NEW YORK--(BUSINESS WIRE)--Fitch Ratings affirms its 'AA+' rating on the following Broward County, Florida (the county) revenue bonds:
--Approximately $514 million in outstanding water and sewer utility system (the system) revenue bonds.
The Rating Outlook is Stable.
The bonds are secured by a first lien pledge of the net revenues of the county's water and sewer system.
KEY RATING DRIVERS
LARGE REGIONAL SERVICE PROVIDER: The customer base is stable and mostly residential. The county also serves numerous wholesale customers (mostly sewer) via long-term service agreements. The agreements are substantially similar and in place at least until one year beyond the maturity of all of the system's bonds associated with the regional sewer plant.
SOLID ECONOMIC BASE: The service area is mature and the broader economy is deep and diverse. Recent employment growth and a stabilizing tax base are positive developments.
STABLE FINANCIAL PROFILE: The system's financial performance remains stable with debt service coverage (DSC) of between 1.6x - 1.7x for the past three years. Affordable rates and improved liquidity provide financial flexibility.
AVAILABLE SYSTEM CAPACITY: The system retains substantial treatment capacity and is well maintained. Management has consistently invested in the system with capital spending at roughly 150% of depreciation (on average) over the past five years.
MIXED DEBT METRICS: The system's debt ratios are somewhat mixed with high debt-to-net plant and rising carrying charges. However, Fitch notes that higher debt ratios are not unusual for utility systems that provide wholesale service.
LARGE CAPITAL PROGRAM: A sizable capital program includes additional bonding, but Fitch projects debt ratios will remain manageable over the near term. Recent legislative changes concerning use of ocean outfall for effluent discharge is favorable and expected to significantly lower longer-term capital costs.
STABLE AND FLEXIBLE FINANCES SUPPORTS RATINGS: Pro forma DSC is somewhat low but acceptable given the system's strong financial and rate flexibility. Significant deviation from stable performance and/or diminished flexibility could pressure the rating.
RISING LONG-TERM DEBT BURDEN: An appreciable rise in the system's debt burden could also pressure the rating.
Broward County (general obligation bonds rated 'AAA' with a Stable Outlook) is located along Florida's southeastern coast, situated between Miami-Dade and Palm Beach counties, and has a population of approximately 1.7 million residents. The system's service area includes unincorporated areas of the county as well as numerous municipalities located in Broward's mostly built-out eastern portions.
WHOLESALE AND RETAIL SERVICE PROVIDED TO STABLE CUSTOMER BASE
The county operates a combined water and sewer utility system. The water system serves approximately 57,000 mostly residential connections, and one wholesale user, the city of Coconut Creek. The county's wastewater system provides service to most of the system's retail water customers and provides wholesale service to 11 large municipal users at its regional treatment plant. The county estimates the combined system serves over 600,000 residents throughout its service area.
Wholesale wastewater users accounted for a somewhat concentrated 26% of gross system revenues in fiscal 2012. However, all of the wholesale customers are signed to substantially similar long-term agreements, and Fitch views the likelihood that one or more wholesale customer develops its own treatment facilities to be remote given the high capital costs and regulatory requirements associated with constructing and operating such facilities. The agreements prudently extend one year beyond the last debt service payment related to the regional plant, which Fitch believes adds stability to the overall customer base.
Broward County is part of the Miami-Fort Lauderdale-Pompano Beach MSA which accounts for nearly 30% of Florida's population. The economy exhibits good diversity, and benefits from extensive transportation and trade infrastructure and a reputation as a leading tourist destination. County income levels are slightly higher than the state average. County-wide employment growth has performed well with an annual average growth rate of 2.9% for the past three years, which is almost triple the job growth rate nationwide. The most recent unemployment rate from October 2013 is 5.3%, well below the national rate of 7%.
SOLID OPERATING PROFILE, AMPLE WATER CAPACITY
The system's primary source of raw water comes from the Biscayne Aquifer and is treated by two water treatment plants with a combined treatment capacity of 46 million gallons per day (mgd). The county is permitted by the water management district to withdraw nearly 41 mgd through 2028, which is ample given the current water demands. The county also has rights to 9.3 mgd from the deeper Floridan Aquifer and typically purchases water on a wholesale basis from the city of Hollywood, amounting to approximately 6.0 mgd in 2013. Water supply and treatment capacity both easily exceeded the 2013 average daily demand of 24.2 mgd (when including water purchased).
The wastewater system includes one large regional wastewater treatment plant with a capacity of 95 mgd. The plant is shared among the system's 11 wholesale customers, with the county reserving approximately 20% of the plant's capacity for its retail customers. The average daily flow in fiscal 2013 was 70 mgd, indicating sufficient capacity remains for the near term. Plant effluent is disposed of through ocean outfalls, deep injection wells, and a 10-mgd reclaimed water system.
