NEW YORK--(BUSINESS WIRE)--Fitch Ratings has affirmed the 'AA-' rating for the following Oakland Park, FL's (the city) revenue bonds:
--Approximately $30.4 million water revenue bonds series 2010A, 2010B and 2012.
SECURITY
The bonds are secured by net system revenues. The series 2010A and 2010B are also secured by a surety funded reserve account; there is no reserve account for the series 2012 bonds.
The Rating Outlook is Stable.
KEY RATING DRIVERS
SUSTAINED STRONG FINANCIAL RESULTS: Key financial metrics such as debt service coverage (DSC) and days cash on hand remained healthy in fiscal 2014. Management expects this trend to continue based on level debt service payments and manageable capital needs going forward.
AUTOMATIC ADJUSTMENT OF RATES: The system's combined rates remain somewhat elevated relative to median household income (MHI). However, Fitch views positively the city's policy to automatically adjust retail rates consistent with wholesale rate increases in order to ensure full cost recovery of purchased water and wastewater treatment expenses.
DECLINING YET ELEVATED DEBT PROFILE: The system's high debt level continues to decline albeit slowly given a prolonged amortization schedule. A lack of future debt issuance plans should continue this trend of improvement.
SOUND OPERATING SYSTEM: The system enjoys manageable capital needs and predictable operational requirements given its position as a water and wastewater bulk customer.
RATING SENSITIVITIES
CONTINUED STRONG FINANCIAL PROFILE: Fitch expects that Oakland Park's water and sewer system will sustain currently strong financial performance while funding most of its annual renewal and replacement capital program from internal sources. Continued positive financial results coupled with a declining debt burden could result in positive rating movement.
CREDIT PROFILE
The city of Oakland Park is located in central Broward County approximately two miles north of Fort Lauderdale with a population of close to 44,000. The city's utility service area is coterminous with the city limits and provides water transmission and distribution and wastewater collection and conveyance service to a relatively small customer base of 8,500 water customers and 7,000 sewer accounts.
The city purchases potable water from the city of Fort Lauderdale pursuant to a 30-year bulk user agreement that expires in 2023. Wastewater treatment service is also purchased through bulk user agreements: Fort Lauderdale treats approximately 78% of Oakland Park's flows and Broward County's utility system treats the balance (Fitch rates Broward County's water and sewer utility revenue bonds 'AA+' with a Stable Outlook and general obligation bonds 'AAA' with a Stable Outlook). Bulk cost increases are passed along in full to city customers and wastewater and water treatment capacity are in sufficient supply relative to current and projected demands.
STRONG FINANCIAL PROFILE
Financial results have remained strong, largely due to strong cost recovery and yearly rate hikes that positively offset declines in usage related to conservation efforts and economic conditions. A 2009 four-year rate increase plan also included a policy to automatically pass-through purchased water and wastewater treatment expenses in full to city customers. The pass-through is viewed favorably as it aligns revenue needs with cost increases from purchased services.
Total DSC of the senior lien bonds and a Florida Municipal Loan Council (FMLC) loan has remained above 2.0x since fiscal 2011. The FMLC loan is not a direct obligation of the utility with a lien on net system revenues. However, because the loan was used for system improvements and is repaid on a subordinate basis by the utility, this burden is included in this analysis. Annual debt service (absent additional leveraging) will remain level therefore DSC is expected to stay strong given management's steady revenue growth forecast. Liquidity is also strong with $10.3 million in fiscal 2014 equating about 290 days cash on hand (including $762,000 in renewal and replacement fund reserves).
SOMEWHAT HIGH CUSTOMER CHARGES
In fiscal 2014 the city's average combined monthly water and sewer residential customer bill totaled nearly $87. This equates to 2.3% of median household income (MHI), which Fitch considers somewhat high. Management indicated that despite moderate customer push-back, the normalization of steady and moderate rate increases passed through from the bulk providers has lent predictability to the rate structure and general customer satisfaction. Nonetheless, as customer charges consume higher proportions of MHI as both in-city and bulk provider rates are consistently raised, management's rate-setting flexibility over time may become constrained. To date, this concern is mitigated by the system's strong billing collection rate of approximately 99%.
ELEVATED BUT DECLINING DEBT BURDEN
Leverage ratios have been somewhat elevated for the rating category. In fiscal 2014 debt represented a high 79% of net plant and $2,051 in per-customer costs, compared to the 'AA' median averages of 50% and $1,934 respectively. Positively, total debt carrying costs on an annual basis are low at only 11% of gross revenues, well below the 'AA' median of 22%, and total debt only represents 6.6x the amount of funds available for debt service, consistent with the 'AA' median. General debt metrics have steadily improved since the system's last major debt issuance in 2012 and absent additional leveraging (as anticipated by management) debt metrics should further improve and compare favorably to other 'AA' median credits.
Management plans to fund its five-year capital improvement plan (CIP) with available un-spent revenues from prior years, future recurring revenues, residual bond proceeds and various grants. Annual capital spending relative to depreciation has been robust, exceeding 300% over the past several fiscal years and forecasted capital spending should continue this trend.
MANAGEABLE CAPITAL PROGRAM
The 2016-2020 CIP of $19.2 million is very similar in size to the last review and will include routine renewal, replacement and rehabilitative projects to address the system's aging distribution and transmission lines. The plan is heavily front-loaded and will largely be funded using prior years' unexpended (available in reserves) capital funds. A major capital focus is to mitigate persistent yet improving inflow and infiltration (I&I) issues. Addressing this problem will minimize currently unbilled, excess sewer flows to the wastewater treatment plant and lower the associated operational costs.
SOLID OPERATING PROFILE
Though the system's position as a wholesale customer results in a limited operational profile, as a bulk customer it is subject to the risk of unexpected cost changes from its service providers. At current, management does not anticipate major capital or operational needs by either wholesale provider that could cause its rates to rise beyond the expected average rate increases of about 5% annually. Management maintains frequent communication with both Broward County and Fort Lauderdale and is generally afforded considerable notice in order to prepare for cost increases should they arise. To date, the system has successfully enacted necessary rate increases to its retail customers to offset wholesale cost changes.
The system's customer base is somewhat diverse with approximately 73% of accounts consisting of residential homes versus commercial customers. Given the built-out nature of the service area, growth in customer accounts over the past five fiscal years has been low at around 1% and future growth is expected to continue at this rate. General economic indicators are good with the city's unemployment rate a very low 3.7% as of November 2015 and income levels measuring only slightly below the state and nation's.
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
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. 03 Sep 2015)
https://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=869223
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https://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=999264
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