Fitch Rates Hillsborough County, FL's Utility System Revs 'AAA'; Outlook Stable

AUSTIN, Texas--()--Fitch Ratings assigns an 'AAA' rating to the following Hillsborough County, FL's (the county) bonds:

--Approximately $213,125,000 utility system revenues bonds, series 2016.

The bonds are scheduled to be sold via competitive bid the week of June 27. Proceeds will be used to finance costs of various improvements to the county's retail water and sewer system (the system) and pay costs of issuance. The bonds will not feature a debt service reserve.

In addition, Fitch affirms the following ratings:

--$142 million in outstanding utility system revenue bonds at 'AAA'.

The Rating Outlook is Stable.

SECURITY

The bonds are secured by a senior lien on net revenues of the county's water and wastewater system (the system), including pledged capacity fees, proceeds from the sale of property, property and casualty insurance proceeds, qualified derivative receipts and federal direct payments (including the BAB subsidy) received by the county.

KEY RATING DRIVERS

STRONG SYSTEM MANAGEMENT: The 'AAA' rating reflects the system's strong and conservative financial management evidenced by solid annual financial margins and cash flows, strong debt service coverage (DSC) and liquidity, cash-funding of capital needs, and historically low debt levels.

MODERATELY INCREASING DEBT BURDEN: The current transaction increases the system's total debt outstanding by about 1.5x. Although debt per customer grows to over $1,000 through 2019, projected levels still align closely to Fitch's 'AAA' rating category median.

HIGHER, STILL MANAGEABLE CAPITAL PROGRAM: Capital needs continue to grow, but remain manageable and will largely be cash funded. Forecasted expenditures through 2020 total $588 million and include system renewal and replacement as well as expansion and consolidation of wastewater treatment facilities.

COMPETITIVE AND AFFORDABLE RATES: Rates are in line with neighboring systems and remain affordable. Rates are expected to remain competitive with annual increases designed to keep pace with inflation. A pass-through mechanism for purchased water costs from Tampa Bay Water (TBW) is viewed favorably by Fitch.

BROAD-BASED ECONOMY: The county serves as the economic hub for Florida's central Gulf Coast, with major sectors in business services, government, healthcare, education, and tourism. Recent employment gains that have lowered the unemployment rate, and rising sales and tourist-related taxes are indicative of economic recovery. The county's unemployment rate declined to 6% in May 2014, which is lower than state and national levels.

RATING SENSITIVITIES

MAINTENANCE OF FINANCIAL PERFORMANCE: Significant debt issuance to fund capital needs or swift declines in cash balances or debt service coverage could pressure the rating, but given Hillsborough County's strong financial planning and the utility system's currently low debt burden, such a situation is viewed as highly unlikely.

CREDIT PROFILE

Hillsborough County (general obligation bonds rated 'AAA' by Fitch) owns and operates the system which services approximately 480,000 residents located in the unincorporated areas of the county. The system serves roughly 166,000 water and 144,000 sewer accounts, most of which are residential. The county, located on central Florida's western coast, is the fourth most populous county in the state with a 2015 estimated population of over 1.3 million.

CONSERVATIVE SYSTEM MANAGEMENT UNDERPINS THE 'AAA' RATING

The system, an enterprise fund of the county, is well managed, evidenced by its strong financial cash flows and coverage of debt service, very high liquidity levels despite significant historical cash-funding of capital needs, and low debt burden.

Financial performance has been strong historically despite recessionary pressures and a regional drought in 2008-2009. The system maintains healthy financial metrics with over 3.5x DSC of all debt (excluding connection fees) over the past five years, and very sizable unrestricted cash balances of nearly $260 million in fiscal 2015, or the equivalent of 642 days cash on hand (DCOH). Including approximately $48 million of renewal and replacement funds, liquidity was equal to 761 DCOH.

Debt is conservatively managed and the current offering will moderately increase leverage ratios, but they remain adequate for the rating category. Following the issuance of the series 2016 bonds, debt per customer ratios grow from the very low $458 (fiscal 2015) to $983 in five years, aligning closely to Fitch's 'AAA' category median of $933. Debt carrying costs are projected to remain just 8% to 10% of operating revenues through the fiscal 2020 forecast period.

