NEW YORK--(BUSINESS WIRE)--Fitch Ratings assigns an 'AA' to the following St. Petersburg, Florida (the city) revenue bonds:
--$25 million public utility system (the system) revenue bonds, series 2013C.
The bonds are expected to sell via competitive sale the week of October 21. Proceeds will be used to fund various water and sewer rehabilitation and replacement capital improvements, make a deposit to the debt service reserve fund, and to pay issuance costs.
In addition, Fitch affirms the 'AA' rating for the following outstanding debt:
--Approximately $295 million in outstanding public utility revenue bonds.
The Rating Outlook is Stable.
The bonds are secured by a first lien on and pledge of the net revenues of the public utility system, which includes the water fund (including wastewater and reclaimed water) and the storm water system.
KEY RATING DRIVERS
HEALTHY FINANCIAL METRICS: Debt service coverage (DSC) remains healthy, although declines are expected with the issuance of additional bonds over the next few years. Liquidity is strong, and coupled with competitive rates provides financial flexibility for the system.
WELL-MANAGED SYSTEM: Fitch views positively the city's various formal policies, comprehensive rate and capital planning, and ongoing system re-investment. The city benefits from a solid operating profile including participation in Tampa Bay Water (TBW), the region's highly rated wholesale water supply authority, and ample capacity. The city provides its own wastewater services, which includes a substantial recycled water system.
LIMITED EXCESS CASH-FLOW: The system makes annual transfers to the general fund (GF), totaling about 10% of operating revenues. The transfers are formulaic and capped by city policy; however, the transfers absorb most of the system's excess cash flow that could otherwise be used for capital projects, increasing the need for debt funding.
MANAGEABLE BUT RISING DEBT: Fitch expects the debt burden to remain consistent with Fitch's medians for similarly rated systems. However, capital needs, while manageable, will be funded by additional bonds, which will increase leverage and debt service costs over the next five years.
COMPETITIVE RATES TO RISE: Rates remain competitive with other regional utilities and affordable relative to household income. Planned rate increases should provide timely cost recovery and help offset concerns of higher expected debt carrying costs, modestly declining sales, and operating cost pressures.
MAINTENANCE OF STABLE FINANCIAL PERFORMANCE: The rating could face downward pressure if significant additional debt is needed beyond the current forecast and/or if the city does not implement timely and sufficient rate increases to stabilize at the lower projected financial position.
St. Petersburg is located in Pinellas County (Fitch sewer revenue bond rating 'AA'), approximately 20 miles southwest of the city of Tampa.
COMBINED UTILITY COVERS LARGELY BUILT-OUT SERVICE AREA
The city's utility system is composed of assets providing for water, wastewater, reclaimed water and storm water service for an estimated 300,000 residents located throughout the region. Revenues of all four utilities are pledged to the bonds; although the storm system is accounted for and operated as a separate enterprise.
The customer base is largely residential in nature. Along with the number of customers served, average daily demand declined between 2006 and 2010, a reflection of conservation policies of the city and a declining housing market leading to an increase in home foreclosures and vacancies. Recent economic and housing data points to a rebounding local economy and housing market, and stabilized water demand trends. Future growth will be limited by the largely developed nature of the city; however, there is some infill development currently underway with several apartment complexes and additional commercial space slated for completion over the next year or two.
SOLID OPERATING PROFILE, WELL-MANAGED SYSTEM WITH AMPLE CAPACITY
The city does not own any drinking water resources but is one of six member governments of TBW, a special district of the state created by inter-local agreement to plan, develop, and deliver a high-quality water supply to the region. TBW (rated 'AA+' by Fitch) has existing water supplies to meet member needs for at least the next 15 years, or perhaps longer depending on growth and conservation efforts.
The city operates a wastewater collection system and four treatment facilities. The city treats to advanced secondary standards producing recycled water, which is sold through the city's extensive recycled water distribution system and disposed of through deep injection wells. No discharge is emitted into Tampa Bay, limiting environmental concerns for the system.
Capacity in the system is strong with treatment capabilities at the four plants nearly two times the average daily flows. The city is in the process of decommissioning one of its existing treatment plants (its smallest and oldest plant), with flows to be re-directed to one of the other facilities.
The city will gain long-term operating efficiencies by decommissioning the plant and avoid higher up-front capital and other costs associated with meeting increased regulatory compliance for effluent standards. Capacity will remain more than sufficient for the city's long-term needs.
CAPEX PRIMARILY FOR IMPROVING EXISTING ASSETS
The city will debt fund the majority of the utility's $200 million 2014-2018 capital improvement plan (CIP). The series 2013C bonds will be used to fund the city's ongoing upgrade and rehabilitation of existing water distribution and sewer collection system assets.
