NEW YORK--(BUSINESS WIRE)--Fitch Ratings upgrades to 'AA+' from 'AA' the rating for the following Sarasota County, FL (the county) revenue bonds:
--Approximately $189.8 million in outstanding utility system revenue bonds.
The Rating Outlook is revised to Stable from Positive.
The bonds are secured by a senior lien on the net revenues and legally available impact fees derived from the operation of the county's water and sewer system (the system).
KEY RATING DRIVERS
SYSTEM STRENGTHS DRIVE UPGRADE: A sustained trend of strong financial, operational and managerial metrics support the positive rating movement. The system has posted very strong debt service coverage (DSC) in fiscal 2013 and had exceptional liquidity, while simultaneously absorbing thousands of new customers and maintaining regulatory compliance.
POSITIVE FINANCIAL RESULTS CONTINUE: All-in DSC in fiscal 2013 was above 2.2x coverage, and 1.8x excluding connection fees. Senior lien DSC was even stronger at 2.8x. Liquidity was ample, equating to over 600 days' cash on hand, significantly bolstering the system's financial flexibility.
LOW DEBT: Debt metrics are consistent with the 'AA' medians and capital needs are manageable despite the continued absorption of smaller private franchise utilities. Both debt and capital spending projections appear manageable.
SOLID OPERATING PROFILE: The utility actively manages existing assets and prudently plans for future supply and treatment provision. Water supply sources are ample and diverse, and wastewater capacity is undergoing expansion and improvements.
MANAGEABLE SYSTEM EXPANSION: The utility has maintained reliable service and financial stability amid the acquisition of thousands of new water and sewer customers in recent years. Management is equipped to serve even more new customers slated to connect to the system in new housing developments currently under construction.
SERVICE AREA CHARACTERISTICS: The local economy continues to rebound and features an expanding employment base, a stabilizing housing market and above average resident wealth levels.
STRONG CREDIT PROFILE MAINTENANCE: The rating is sensitive to shifts in fundamental credit characteristics including management of the system's currently strong financial, debt, customer expansion and operational profiles. The Stable Outlook reflects Fitch's expectation that such shifts are unlikely.
Sarasota County (Fitch implied 'AAA' general obligation rating) is located along the Gulf of Mexico in central Florida, approximately 50 miles south of the city of Tampa. The county is home to an estimated 356,000 permanent residents, increasing closer to 500,000 residents during the winter months as it is a popular destination for wealthy retirees and tourists.
GENERAL SYSTEM STRENGTHS DRIVE UPGRADE
The utility has successfully acquired tens of thousands of customers since its inception in 1988 from the unincorporated parts of the county and through the consolidation of over sixty small and independent private franchise utilities into one county-wide system. The service territory serves roughly 220,000 residents and is growing as the economy improves and residential developments break ground.
The utility's financial metrics have trended very positively in the past five years, undeterred by the operational and capital costs associated with the acquisition of new customers and the often impaired franchise system assets. Much of the utility's overall stability is attributable to management's judicious cash reserve, debt issuance, and operational oversight policies that allow for significant pay-go capital financing and yield a high degree of financial flexibility.
The system's finances have been well managed historically with solid annual cash flow margins producing strong senior lien DSC in-line with other Fitch 'AA' category rated systems, and healthy liquidity. Senior lien DSC has exceeded 2.0x annually for the past five years when including connection and developer impact fees, and between 1.9x and 2.1x without such fees. In fiscal 2013, net revenues yielded senior DSC of 2.8x and 2.3x when excluding connection fees. All-in DSC for the same period, including subordinate debt from state revolving fund (SRF) loans, was also favorable at 2.2x and 1.8x when excluding connection fees.
The system's liquidity position continues to improve with $96.5 million in unrestricted cash in fiscal 2013, equivalent to 634 days cash on hand and well in excess of 'AA' category medians. Free cash to depreciation, which measures surplus revenues available to fund depreciation expense, was strong at 108% in fiscal 2013, indicating sufficient capability to maintain system assets from current resources. Fitch expects the system's coverage levels and liquidity to stay strong throughout the utility's relatively conservative five-year pro forma forecast.
SUSTAINABLY EXPANDING CUSTOMER BASE
The system serves the unincorporated areas of the county and provides water and sewer services to a mostly residential customer base of roughly 82,000 water and 74,800 wastewater accounts. Though new customer growth has slowed in recent years, the system has acquired new accounts through the absorption of thousands of existing residences who are either customers of smaller utilities or are still using septic systems and well water.
The county's most recent system acquisition was completed in December 2013 with the purchase of the Dolomite Utility Corporation (Dolomite). This purchase incorporated 4,500 and 7,300 new water and wastewater residential and commercial retail customers, respectively, which are reflected in the customer totals above. To date, management reports the successful billing of nearly 100% of the additional Dolomite customers and minimal capital improvement outlays to the Dolomite assets.