Significant investment in the system has been accomplished mainly with cash resources, limiting long-term debt outstanding to just $142 million as of fiscal-end 2015. Since fiscal 2007, the system has invested over $500 million in capital assets, while debt issuance has been kept to a minimum. As a result, existing leverage ratios approximate the medians for system's rated 'AAA'. Debt totaled just 15% of net capital assets and a very low 0.4% of system equity in fiscal 2015.

Capital needs remain manageable despite an increase in the five-year capital improvement plan (CIP) to $588 million through fiscal 2020 (the previous CIP totaled $400 million). Approximately $200 million, or 30%, of the CIP will be financed with the series 2016 bond proceeds. Also included in the use of bond proceeds is reimbursement to the county for the purchase of a private water and sewer system at a cost of $14 million.

The CIP includes system renewal, rehabilitation and upgrades as well as expansion and improvements to a wastewater reclamation plant, a $170 million project that will allow the county to decommission two older facilities. Even with an increase in identified capital needs, no additional debt is expected over the intermediate term; management expects to rely largely on existing cash, sizable expected excess annual cash flows and other reserves to fund its capital program.

RELIABLE & AMPLE OUTSOURCED WATER SUPPLY LIMITS EXPOSURE

The county's water is supplied by TBW, a highly-rated special district created by inter-local agreement to plan, develop, and deliver a high-quality water supply to the region. TBW (revenue bonds rated 'AA+' with a Stable Outlook by Fitch) provides water to the county and five regional municipal systems, including such highly rated entities as Pinellas County (sewer revenue bonds rated 'AA'; Positive Outlook), Pasco County (water and sewer revenue bonds rated 'AA'), and the cities of Tampa (water and sewer revenue bonds rated 'AAA'), St. Petersburg (utility revenue bonds rated 'AA'), and New Port Richey.

The county received about 51 million gallons per day (mgd), or about 32% of TBW's average production of 157 mgd, remaining one of TBW's largest customers (just behind Pinellas County). TBW maintains significant and diverse raw water resources that include groundwater wells, a large man-made reservoir and various additional surface water sources (including seawater desalination) totaling as much as 240 mgd. TBW is obligated to provide 100% of the water supply needs to the member governments. Members make several, not joint, payments to TBW as an operating expense of their respective utility systems.

MANAGEABLE RATES INCLUDE TBW PASS-THROUGH

Rates are set by the county independent from any regulatory or other outside influence, and are designed to recover the fixed and variable costs of the system. Monthly user charges have several components including a customer service charge, a base charge for sewer service, water and sewer use charges, and a TBW pass-through charge which is calculated annually to recover the cost of purchased water.

The average residential customer pays roughly $76 for combined service assuming 6,000 gallons of water use in 2016. Rates are competitive relative to nearby systems but nearing Fitch's affordability marker of 2% of median household income. The county implemented an annual rate adjustment indexed to inflation that will provide baseline revenue growth and offset normal increases in operating costs. Rate increases beyond the annual inflation adjustment are not expected at this time, which should leave rates competitive over the intermediate term

Media Relations:

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

Additional Disclosures

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https://www.fitchratings.com/creditdesk/press_releases/content/ridf_frame.cfm?pr_id=1005561

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https://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=1005561

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https://www.fitchratings.com/jsp/creditdesk/PolicyRegulation.faces?context=2&detail=31

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Contacts

Fitch Ratings
Primary Analyst
Teri F. Wenck, CPA
Director
+1-512-215-3742
Fitch Ratings, Inc.
111 Congress, Suite 2010
Austin, TX 78701
or
Secondary Analyst
Andrew DeStefano
Director
+1-212-908-0284
or
Committee Chairperson
Dennis Pidherny
Managing Director
+1-212-908-0738
or
Media Relations:
Elizabeth Fogerty, +1 212-908-0526
elizabeth.fogerty@fitchratings.com

Contacts

Fitch Ratings
Primary Analyst
Teri F. Wenck, CPA
Director
+1-512-215-3742
Fitch Ratings, Inc.
111 Congress, Suite 2010
Austin, TX 78701
or
Secondary Analyst
Andrew DeStefano
Director
+1-212-908-0284
or
Committee Chairperson
Dennis Pidherny
Managing Director
+1-212-908-0738
or
Media Relations:
Elizabeth Fogerty, +1 212-908-0526
elizabeth.fogerty@fitchratings.com