NEW YORK--(BUSINESS WIRE)--Fitch Ratings assigns an 'A+' rating to the following Deltona, FL (the city) revenue bonds:
--$22,120,000 million utility system (the system) revenue bonds, series 2014.
Bond proceeds will be used to finance the costs of certain improvements to the city's sewer system and water system, retiring the city's outstanding utility system bond anticipation note, series 2014; and to pay the costs of issuance of such series 2014 bonds.
The bonds are scheduled for negotiated sale the week of Dec. 1.
In addition, Fitch affirms the following:
--Approximately $77.8 million in outstanding improvement and refunding revenue bonds, series 2013, at 'A+'.
The Rating Outlook is Stable.
SECURITY
The bonds are secured by a pledge of the net revenues of the system levied and collected by the issuer, including impact fees and direct pay subsidies paid to the issuer. The 2014 bonds are not expected to carry a debt service reserve.
KEY RATING DRIVERS
ADEQUATE FINANCIAL PROFILE EXPECTED: Increased annual debt service (ADS) payments on the 2014 bonds are projected to weaken DSC levels but remain in the 'A' category median range. A fiscal 2013 cash decline due to partly cash funding the cancellation of a swaption led to a one-time decline of days cash on hand to a still satisfactory 242 days.
HIGH, INCREASING DEBT BURDEN: Debt ratios are high relative to comparable ratings and will rise with the current issuance. Principal amortization is slow with only 30% and 68% paid off in 10 and 20 years, respectively.
MODERATE USER CHARGES: Overall rate flexibility remains strong. Water-only customers represent 83% of the customer base with monthly rates for service that are only 0.5% of median household income (MHI). Maintenance of adequate credit metrics rely heavily on the utility implementing city-authorized annual rate increases which will exacerbate the already high burden for the remaining customers covered by the combined water, wastewater and reclaimed water services.
INFRASTRUCTURE INVESTMENT FOSTERS DEVELOPMENT: The system is actively increasing capacity through the exploration and construction of alternative water supply and wastewater treatment options, and is laying the infrastructure for development in the eastern side of the service area. Management has funded its capital program at an average of almost twice the rate of depreciation over the past five years.
STABLE BUT LIMITED ECONOMY: Deltona's local economy is largely residential, with most employment sought in neighboring economic hubs. The development of multiple new health care facilities as well as commercial and multi-family residential inside the service area is already underway.
RATING SENSITIVITIES
MANAGEMENT OF ADDITIONAL DEBT: The rating is sensitive to shifts in credit fundamentals including financial performance, debt management, operational stability and rate-raising flexibility. The utility's ability to maintain adequate DSC with the onset of substantially greater ADS as forecasted in financial projections will be critical to maintaining rating stability. Satisfactory financial performance is expected to continue.
CREDIT PROFILE
Deltona is located in Volusia County in central Florida, 25 miles northeast of Orlando and 25 miles southwest of Daytona Beach. The city's population of 86,360 is spread across a total area of about 46 square miles. The utility's service area includes unincorporated areas and encompasses approximately 147 square miles. The mostly residential customer base includes 31,326 water customers and 5,440 sewer accounts, which represent only 17% of the number of water accounts because most residents are septic owners.
WATER REDUCTION REQUIREMENT
The city's ample potable water supply is sourced from the Upper Floridan Aquifer groundwater supply and requires minimal treatment. The system's consumptive use permit (CUP) was updated in November 2013 by the St. John's River Water Management District (SJRWMD) will last 20 years through 2033. Though annual consumption rates equate to less than half of the utility's permitted withdrawal, the CUP was approved with specific conditions that require the city to implement aquifer recharge projects and to source new water supplies.
The utility's capital improvement program (CIP) includes projects that increase the city's reclaimed water production and conveyance facilities for the purpose of lowering the volume of potable water used for irrigation. In addition, management has received grant money in order to explore the possibility of potentially withdrawing water from the more brackish Lower Floridan Aquifer.
This possible water source would likely require more specialized treatment processes in order to be a viable potable drinking water or irrigation resource. The project could add debt to the district's already high burden but funding and costs are currently unknown. Management is in the preliminary stage of investigating this resource and potential capital projects are not anticipated in the 10-year window.
WEAKER YET STABLE FINANCIAL RESULTS EXPECTED
The utility's financial status steadily improved over the past four years due to revenue growth, flat operating costs, and manageable ADS payments. However, in fiscal 2013 senior lien DSC declined to 1.8x as a result of greater potable water conservation impacts, a corresponding decline in revenues, and slightly increased ADS that year. In addition, liquidity, as measured by the number of days' cash on hand, declined to a five-year low of 242 days as the system used roughly $5.9 million in available cash to pay part of a swaption terminated in fiscal 2013.
Fitch expects the city to perform consistent with its projections including additional debt. Increased ADS associated with the series 2014 bonds and a subordinate state revolving fund (SRF) loan will cause DSC levels to decline. Senior lien DSC (excluding connection fees) will drop to an annual average 1.5x through fiscal 2018 and all-in DSC will fall to an average 1.2x through the forecast.