The CIP includes additional upgrade and replacement projects and the construction of a waste to energy facility that will generate electricity from the sludge by-product and reduce the city's sludge disposal and electricity costs. A small amount of the CIP will fund storm water projects.
DEBT BURDEN TO RISE, REMAIN MANAGEABLE
The system's total outstanding debt as of fiscal-end 2012 was approximately $280 million. Debt ratios are solid with debt per customer around $1,600 and debt to net assets of 48%. Debt carrying costs are currently low at 16% of gross revenues. The additional borrowing (approximately $190 million) will increase debt ratios above 'AA' category rating median levels to about $2,600 per customer (water and sewer only), with carrying costs increasing to a still manageable 22% of gross revenues.
Debt amortization is also slow, with principal payout at 22% and 52% in 10 and 20 years, respectively, ensuring the debt burden will remain above the medians for the foreseeable future. On the positive side, the service area is fully developed. As such, capital needs beyond the current plan are minimal.
RATES SHOULD KEEP PACE WITH COST INCREASES
Rate setting is done annually with adjustments put into place for each utility at the beginning of the fiscal year. Management conducts an independent rate study annually, which is viewed favorably by Fitch. The study includes a 10-year rate forecast based on planned capital spending, incorporating additional debt, and long-term operating costs. Assumptions used in rate planning rely on a zero-growth scenario, which appears reasonable, and a recommendation for annual rate increases.
Retail water sales were flat in fiscals 2011 and 2012 following a cumulative 19% decline from 2006 to 2010. Fitch believes further declines in consumption are likely limited given the average customer already uses just 4,000 gallons per month. Any further declines would likely be mitigated by the city's annual rate action.
Water and sewer rates have been on the rise with incremental increases adopted in each of the past 10 fiscal years. Followed by a 7.5% rate increase in fiscal 2011 and a 5% increase in 2012, a more modest 2.75% rate increase was adopted in fiscal 2013. Rates will rise again in fiscal 2014 by 3.75%.
The city retains future rate raising flexibility as rates remain affordable despite increases, and monthly bills are in line with regional utilities. In fiscal 2013, the average residential customer using 4,000 gallons pays about $61 for combined service (water, sewer, and storm) per month, which is an affordable 1.6% of median household income (MHI). Fitch notes rate affordability is somewhat a function of the lower average use. Rates reach Fitch's affordability threshold (of 2% of MHI) when based on average customer usage of 7,500 gallons per month, closer to the national average.
The rate study projects annual water and sewer rate increases over the next 10 years of 5.5% in fiscals 2015 and 2016, and 3.75% thereafter, which is manageable given the level of rates currently and the history of city-council support for rate increases.
DSC EXPECTED TO DECLINE, LIQUIDTY TO REMAIN STRONG
Financial operations have been healthy, supported by the annual incremental rate increases that have helped offset rising operating and debt service obligations. Coverage levels remain strong but have declined from previous high levels with additional debt issuance over the past several years.
DSC of all-in annual debt service (ADS) in fiscal 2012 was 2.1 times (x) (including junior lien state revolving fund payments). Coverage of all fixed charges, including the transfer payment to the general fund (which represents payments in lieu of taxes and franchise fees) was a still good 1.5x.
Coverage levels are projected to decline to between 1.6x-1.9x all-in (and 1.1x-1.2x net of transfers) through the five year forecast. Projected levels are low but adequate for the rating, and somewhat offset by the strong liquidity position and rate raising flexibility. However, free cash flow (after payment of O&M, debt service and transfers) is modest, resulting in a reliance on debt funding for most capital needs.
Fitch expects stability and predictability in transfers as they are based on a formula that provides payments to the city in lieu of taxes and franchise fees. The utility includes the transfers in its rate setting process and they are paid subordinate to debt service.
The utility maintains a strong balance sheet with $112.9 million in unrestricted cash and investments or 493 days cash on hand at the close of fiscal 2012. A significant portion of the utility's reserves were funded from the sale of water supply facilities to TBW in 1999. These reserves are designated solely for water purchases and the development of water production and transmission facilities, but can be used for any system-related purpose. Management intends to keep reserves at similar levels going forward.
Additional information is available at 'www.fitchratings.com'.
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.
Applicable Criteria and Related Research:
--'Revenue-Supported Rating Criteria' (June 2013);
--'U.S. Water and Sewer Revenue Bond Rating Criteria' (July 2013);
--'2013 Water and Sewer Medians' (December 2012);
--'2013 Sector Outlook: Water and Sewer' (December 2012).
Applicable Criteria and Related Research:
Revenue-Supported Rating Criteria
U.S. Water and Sewer Revenue Bond Rating Criteria
2013 Water and Sewer Medians
2012 Outlook: Water and Sewer Sector