Fitch Affirms Boca Raton FL's Water & Sewer Revs 'AAA'; Outlook Stable

NEW YORK--()--Fitch Ratings has affirmed the 'AAA' rating on the following Boca Raton, FL (the city) revenue bonds:

--$11.2 million water and sewer revenue refunding and improvement bonds, series 2008 and 2009.

The Rating Outlook is Stable.

SECURITY

The bonds are supported by a pledge of the net revenues of the city's water and sewer system (the system), including legally available impact fees.

KEY RATING DRIVERS

SUSTAINED STRONG FINANCIAL PERFORMANCE: The system continues to maintain excellent financial margins with very strong debt service coverage (DSC) and abundant cash.

LOW DEBT BURDEN: Debt metrics have remained very low and continue to decline, ranking well below Fitch's 'AAA' medians. All of the system's outstanding debt is scheduled to be fully retired in 15 years.

AFFORDABLE USER CHARGES: The typical residential bill equates to a low 1% of median household income (MHI) and compares favorably to neighboring systems.

SOUND OPERATIONS: The system reuses 100% of its effluent for sale to local irrigation users. The Biscayne Aquifer provides abundant potable water supply to the city through at least 2035.

STRONG SERVICE AREA DEMOGRAPHICS: The service area's customer base is characterized by low unemployment and high wealth.

RATING SENSITIVITIES

MAINTENANCE OF STRONG CREDIT FUNDAMENTALS: Maintenance of Boca Raton, FL's water and sewer system exceptionally strong financial, operational, debt and managerial profiles is critical in supporting rating stability.

CREDIT PROFILE

WEALTHY, RESIDENTIAL CUSTOMER BASE

The city of Boca Raton (general obligation [GOs] bonds rated 'AAA' by Fitch) is located on Florida's southeast coast in Palm Beach County (GOs rated 'AAA', Stable Outlook). The city owns and operates a combined water and sewer utility system, serving over 36,000 water and 33,500 sewer customers over a 35 square mile service area. The customer base is mostly residential and fairly affluent. Customer concentration is low with the 10 largest customers, the topmost of which (after the city of Boca Raton) include Florida Atlantic University (FAU) and Office Depot's headquarters, representing less than 10% of usage.

The service area includes the city and some surrounding areas, and is considered primarily built-out. Though commercial development continues, the system's capital improvement plan (CIP) largely addressees system upgrade and renewal versus expansion-related projects. Unemployment indicators continue to improve. As of August 2016 the unemployment rate was 3.8% compared to 4.2% the year prior, ranking below the rates of Palm Beach County and the state.

STRONG SUSTAINED FINANCIAL RESULTS

The system's financial profile is characterized by a trend of strong DSC and ample liquidity. DSC for fiscal years 2014 and 2015 was 3.7x and 4.2x, respectively. The system had $72.4 million in available cash and cash equivalents, equating to 793 days of cash on hand (DCOH) in fiscal 2015, in line with Fitch's 'AAA' median of 764 DCOH. This balance includes renewal and replacement (R&R) and operating and maintenance funds. The system's operating margin has maintained a strong average of 35% over the past five years compared to the 'AAA' median of 40%. Free cash relative to depreciation has exceeded 100% during the same period.

Strong results are expected to continue for fiscal 2016; management projects net revenues to yield 2.9x DSC, and unrestricted cash should total $36.4 million, the equivalent of 403 DCOH. The additional $22.5 million in available R&R funds would increase system liquidity to 652 DCOH. Forecasted DSC is expected at over 4x in fiscal 2017, rising to over 7x by fiscal 2021.

AFFORDABLE CUSTOMER CHARGES

The average Boca Raton resident pays a customer charge of approximately $60 for consuming a very high 15,000 gallons of water per month. The associated charge for this volume is low compared to other systems in the region, and given the area's above-average income levels, equates to only 1% of MHI, one-half the 2% Fitch affordability threshold for combined service. A city ordinance requiring automatic annual rate increases equal to the growth in the consumer price index (CPI) helps revenues keep pace with escalating costs.

