is driven by the additional cost of SRF debt noted above. Management conservatively assumes flat water consumption and flat growth in its forecasts and targets at least 1.3x coverage and 90 days of operating expenses, which would be considered on the low end of the 'A' rating category. Recently improved operating margins boosted system liquidity to 232 DCHO in fiscal 2012, after a weak one day of operating cash was reported in 2010.
RATES REMAIN AFFORDABLE
Despite these years of above average increases, rates remain affordable and fall below Fitch's affordability threshold of 2% of median household income (MHI). The average city utility customer's bill, based on 6,000 gallons of water consumption, is affordable at $60 or 1.6% of MHI.
MODERATELY IMPROVED ECONOMIC CONDITIONS
The service territory, which had once seen high unemployment, is now reporting unemployment of 7.9%, as of December 2012, closer to the state (7.95%) and nation (7.6%), largely due to job growth. Wealth levels are fall just below the state and nation also. While annual population growth had been rapid at 4% through 2006, it has since stalled over the last several years.
Additional information is available at 'www.fitchratings.com'. The ratings above were solicited by, or on behalf of, the issuer, and therefore, Fitch has been compensated for the provision of the ratings.
In addition to the sources of information identified in Fitch's U.S. Municipal Revenue-Supported Rating Criteria, this action was additionally informed by information from Creditscope and Public Resources Management Group (Rate Consultant).
Applicable Criteria and Related Research:
--'Revenue-Supported Rating Criteria' (June 12, 2012);
--'U.S. Water and Sewer Revenue Bond Rating Criteria' (Aug. 3, 2012);
--'2013 Water and Sewer Medians' (Dec. 5, 2012);
--'2013 Sector Outlook: Water and Sewer' (Dec. 5, 2012).
Applicable Criteria and Related Research
Revenue-Supported Rating Criteria
U.S. Water and Sewer Revenue Bond Rating Criteria
2013 Water and Sewer Medians
2013 Outlook: Water and Sewer Sector