NEW YORK--(BUSINESS WIRE)--Fitch Ratings affirms the 'AA-' rating on the following Oakland Park, Florida (the city) water & sewer revenue bonds:
--$31 million utility system revenue bonds, series 2010A, 2010B and 2012.
The bonds are secured by net system revenues. The series 2010A and 2010B are secured by a surety-funded reserve account; there is no reserve account for the series 2012 bonds.
The Rating Outlook is Stable.
KEY RATING DRIVERS
SUSTAINED STRONG FINANCIALS: Strong financial results continue to yield robust debt service coverage (DSC) and healthy liquidity. Financial metrics have stayed strong despite additional debt issuances.
AUTOMATIC ADJUSTMENT OF RATES: Though the system's combined rates remain on the higher end Fitch views positively the city's policy requiring an automatic adjustment of rates to ensure full cost recovery of purchased water and wastewater treatment expenses.
SOMEWHAT ELEVATED DEBT PROFILE: The system's debt levels are relatively high and amortization of debt is slow. However, a lack of future debt issuance plans due to only modest capital needs should prove to lower debt metrics over time.
SOUND OPERATING SYSTEM: As a bulk customer for both water and wastewater service and with a stable, low-growth customer base, the city enjoys manageable capital needs and predictable operational requirements.
MAINTENANCE OF STRONG FINANCIAL PROFILE: Fitch expects that management will sustain currently strong financial performance and a declining debt burden while implementing stated system improvements. Should these positive trends continue as major capital needs are fulfilled, positive rating movement may result.
Located in central Broward County, approximately two miles north of Fort Lauderdale, the city's utility system provides water transmission and distribution and wastewater collection and conveyance service to a relatively small customer base. The service area is coterminous with the city and includes nearly 7,700 water customers and 6,800 sewer accounts.
The city purchases potable water from the city of Fort Lauderdale pursuant to a 30-year bulk user agreement that expires in 2023. Wastewater treatment service is also purchased through bulk user agreements: Fort Lauderdale treats approximately 78% of Oakland Park's flows and Broward County's utility system treats the balance (Fitch rates Broward County's water and sewer utility revenue bonds 'AA+' with a Stable Outlook).
STRONG FINANCIAL OUTLOOK
Financial results have remained strong despite historical declines in usage resulting from conservation efforts and economic conditions. Recent financial improvement is largely attributable to substantial annual rate hikes implemented in a 2009 four-year schedule that also included a policy to automatically pass-through purchased water and wastewater treatment expenses to city customers. The pass-through is viewed favorably as it aligns revenue needs with cost increases from purchased services.
DSC of senior lien bonds from recurring net revenues has remained above 2.5x over the past five years, including in fiscal year 2013 with the onset of additional debt payments from the series 2012 bond issuance. Annual debt service will be level going forward; therefore, senior lien DSC is expected to stay strong provided revenues maintain positive growth. All-in DSC, which includes a small amount of debt from the Florida Municipal Loan Council (FMLC), was also strong during that period, not falling below 1.9x, with fiscal 2013 coverage of 2.5x. The FMLC loan is not a direct obligation of the utility with a lien on net system revenues. However, because the loan was used for system improvements and is repaid on a subordinate basis by the utility, this burden is included in this analysis.
Liquidity is also strong; after declining to a low point of about $3.1 million in fiscal 2009, available cash has more than tripled to a high of nearly $11 million in fiscal 2013. This improvement is primarily a result of higher revenues generated by rate increases as well as the build-up of cash levels as capital needs have been largely funded by bond proceeds. The resulting healthy cash position equates to over 350 days cash on hand in fiscal 2013 (inclusive of $762,000 in renewal and replacement fund reserves).
SOMEWHAT HIGH CUSTOMER CHARGES
For fiscal 2013 the city's average combined monthly water and sewer bill totaled nearly $86 for residential customers. This equates to 2.3% of median household income (MHI), which Fitch considers somewhat high. Management indicated that despite moderate customer push-back, the normalization of steady and moderate rate increases passed through from the bulk providers has lent predictability to the rate structure and general customer satisfaction. Nonetheless, as customer charges consume higher proportions of MHI as both in-city and bulk provider rates are consistently raised, management's rate-setting flexibility over time may become constrained. Collection of annual billings remains strong; management reports a collection rate of approximately 99%.
