Fitch Affirms Clearwater, FL Stormwater Revs at 'AA-'; Outlook Stable

NEW YORK--()--Fitch Ratings affirms the 'AA-' rating on the following Clearwater, FL (the city) revenue bonds:

--$28.5 million stormwater revenue bonds series 2012.

The Rating Outlook is Stable.

SECURITY

The bonds are payable from the net revenues of the city's stormwater system (the system).

KEY RATING DRIVERS

STRONG FINANCIAL MANAGEMENT: The system's well-managed financial operations have consistently yielded high debt service coverage (DSC) and ample liquidity.

MODERATE DEBT AND CAPITAL PROGRAM: The system's current debt burden is somewhat elevated but manageable. Modest near-term capital needs are expected to be cash-funded.

HIGH RATES: The combined water, sewer and stormwater charges equate to 2.1% of median household income (MHI), slightly above Fitch's 2.0% affordability threshold. Positively, management has consistently raised its stormwater rates to achieve and sustain solid financial results in recent years.

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.

RATING SENSITIVITIES

MAINTENANCE OF FINANCIAL PROGRESS: The rating is sensitive to shifts in fundamental credit characteristics, including the maintenance of strong financial metrics in light of possible large capital spending needed to meet future regulatory changes. Greater clarity regarding future regulatory needs and a sustained trend of sound financial metrics could lead to upward rating movement in the future.

CREDIT 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 system served about 30,500 stormwater customers in fiscal 2014 and is expected stay at or close to that amount for the foreseeable future.

VERY GOOD FINANCIAL PERFORMANCE

The system's strong operating margins continue to generate high DSC levels and sizeable cash balances. Coverage has exceeded 3.0x since fiscal 2010 and liquidity has averaged 900 days' cash on hand (DCOH). Net revenues in fiscal 2014 were somewhat weaker than prior years due to increased repairs and maintenance expenses for capital project activity related to the Stevenson's Creek Estuary, Jeffords Street Channel, and storm pipe system improvement program. Regardless, DSC remained acceptable, yielding senior lien coverage of 1.75x that year. Projected results for fiscal 2015 indicate that DSC will rebound to over 3.0x, consistent with historical results.

Fiscal 2014 liquidity increased to almost $25 million, equating to 724 DCOH. Unaudited cash levels for fiscal 2015 show even further improvement over the prior year to over $26 million due to an increase in actual cash balances from operations and a return to more normal operating expenses. This equates to more than 1,200 DCOH.

Free cash flow has represented on average 178% of annual depreciation since fiscal year 2010, demonstrating a strong ability to generate sufficient resources to cover amortizing capital assets. Further, the system has funded annual depreciation at an average rate of 110% annually since 2010, indicating sound capital reinvestment.

MODERATE RATES CONTINUE TO RISE

Stormwater charges were raised by 6% from fiscal years 2009-2011, by 4.25% in fiscal years 2012 and 2013, and more recently by 2.75 in fiscal 2014. Though customer charges are considered high relative to other stormwater utilities rated by Fitch, the average bill of $13.70 equates to only 0.4% of MHI, considered affordable to Clearwater ratepayers. Nevertheless, these charges must be viewed in the context of the larger combined utility bill, and when factored into the average water and sewer bill based on 4,000 gallons per month the combined charge nears $74 and equates to roughly 2.1% of MHI. The amount is slightly above Fitch's affordability metric of 2.0% (for only two utility charges). Given continued rate increases are projected for all three services, rate affordability may be pressured going forward.

The city's engineering consultant has recommended that the system continue to levy annual 2.75% rate increases through the 10-year forecast. Management is 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. Fitch views management's commitment to set rates sufficient to meet the stormwater utility's ongoing operating needs and total fixed costs positively in light of continuously evolving statewide stormwater regulations that may lead to rising operating and capital costs.

REGULATORY COSTS UNCERTAIN

The Florida Department of Environmental Protection (DEP) is still finalizing Numeric Nutrient Criteria (NNC) standards for stormwater runoff for municipal separate storm sewer systems (MS4s) on a case-by-case basis. The U.S. Environmental Protection Agency (EPA) has granted the DEP the authority to establish and enforce local runoff standards within the guidelines of the National Pollution Discharge Elimination System (NPDES). Pinellas County holds the county-wide NPDES permit for its municipalities and, as a co-permittee and MS4 owner, Clearwater must comply with all standards, including the pending NNC changes, promulgated under the NPDES permit.

These future compliance costs are still uncertain. Depending upon the final outcome of the rulemaking process, the utility could be required to incur capital costs totaling $85 million over a five year period to construct three stormwater treatment plants, presently anticipated to begin in fiscal 2018 (upon expiration of existing permits). Roughly half of this capital spending would likely be debt-funded. Additionally, management predicts operating and maintenance expenses ranging from $500,000 to $1 million beginning in fiscal 2020 (between 3% - 5% of that year's projected revenues) to support these plants.

Management has indicated that costs are likely to be far less than this worst-case scenario, and that its past and current stormwater mitigation efforts (which include creating a stormwater atlas, conducting maintenance and street-sweeping programs, and administering frequent inspections of the stormwater infrastructure) have positioned the system ahead of its peers in meeting future NNC standards. Fitch believes that the system's manageable debt levels, flexible capital plan, reasonable and self-sustaining rates, and very strong operating margins, provides ample financial flexibility to absorb near-term costs.

DEBT AND NEAR-TERM CAPITAL NEEDS MANAGEABLE

The system's debt burden is somewhat elevated but manageable, with total debt representing 49% of net plant and equating to $1,184 per customer in fiscal 2014. For the same period, annual debt service represented only 16% of gross revenues, a continued decline from prior years.

The system's five year, fiscal 2015 - 2019 capital improvement plan (CIP) totals approximately $29.6 million and equates to $194 per customer. This CIP represents a 7.5% decline from the prior CIP reviewed by Fitch, and will be entirely funded by internal resources. The bulk of the CIP funds annually recurring projects to expand, improve, and re-line the storm conveyance and collection systems, improvements to coastal basins, and targeted watershed management efforts. Remaining projects include the development of stormwater retention ponds and the installment of water quality treatment devices such as baffle type boxes.

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:

U.S. Water and Sewer Revenue Bond Rating Criteria

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=715275

2015 Water and Sewer Medians

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=818409

Revenue-Supported Rating Criteria

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=750012

2015 Outlook: Water and Sewer Sector

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=818410

Additional Disclosure

Solicitation Status

http://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=983229

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Contacts

Fitch Ratings, Inc.
Primary Analyst
Eva Rippeteau
Associate Director
+1-212-908-9105
Fitch Ratings, Inc.
33 Whitehall Street
New York, NY 10004
or
Secondary Analyst
Andrew DeStefano
Director
+1-212-908-0284
or
Committee Chairperson
Doug Scott
Managing Director
+1-512-215-3725
or
Media Relations
Elizabeth Fogerty, +1-212-908-0526
elizabeth.fogerty@fitchratings.com

Contacts

Fitch Ratings, Inc.
Primary Analyst
Eva Rippeteau
Associate Director
+1-212-908-9105
Fitch Ratings, Inc.
33 Whitehall Street
New York, NY 10004
or
Secondary Analyst
Andrew DeStefano
Director
+1-212-908-0284
or
Committee Chairperson
Doug Scott
Managing Director
+1-512-215-3725
or
Media Relations
Elizabeth Fogerty, +1-212-908-0526
elizabeth.fogerty@fitchratings.com