NEW YORK--(BUSINESS WIRE)--Fitch Ratings affirms the 'AA-' rating on the following Clearwater, FL (the city) revenue bonds:
--$157.1 million water and sewer revenue bonds.
The Rating Outlook is Stable.
The bonds are payable from the net revenues of the city's water and sewer system (the system).
KEY RATING DRIVERS
IMPROVING FINANCIAL RESULTS: Revenue growth and prudent expense budgeting have resulted in strong debt service coverage (DSC) levels and improved liquidity over the past five years. Projections provided in a rate study forecast indicate continued strong performance through fiscal 2019.
POTENTIAL LARGE BORROWING FORECASTED: The system's long-term debt represents an elevated 60% of net assets and is high on a per-customer basis. Significant borrowing included in the system's ten-year rate study forecast will increase these metrics further, although management notes actual borrowing may be significantly less.
ELEVATED CAPITAL NEEDS: The utility's five-year capital improvement plan (CIP) is comprehensive and funds projects to ensure regulatory compliance and increase potable water production and groundwater supply replenishment.
POSITIVE RATE SETTING PROGRAM: The utility has proactively planned multi-year, steady annual rate increases to support capital needs as well as buffer the impacts of declining customer demand and wholesale water rate increases passed down from the county. The average customer charge including a stormwater fee equates to a somewhat elevated 2.1% of median household income (MHI), slightly above Fitch's 2% affordability threshold.
STABILIZED ECONOMY: Unemployment has steadily improved over the past five years and inclusion in the Tampa-St. Petersburg-Clearwater Metropolitan Statistical Area (MSA) provides economic support to the service area.
MANAGEMENT OF CAPITAL NEEDS: The rating is sensitive to shifts in fundamental credit characteristics, including the maintenance of strong financial results and manageable debt levels while supporting considerable capital needs, some of which are regulatory-driven. The Stable Outlook reflects Fitch's expectation that management's commitment to continued rate increases and frequent revisiting of its capital and debt requirements will sustain a steady financial profile.
Clearwater, the county seat of Pinellas County, is located in the middle of the west coast of Florida along the Gulf of Mexico, approximately 20 miles west of Tampa and 15 miles north of St. Petersburg. The system's service area includes the city, with an estimated population of about 110,000, and a small portion of surrounding unincorporated sections of the county. The combined system's customer base is diverse with little concentration among its largest users.
CONTINUED STRONG FINANCIAL PERFORMANCE
The system continued a strong trend of financial results in fiscal 2014. The systems' operating margin was 33%, DSC of senior lien bonds was solid at 2.2x, and unrestricted cash of $24.7 million including cash reserves for renewal and replacement equated to over 300 days cash on hand. The system's cash level marked a nearly 50% decline from the prior year due to significant pay-go capital spending during fiscal 2014. Fiscal 2015 financial projections show cash improving slightly and increasing thereafter in part attributable to projected debt issuances built into the forecast to support capital spending.
Free cash flow and capital spending have been strong historically and equated to a healthy 102% and 289% of annual depreciation in fiscal 2014, respectively. Both of these metrics are expected to remain sound in the five-year forecast. DSC, incorporating increased annual debt service due to forecasted new debt, is expected to stay strong and approximate 2.0x through fiscal 2019.
The system's debt profile is considered elevated compared to other systems rated by Fitch in the 'AA' category. The long-term debt-per-customer and debt-per-capita metrics in fiscal 2014 were $2,122 and $1,491, both exceeding the 'AA' medians of $1,963 and $521, respectively. Debt represented an elevated 60% of net plant and is expected to stay elevated as upwards of $136 million in additional debt is budgeted in the system's five-year financial forecast. Management attributes much of its large debt load on the system's push to lessen its reliance on the county's potable water supply to achieve longer-term savings and to meet regulatory requirements.
Management historically budgets significantly more debt in its near- and long-term projections than it expects to actually incur. This process is useful for budgetary purposes, although new debt issuances forecast in rate studies are typically not realized. The system has not borrowed for new money purposes since 2009 despite an estimated $50 million worth of financing programmed through 2015 per a 2011 rate study.