ELEVATED BUT DECLINING DEBT BURDEN
Leverage ratios are somewhat elevated for the rating category. In fiscal 2013 debt represented a high 84% of net plant and $2,094 in per-customer costs, compared to the 'AA' median averages of 47% and $1,812 respectively. This concern is partially mitigated by the fact that the outstanding debt was secured specifically to address deferred maintenance and execute necessary capital improvements to provide greater system reliability. The current debt is expected to satisfy major capital needs in the five-year forecast and going forward management does not anticipate additional debt issuances. Rather, the system will fund minimal and targeted needs with recurring revenues after spending down the balance of 2012 bond proceeds. The cited metrics above are expected to improve over time to align more closely with the 'AA' median averages. Positively, debt carrying costs on an annual basis are low at only 12% and 13% of gross revenues for senior and all-in debt service, below the 'AA' medians of 16% and 22%, respectively.
MANAGEABLE CAPITAL PROGRAM
The 2014-2018 capital improvement plan (CIP) is sized at $21.4 million, 70% of which is funded by existing bond proceeds. The multi-year plan, consistent with prior capital programs, is heavily front-loaded with nearly the entire capital priority list scheduled in the current and subsequent fiscal year. The expectation is that unaddressed projects will roll into future fiscal years. Due to the lack of costly water and wastewater treatment plants that typically command larger capital needs and debt issuance, Oakland Park's water and sewer capital needs are mainly routine. Much of the CIP funds projects that replace, repair, and rehabilitate aging distribution and transmission lines throughout the system. A significant component of the current CIP is the mitigation of inflow and infiltration (I&I) issues. Addressing this problem will minimize currently unbilled, excess sewer flows to the wastewater treatment plant and lower the associated operational costs.
The system's average age of plant currently stands at 26 years, almost double the median for similarly rated systems; however, this is to be expected for a system comprised primarily of longer-lived assets such as distribution and conveyance pipes. Positively, capital expenditures relative to annual depreciation have averaged a robust 527% over the last five years, indicating a high level of system investment. A relatively small portion of the capital program, including much of the I&I work, will be funded on a pay-go basis. Projected cash flows demonstrate sufficient excess cash to meet planned pay-go amounts.
SOLID OPERATING PROFILE
The city's limited operating profile as only a distribution and transmission system implies relatively limited capital and operational needs compared to systems with large treatment plants. As a bulk customer the city is subject to the risk of cost changes from its wholesale providers; however, these costs are passed along in full to city customers. Moreover, management maintains frequent communication with both Broward County and Fort Lauderdale, and is afforded considerable notice in order to prepare for cost increases should they arise.
The system's customer base is somewhat diverse as approximately 73% of accounts consist of residential homes and the remaining are commercial customers. There is a somewhat elevated level of customer concentration, as the top 10 combined water and wastewater customers comprise 15.5% of gross revenues. Given the built-out nature of the service area, growth in customer accounts over the past five fiscal years has been minimal, with total accounts increasing by an average of less than 1% annually. Future growth is expected to remain close to this level through the current forecast period; however, both wastewater and water treatment capacity are in sufficient supply relative to current and projected demands.
Oakland Park had a population of 43,201 in 2013. Unemployment is very low (4.0% as of April 2014) relative to the state (6.2%) and nation (6.3% in May 2014), and income levels measure slightly below the state and nation's.
Additional information is available at 'www.fitchratings.com'
In addition to the sources of information identified in the 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 12, 2012);
--'U.S. Water and Sewer Revenue Bond Rating Criteria'(Aug. 3, 2012);
--'2013 Water and Sewer Medians' (Dec. 5, 2012);
--'2013 Outlook: Water and Sewer Sector' (Dec. 5, 2012).
Applicable Criteria and Related Research:
2013 Outlook: Water and Sewer Sector
Revenue-Supported Rating Criteria
U.S. Water and Sewer Revenue Bond Rating Criteria
2013 Water and Sewer Medians