FAVORABLE DEBT AND CAPITAL PROFILES

The system's low debt burden is evidenced by a per-customer debt ratio of $499 and debt-to-net plant of only 15% in fiscal 2015, both of which are well below the 'AAA' median levels. Debt amortization is rapid with 100% of principal retiring in 15 years, and in fiscal 2015 the ADS carrying costs were a very low 9% of gross revenues.

The current six-year CIP totals $140 million, or $23.3 million on average per year, and focuses primarily on R&R work and maintaining regulatory compliance. Capital spending is expected to be fully funded by internal cash and operating surpluses, which appears reasonable given the city's very strong current and expected cash flows, including robust available R&R funding. No additional debt is expected at this time.

AMPLE GROUNDWATER TO MEET LONG-TERM DEMAND

Groundwater is provided from five well fields that draw water from the Biscayne aquifer, which is considered to have a sufficient long-term supply. The system's 70 million gallon per day (mgd) in total water treatment capacity is twice that of the current average daily demand. Though some commercial development continues, the city's built-out nature ensures that water supply should remain ample relative to demand. The water use permit from the South Florida Water Management District (SFWMD) is valid through fiscal 2028.

Wastewater treatment is provided by the Glades Road wastewater treatment plant (WWTP), which has a permitted treatment capacity is 17.5 mgd. Average flows of 13.3 mgd in 2015 equate to a somewhat elevated 76% of available ample treatment capacity, although the city's mostly developed nature supports demand stability.

The system also operates a 17.5 mgd water reclamation facility (co-located with the Glades Road WWTP) that supplies treated wastewater effluent for irrigation use within the service area. Known as 'Project IRIS' (in-city reclamation irrigation system), the effluent reuse system reduces system-wide demand for irrigation from groundwater sources in order to maintain compliance with SFWMD rules regulating water availability. The reclamation facility currently treats 100% of effluent for re-use and maintains agreements with large irrigation users such as golf courses, universities and parks and recreation facilities.

Project IRIS helps limit the system's potential exposure to increased financial and capital requirements associated with state and federal mandates, including numeric nutrient criteria. Consistent with state law, the city is legally permitted to discharge excess treated effluent created by wet weather events via ocean outfall.

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 Lumesis.

Applicable Criteria

Revenue-Supported Rating Criteria (pub. 16 Jun 2014)

https://www.fitchratings.com/site/re/750012

U.S. Water and Sewer Revenue Bond Rating Criteria (pub. 03 Sep 2015)

https://www.fitchratings.com/site/re/869223

Additional Disclosures

Dodd-Frank Rating Information Disclosure Form

https://www.fitchratings.com/creditdesk/press_releases/content/ridf_frame.cfm?pr_id=1014822

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https://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=1014822

Endorsement Policy

https://www.fitchratings.com/regulatory

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Contacts

Fitch Ratings
Primary Analyst
Eva Rippeteau
Director
+1-212-908-9105
Fitch Ratings, Inc.
33 Whitehall Street
New York, NY 10004
or
Secondary Analyst
Andrew DeStefano
Director
+1-212-908-1284
or
Committee Chairperson
Doug Scott
Managing Director
+1-512-215-3725
or
Media Relations:
Alyssa Castelli, New York, +1 212-908-0540
Email: alyssa.castelli@fitchratings.com

Contacts

Fitch Ratings
Primary Analyst
Eva Rippeteau
Director
+1-212-908-9105
Fitch Ratings, Inc.
33 Whitehall Street
New York, NY 10004
or
Secondary Analyst
Andrew DeStefano
Director
+1-212-908-1284
or
Committee Chairperson
Doug Scott
Managing Director
+1-512-215-3725
or
Media Relations:
Alyssa Castelli, New York, +1 212-908-0540
Email: alyssa.castelli@fitchratings.com