A 2016 issuance of roughly $32 million is currently being contemplated by the city and rate consultants which would continue the currently high debt profile if issued. Management indicates that this issuance may be similarly deferred should positive operating results again preclude the need for additional debt.
Amortization of existing debt is slow, with only 71% of outstanding debt retired in 20 years, indicating that both carrying costs and debt-per-customer levels should remain somewhat elevated over the next five years.
LARGE, COMPREHENSIVE CAPITAL PROGRAM
The system's five year fiscal 2015-2019 comprehensive CIP totals $149.6 million and equates to a somewhat elevated $388 average cost per customer ('AA' median is $260). Almost 30% of the plan will fund water-related projects that support expanded potable water production and further decrease the city's reliance on the county's wholesale contract. The remaining 70% funds substantial renewal and replacement projects of the sanitary sewer system, expanded thermal drying capacity to treat biosolids, and treatment plant upgrades to provide enhanced nutrient reduction. The latter projects support likely future regulatory compliance requirements. Management indicates that the CIP is fairly flexible and certain less-critical projects may be deferred should funding not be available.
HIGH RATES SUPPORT REVENUE GROWTH
Customer charges are somewhat high both relative to MHI and compared to peer systems. The average customer paid roughly $60 for a combined water and sewer bill based on 4,000 gallons consumed per month (gpm). This charge represents 1.7% of MHI, which is below the Fitch affordability threshold of 2.0% MHI. When combined with the stormwater rate of about $14 in 2014 the bill averaged closer to $74, or 2.1% MHI. If rates were applied to the national average of 7,500 and 6,000 gpm of water and sewer, respectively, charges inclusive of the stormwater fee are closer to $109, or a high 3.1% of MHI.
Planned rate increases going forward, while viewed positively by Fitch to promote financial stability, may eventually exert affordability pressures on rate payers, minimizing rate-raising flexibility. Positively, management appears to be very transparent with city council and customers and indicates that to date there has been minimal to no public dissention in response to rate increases.
ABUNDANT SUPPLY AND CAPACITY
Available water supply and treatment capacity are well in excess of average demand. In-city water sources are derived from city-owned well fields drawing from the Floridan aquifer. The remaining need comes from the city's wholesale contract with Pinellas County. The system is expanding its reverse osmosis and ultraviolet disinfection treatment capabilities in order to increase internal water production and decrease dependence on the county. Moreover, the city is expanding its reclaimed water program in order to reduce the amount of potable water used for irrigation purposes. Treatment capacity at the city's three wastewater treatment facilities is twice that of its average daily flows, leaving sufficient capacity for the foreseeable future.
The system's wastewater treatment processes include nutrient removal, anaerobic digestion, sludge thickening, and expanding the availability of reclaimed water for irrigation purposes. In addition, the system is decreasing the volume of effluent discharged into surface water by constructing a groundwater replenishment facility that will recharge the aquifer after indirect potable reuse.
STABLE SERVICE AREA ECONOMY
The city's economy has remained stable for several years following a steep decline during the recession. Current stability is supported by a consistently low unemployment rate (5.5% in December 2014, below both the state and national averages), moderate home sale growth and levelled-off property values. Local employment benefits greatly from the city's inclusion in the expansive and diverse Tampa-St. Petersburg-Clearwater MSA employment base. But in-city wealth indices still lag behind state and national levels. Tourism continues to be the largest local economic driver and based on the city's significantly built-out status, permanent resident growth is expected stay minimal in the near-term.
Additional information is available at 'www.fitchratings.com'.
In addition to the sources of information identified in Fitch's 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);
--'2015 Water and Sewer Medians' (December 2014);
--'2015 Outlook: Water and Sewer Sector' (December 2014).
Applicable Criteria and Related Research:
Revenue-Supported Rating Criteria
U.S. Water and Sewer Revenue Bond Rating Criteria
2015 Water and Sewer Medians
2015 Outlook: Water and Sewer Sector