NEW YORK--(BUSINESS WIRE)--Fitch Ratings has assigned an 'AAA' rating to the following city of Tampa, FL revenue bonds:
--$86 million water and sewer systems refunding revenue bonds, series 2015.
The bonds are expected to sell via negotiation the week of June 22. Bond proceeds will be used to advance refund all or a portion of outstanding series 2006 and 2007 bonds for savings and pay issuance costs.
In addition, Fitch affirms the following ratings:
--$227 million water and sewer revenue bonds at 'AAA'.
The Rating Outlook is Stable.
SECURITY
The bonds are secured by and payable from a senior lien pledge of the net revenues of the city's water and sewer system (the system), including available connection fees.
KEY RATING DRIVERS
FINANCES ARE STRONG: A combination of rate increases and customer growth have greatly improved the system's revenue position and resulted in a trend of strong margins, healthy debt service coverage (DSC) and ample liquidity.
CONSERVATIVELY MANAGED DEBT: The debt burden continues to improve and capital needs are manageable. Sizable financial margins and free cash flow (FCF) allow for the majority of the capital program to be internally funded. Debt carrying costs are low and existing debt amortizes rapidly.
RATES REMAIN AFFORDABLE: Rates have been held steady after sizable multi-year rate adjustments from 2008-2012 improved the system's financial profile. Despite the increases, utility charges remain affordable and no additional rate increases are anticipated over the five-year forecast.
AMPLE SYSTEM CAPACITY AND SUPPLY: The system benefits from a diverse and ample water supply consisting of system-owned surface water and back-up supply from Tampa Bay Water (TBW; rated 'AA+' by Fitch), a highly rated regional wholesale water supplier. Treatment capacity is also ample and existing infrastructure is in a state of good repair. Future capital needs focus on system renewal and replacement (R&R).
STRENGTHENED ECONOMIC CLIMATE: Tampa remains the hub of economic activity for Florida's Gulf Coast. The local economy continues its recovery, as evidenced by rapid job growth, extensive development activity and a revived housing market.
RATING SENSITIVITIES
RATING STABILITY ANTICIPATED: Tampa's rating is sensitive to shifts in various credit fundamentals including financial performance and capital and debt management. The Stable Outlook reflects Fitch's expectation that such shifts are unlikely over the next several years.
CREDIT PROFILE
The city of Tampa ('AA' implied GO rating) is located in central Florida along the Gulf Coast. The city's utility system provides potable, reclaimed, and wastewater services to a mostly residential and retail customer base. Most customers live within Tampa's city limits; however, the system also serves portions of surrounding Hillsborough County (GOs rated 'AAA'), and provides wholesale sewer service to the city of Temple Terrace.
STRONG FINANCIAL PROFILE TO CONTINUE
Financial management of the system remains very strong, evidenced by high margins and DSC in each of the past five fiscal years. Significant rate adjustments through fiscal 2012 led to a steady rise in operating income and much-improved financial ratios following the recession. In fiscal 2014, senior lien DSC totaled a very healthy 4.1x, and all-in coverage, which includes subordinate lien state revolving fund loans, was a still robust 3.1x, results that were similar to the previous year.
The system makes annual transfers to the general fund (GF) in the form of payments in lieu of taxes (PILOT) and payments in lieu of franchise fees (PILOFF). The PILOT is based on the value of the system's assets multiplied by the ad valorem tax rate, while the PILOFF is based on the system's current budget multiplied by the same franchise fee rate (6%) charged to all utilities within the city.
After an increase in the franchise fee in 2013 to the highest rate allowed, the transfers increased from a moderate 7% of gross system revenues to a sizable 10% of gross revenues for the past two years. However, coverage of all fixed payments (including the transfers) totaled a still very strong 2.5x in fiscal 2014, approximating the median all-in coverage ratio for 'AAA' water and sewer utilities (also including transfers). While not anticipated, additional transfers out of the system could adversely impact financial performance and/or the system's ability to internally fund its capital program and would be viewed negatively.
Liquidity is strong despite judicious pay-as-you-go capital funding and annual GF transfers. Since fiscal 2008, the system has spent over $360 million on construction and acquisition of capital assets with only $66.6 million in new bonds (consisting of the series 2007 and 2011) issued over that time. Liquidity has more than doubled since fiscal 2008 to $173 million in fiscal 2014, which is equivalent to a robust 597 days cash on hand (the median days cash for 'AAA' utilities is 481).