The majority of the system's five-year CIP will be debt-funded and therefore cash balances should stabilize and remain satisfactory. Further, despite the utility's weakened fiscal 2013 cash position, free cash-to-depreciation still yielded a robust 147%, demonstrating the system's ability to substantially cash-fund routine capital spending from internal sources. This level continues a trend that is much improved from the 63% recorded in 2008, and based on out year free cash flow projections is estimated to average a still reasonable 81%.
ELEVATED DEBT PROFILE
In fiscal 2013 the utility's overall debt represented 100% of net plant and debt per customer was $2,246, both somewhat elevated but not inconsistent with the Fitch 'A' category medians of 54% and $1,951 respectively. The current 2014 issuance represents new debt and is expected to elevate these metrics to well above 100%, equating to roughly $3,100 per customer by fiscal 2014.
The estimated amortization rate for all current and planned debt is somewhat slow, but compares reasonably to other issuers rated in the 'A' category; 30% of Deltona's debt will retire in 10 years and 68% in 20 years. Proceeds from the series 2014 bonds will be used to fund projects to fulfill both near- and long-term water supply and consumptive use permit requirements, therefore management does not anticipate additional bond issuances in the five- to 10-year time horizon.
APPROVED RATE INCREASES, MODERATE AFFORDABILITY
The city of Deltona purchased its water and sewer utility system from the Florida Water Services Corporation with 2003 bond proceeds. After a five-year rate freeze, the city introduced a tiered rate system to promote water conservation in 2008 and a year later implemented a five-year, 17.25% annual rate increase on both water and sewer charges through fiscal 2014. These substantial rate increases resulted in stronger-than-expected financial metrics and prompted the city to lower the rate increases for the final rate plan years, fiscals 2013 and 2014, to a more moderate 4 - 6%. Full authorization to raise water rates by 4.5% and wastewater/reclaimed rates by 5.5% was granted to the utility by the city commission in May 2013 and went into effect on Oct. 1, 2014. The city commission conducts annual reviews of the system's financial performance to ensure the increases are necessary and adequate to meet system requirements.
The average 5,000 gallon-per-month water customer charge represented approximately 0.5% median household income (MHI) in fiscal 2013, below the Fitch's affordability indicator of 1% or less for one utility bill. Only 17% of the potable water customers are also sewer users, as most customer's sewer needs are met by privately owned individual septic systems.
The average sewer customer pays about 1.9% of MHI for sewer service, which far exceeds Fitch's 1% standard of affordability. Combined water and sewer bills for those customers represent 2.3% of MHI for those receiving both services. The utility's modest water rates afford it the flexibility to raise rates for the majority of the customer base; however, it has been unable to achieve the economies of scale necessary to have similar flexibility for its sewer customers.
SYSTEM EXPANSION
The city projects utility customer accounts to grow cumulatively by between 2% and 4% over the next five years, including the conversion of existing residents who own septic owners into wastewater treatment customers. The growth projections are somewhat aggressive given the slow pace to date of septic owner conversions, but management is actively expanding sewer capacity and connection proximity to attract and serve potential future new development. Converting existing septic owners into wastewater customers would help lower per-customer costs as well as grant management greater control over regulatory and environmental issues within its jurisdiction.
The utility's sewer flows for fiscal 2013 represented nearly two thirds of its permitted capacity at the system's sole Fisher Wastewater Treatment Plant (WWTP). The utility has installed water and sewer infrastructure along State Road 415 to connect anticipated potential future commercial and residential development, and is planning the construction of a second WWTP to meet current and future capacity needs.
Construction of the new WWTP is being financed by a $29 million SRF loan and debt service payments will begin six months upon the completion of construction, or mid-2016. The new plant will provide incremental capacity of up to 4.5 millions of gallons per day (mgd).
STABLE LOCAL ECONOMY
Deltona is a self-described bedroom community, where most residents commute to neighboring Orlando or Daytona Beach for employment. Economic indicators are improving; the city's unemployment rate has steadily fallen over the past five years and was 6.5% throughout fiscal 2014, approximating the state average of 6.2% during the same period. In fiscal 2013, Deltona's MHI represented 98% and 86% of the state and national averages, respectively, somewhat lower than the prior year.
Management expects that the development of future commercial and residential properties, some already underway, in the eastern portion of the service area will expand local economic activity.
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 2014);
--'U.S. Water and Sewer Revenue Bond Rating Criteria' (July 2013);
--'2013 Water and Sewer Medians'(December 2012);
--'2013 Outlook: Water and Sewer Sector'(December 2012).
Applicable Criteria and Related Research:
Revenue-Supported Rating Criteria
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=750012
U.S. Water and Sewer Revenue Bond Rating Criteria
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=715275
2014 Water and Sewer Medians
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=724358
2014 Outlook: Water and Sewer Sector
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=724357
Additional Disclosure
Solicitation Status
http://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=911835
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