The county mandated in 2000 that all existing septic owners in the service territory connect to the county sewer collection and transmission system. To date, management has identified over 15,000 septic owners for consolidation, 54% of which have been successfully connected to the county system. The remaining identified septic owners are expected to be connected in the 10-year forecast, with most expected to be connected over the next five years. The septic owners are provided an incentive of $1,000 cash and a 20-year loan to cover connection costs and impact fees and most residents connect to the system within 90 days of notice.
The county has incorporated the expected operating expenses and capital costs associated with the acquisition of these new customers into a five-year financial and operational projection. Over the next five years the system is expected to maintain solid financial metrics and water and wastewater treatment capacity despite the impact of new accounts. Fitch views the projections as reasonable given the utility's demonstrated past ability to absorb over 60 separate private utility franchises, or tens of thousands of new retail customers, to date.
AFFORDABLE CUSTOMER CHARGES
The average residential customer charge of $71 per month remained the same in fiscal 2013 for combined water and sewer service (assuming a consumption of 4,000 gallons of use). The charge ranks in the middle of neighboring systems' bills and equates to approximately 1.7% of median household income, providing sufficient flexibility below Fitch's 2% threshold for affordability assuming current consumption rates hold. The county has suspended annual rate increases since fiscal 2011 and will continue to do so in the near term due to strong cash reserves. The utility's bond covenants dictate a rate covenant of raising rates should net revenues equate to 1.0x annual debt service (ADS) or 1.2x including connection fees.
MANAGEABLE DEBT AND CAPITAL PROFILE
The system's debt burden has moderated over time, currently reflecting ratios that are comparable to other systems rated in the 'AA' category. The system's outstanding indebtedness totals approximately $285.6 million, including $50.6 million in subordinate debt, mostly state revolving fund (SRF) loans. Debt per customer improved in fiscal 2013 to $1,754, consistent with the rating category median of $1,812. For the same period, total debt represented only 44% of net plant and debt service for the year constituted a manageable 23% of gross revenues. These metrics are comparable to the 'AA' medians of 49% and 22%, respectively. Additional bonds can only be issued when net revenues for 12 consecutive months out of the preceding 24 months equate to at least 1.0x of ADS or 1.2x including connection fees.
Pro forma debt ratios going forward incorporate a projected debt refunding and show debt metrics remaining manageable. The county is projecting a roughly $115 million five-year capital improvement plan (CIP), which will be funded primarily by customer receipts, but also by proceeds from the county's local option one-cent infrastructure sales tax.
SOLID OPERATING PROFILE
Water supply is derived from a combination of sources, including groundwater from the Upper Floridan Aquifer and bulk water supply from the neighboring systems of Manatee County, FL (revenue bonds rated 'AA+' by Fitch) and the Peace River-Manasota Regional Water Supply Authority, FL (revenue bonds rated 'AA-' by Fitch). Existing water supply and treatment capacity are ample and the county is actively improving storage volumes. Moreover, the county is continually upgrading and enhancing the electro-dialysis reversal and reverse osmosis treatment technologies at its water treatment plants in order to ensure a long-term ability to treat brackish water for potable use.
Wastewater treatment is also ample. The county treats the majority of its own flows but contracts for approximately 9% of total flows with the City of Venice, FL through a bulk treatment agreement. The utility's five wastewater treatment plants combined have the capacity to treat 24 million gallons per day, and several are in the process of completing capacity expansions to accommodate all anticipated additional flows with ample cushion. All capital needs are addressed through dedicated capital funding included in the five-year CIP.
After a significant economic setback during the recession and its aftermath, the county's economy is experiencing a sustained recovery, with increases in building permit activity, a more substantial rise in sales tax collections, an uptick in housing prices, and a decline in foreclosure activity. Though the economy remains tied to economically sensitive tourism and real estate, it also has a solid health care and education presence. Wealth indices are supported by a significant affluent retiree population and are therefore above the state and national averages. Employment continues to expand, and as of June 2014, the 5.7% unemployment rate decreased from the prior year's rate of 7.1%, as robust employment growth outpaced labor force expansion.
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:
--'U.S. Water and Sewer Revenue Bond Rating Criteria' (July 31, 2013);
--'2013 Water and Sewer Medians' (Dec. 5, 2012);
--'2013 Outlook: Water and Sewer Sector' (Dec. 5, 2012).
Applicable Criteria and Related Research:
U.S. Water and Sewer Revenue Bond Rating Criteria
2014 Water and Sewer Medians
2014 Outlook: Water and Sewer Sector