In 2013, the state legislature amended the ocean outfall requirements to allow utilities such as Broward County to continue to discharge treated effluent via ocean outfall during instances of extreme peak flows. In addition, county plans to expand the reclaimed water system to more than 20 mgds by 2020 and construct two additional deep injection wells will further reduce the system's overall surface water discharge, allowing the county to meet the recently amended ocean outfall discharge elimination requirements more cost effectively. The county estimates saving roughly $300 million in capital needs (duplicate deep wells) compared to the previous requirements to eliminate 100% of its ocean discharge.
Regulatory mandates recently adopted by the state to lower nutrient levels in treated wastewater are not expected to significantly impact the county as a result of the above-mentioned reclaimed water system enhancements and already implemented biological nutrient removal treatment standards.
STRONG LIQUIDITY AND AFFORDABLE RATES PROVIDE FLEXIBILITY
The system's liquidity position has strengthened over the past few years with unrestricted cash and investments that have more than doubled from fiscal 2009 to fiscal 2012. In fiscal 2012, the system had over $37 million in unrestricted balance sheet resources and an additional roughly $6 million in renewal and replacement fund balance. Combined, these funds totaled 245 days cash on hand. Fiscal 2013 results, which are preliminary and unaudited, indicate the system added another $17 million in unrestricted cash, increasing the overall liquidity position to a strong 346 days cash. Fitch notes liquidity may decline as the county funds roughly half of its five-year capital program on a pay-as-you-go basis.
In fiscal 2013, the residential monthly bill for combined service remains affordable at approximately $73 assuming 7,000 gallons of use. Monthly charges, at 1.8% of median household income (MHI), remain below Fitch's affordability threshold (which is 2% of MHI), and coupled with a strong balance sheet will remain an important source of financial flexibility. Rates were not increased in fiscal 2014, and the county expects additional increases to be modest (less than 3% annually), which if implemented are not expected to diminish the system's solid rate-raising flexibility.
STABLE HISTORICAL FINANCIAL RESULTS EXPECTED TO REMAIN SOLID
The system's financial profile remains solid evidenced by strong operating margins and solid DSC of 1.7x or better in each of the past five fiscal years. Preliminary results for fiscal 2013 show a slight decline in DSC to about 1.6x, which is still considered sufficient at the current rating level given the county's strong balance sheet and low rates. The free cash flow ratio, which measures the amount of cash flow from operations that is left after operating expenses and debt service are paid, is somewhat low and suggests the system must issue additional bonds to fund its capital needs.
Updated financial projections provided by the county show a rise in DSC to 1.75x in fiscal 2015 before another slight decline to 1.5x by fiscal 2017 as the debt service from the expected series 2016 bonds is included in the forecast. Fitch expects the system will maintain a solid financial profile going forward and believes the aforementioned strong liquidity and low rates sufficiently mitigate the lower projected DSC. However, if DSC falls below the forecast or if liquidity is substantially lower than current levels, downward rating pressure may result.
DEBT BURDEN TO REMAIN SLIGHTLY ELEVATED WITH LARGE CIP
The system's debt position is somewhat mixed with high debt-to-net plant (80%) and a slightly elevated debt per customer ratio, which includes an estimated number of retail connections served through wholesale contract, of $2,046 in fiscal 2012. Debt carrying costs have also headed higher reaching 31% of gross system revenues. A rise in debt ratios was expected following the system's issuance of the series 2012 bonds, and Fitch expects debt ratios to remain at similar levels going forward. Amortization of existing bonds is somewhat slow with just 28% of principal retired over the next 10 years.
The system's large wholesale customer base partially offsets concerns over these elevated ratios as the system recoups some of its capital outlay through its wholesale rates. The system's five-year capital program through fiscal 2018 is fairly large at approximately $530 million. The CIP addresses wastewater capacity improvements including the construction of additional deep injection wells, the construction of reclaimed water transmission mains and pumping stations as well as plant rehabilitation projects, an expansion of one of the water treatment plants, and replacement of aging water and sewer mains. The capital plan is expected to be financed with existing bond proceeds ($85 million) and expected bond proceeds ($154 million, in 2016), and ongoing cash flows and other pay-as-you-go sources.
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);
--'2014 Water and Sewer Medians' (December 2013);
--'2014 Sector Outlook: Water and Sewer' (December 2013).
Applicable Criteria and Related Research:
2014 Outlook: Water and Sewer Sector
2014 Water and Sewer Medians
U.S. Water and Sewer Revenue Bond Rating Criteria
Revenue-Supported Rating Criteria