Pro forma financial projections provided by the city's feasibility consultant show all-in DSC above 2.9x (2.3x including transfers) through fiscal 2017. Coverage will improve from these very healthy levels with a decline in debt service as several series of outstanding bonds are scheduled to mature. All-in DSC reaches 4.4x (3.2x net of transfers) in fiscal 2018 and remains close to these levels through the remainder of the forecast period (through fiscal 2020). The projections appear reasonable and include limited revenue growth, no rate increases, and no additional debt.
DEBT TRENDING LOWER, MOSTLY INTERNALLY-FUNDED CIP
The system had a total of approximately $270 million of fixed-rate bonds and loans outstanding as of fiscal 2014. Conservatively, the city has issued only a small amount of new debt over the past five years, opting instead to use a portion of its sizable annual financial margins to improve and upgrade the system. As a result, the debt profile is trending positive, with most debt ratios comparing favorably to 'AAA' rated systems.
In fiscal 2014, debt totaled just 27% of net fixed assets and $1,228 per customer ('AAA' median is $1,259). Debt carrying charges are a low 16% of gross revenues and amortization is above average with 50% retired over the next 10 years. In addition to these favorable metrics, annual debt service (ADS) is scheduled to decline from roughly $31 million annually to just over $20 million in fiscal 2018 (just 10% of expected gross revenues).
The five-year capital improvement plan (CIP), totaling $284 million through fiscal 2019, is slightly larger than the previous CIP but will continue to address system R&R and rising age of plant. The city anticipates funding the vast majority of capital spending from excess cash flow with a small potential state revolving fund borrowing in fiscal 2016. Fitch projects the debt burden will continue to improve.
SOLID OPERATING PROFILE AND LONG-TERM CAPACITY
In fiscal 2014, the system served roughly 500,000 permanent residents through 130,000 water and 101,000 sewer connections. The customer base is approximately 90% residential and diverse with the leading 10 commercial customers for both systems, led by Pepsi Cola Bottling Company, comprising only 4% of gross system revenues.
The system's operating profile remains strong. Fitch considers ample and diverse water supply and strong water and sewer treatment capacity to be long-term credit strengths. Water is primarily supplied from a city-owned reservoir from the Hillsborough River. In addition to its own resources, the system benefits from being a member agency of TBW. Water resources are well in excess of average demand.
TBW provides the system with a supplemental source of finished water during periods of high demand (or drought), and is required to provide/sell the system as much water as it needs. The city is not obligated to purchase a minimum amount of water from TBW, and in fact purchases very little from TBW at present. All of TBW's members benefit from TBW's solid long-term capital and resource planning, which has provided members with a secure and long-term water supply.
The sewer system provides collection, advanced treatment, and disposal services. Treatment capacity at the system's main plant is 96 mgd, well above the average fiscal 2014 daily flow of 58.6 mgd. The treatment plant's National Pollutant Discharge Elimination System permit is valid through November 2015. An application for renewal has been submitted.
LARGE REGIONAL ECONOMY DEMONSTRATING RECOVERY
Tampa's economy is large and diverse, and remains the economic anchor for central Florida with year-round tourism, an extensive transportation network, including the Tampa International Airport and the Port of Tampa, cultural and recreation attractions, and a sizeable education and healthcare presence.
The Tampa-St. Petersburg-Clearwater metropolitan statistical area (MSA) experienced consistent year-over-year monthly employment gains from 2009-2014, particularly in the professional and business, education and health, and leisure and hospitality sectors. The March 2015 unemployment rate of 5% is low and continues to outpace rates for both the state and nation.
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 and Public Resources Management Group, Inc.
Applicable Criteria
Revenue-Supported Rating Criteria (pub. 16 Jun 2014)
https://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=750012
U.S. Water and Sewer Revenue Bond Rating Criteria (pub. 31 Jul 2013)
https://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=715275
Additional Disclosures
Dodd-Frank Rating Information Disclosure Form
https://www.fitchratings.com/creditdesk/press_releases/content/ridf_frame.cfm?pr_id=986650
Solicitation Status
https://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=986650
Endorsement Policy
https://www.fitchratings.com/jsp/creditdesk/PolicyRegulation.faces?context=2&detail=31
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