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Fitch Affirms Seacoast Utility Authority, FL's Water & Wastewater Revs at 'AA'; Outlook Stable

AUSTIN, Texas--(BUSINESS WIRE)--Fitch Ratings affirms the 'AA' rating on following Seacoast Utility Authority, Florida (the authority) bonds:

--$101.79 million water and sewer revenues bonds, series 2009A, 2009B and 1989A.

The Rating Outlook is Stable.

SECURITY

The bonds are secured by a first-lien pledge of net revenues of the water and sewer system (the system) and investment income. The authority has a cash-funded debt service reserve.

KEY RATING DRIVERS

FINANCIAL FLEXIBILITY: The system's financial position is solid, with debt service coverage averaging 1.9x for the last four years. Liquidity for fiscal 2013 registers a strong 894 days of cash on hand, but a modest decline is expected as the authority plans to finance 100% of the capital improvement plan (CIP) with cash.

IMPROVING DEBT PROFILE: Debt metrics are mixed with debt per customer on par with the 'AA' category median while debt per capita is high at 2.5x the 'AA' category median. Fitch expects debt levels to decline as the authority has no plans for additional debt in the near term.

AFFORDABLE RATES: Rates remain very affordable and provide additional financial flexibility to the authority.

UPDATED TREATMENT AND ADEQUATE SUPPLY: The authority has completed construction of a new water membrane treatment plant to meet future drinking water standards, replacing two of its lime-softening treatment plants. The system also recently renewed its water use permit successfully, which will provide the system with sufficient water supplies and treatment capacity to meet demand requirements for the near- to intermediate-term.

DIVERSE SERVICE AREA: The economic base of the service area is very stable and diverse and characterized by high wealth levels.

RATING SENSITIVITIES

STABILITY EXPECTED: The rating is sensitive to fluctuations in various credit fundamentals including financial and operating performance, capital needs and debt levels. The Stable Outlook reflects Fitch's belief that such fluctuations are unlikely to occur.

CREDIT PROFILE

The authority was established in 1988 when it acquired the assets of a private water and wastewater utility. Created by an inter-local agreement between Palm Beach County, the city of Palm Beach Gardens, the village of North Palm Beach, and the towns of Juno Beach and Lake Park, the authority serves a 65-square-mile service area in northeastern Palm Beach County.

STRONG LIQUIDITY AND GOOD COVERAGE PROVIDE FINANCIAL FLEXIBILITY

Financial metrics continue a positive trend with robust liquidity and stable debt service coverage. Authority liquidity has average over 900 days of cash on hand for the last three fiscal years. Senior-lien annual debt service (ADS) coverage for fiscal 2013 registered at 1.9x, above the previously forecast coverage of 1.6x. Management projections, which appear reasonable and somewhat conservative, point to ADS coverage of 1.6x to 1.7x through 2019. Liquidity is expected to decline modestly but remain high for the rating level, as the authority plans to cash-fund its CIP for at least the next five years.

DECLINING DEBT BURDEN

The authority's CIP totals a very manageable $57 million or $867 per customer. The cash-funded CIP focuses on the renewal and replacement of system assets. Debt metrics are mixed with debt per customer of $1,857 aligning closely to the 'AA' category median of $1,812, while debt per capita of $1,318 is considered high compared to the $514 median for the rating category. However, with no future borrowing planned, levels will continue to decline.

NEW TECHNOLOGY AND RENEWED PERMIT PROVIDE ADEQUATE SUPPLY

The authority recently completed construction of a new water treatment plant with a 30.5 millions of gallons per day (mgd) capacity to replace the two lime softening plants. The new plant improves the quality of water delivered and represents a more efficient alternative to renewal and replacement of aging lime softening infrastructure. Furthermore, the new plant produces a recyclable byproduct and allows for the treatment of brackish Floridan aquifer water.

Treatment plant capacity exceeded the 2013 demand of 13.3 mgd by 56%. With the new plant complete, the authority will move forward with decommissioning the lime softening plants. Water is supplied to the authority by surficial aquifers and permitted through the South Florida Water Management District (SFWMD). The authority was awarded a 20-year SFWMD water use permit application in October of 2012.

Wastewater is treated at a system-owned and operated plant. The majority of effluent from the wastewater system is sold as recycled water. A deep injection well disposes of the small portion of effluent that is not recycled. Current wastewater treatment capacity exceeds demand by 43%.

AMPLE RATE AFFORDABILITY

Fitch sees the authority's rate structure and flexibility as positive credit factors. Rates are structured with a substantial fixed component which provides for stable revenue to support operations. The authority also has a history of raising water and sewer rates as needed. From 2007-2010, rates increased an average of 6.7% annually. In fiscal 2010, the authority's governing board voted to adjust rates annually based on the consumer price index (CPI).

Management did not adjust rates in fiscal 2013 due to favorable financial results and cost containment but resumed indexed increases in fiscal 2014. Rates were increased by approximately 3% in fiscal 2014, and 3.5% CPI-based increases are anticipated for fiscals 2015 and 2016. Rates maintain tremendous flexibility, registering 1.0% of median household income (MHI) and well below Fitch's 2% MHI affordability threshold.

STABLE, WEALTHY SERVICE TERRITORY

The system provides retail service to over 35,000 and 30,000 water and wastewater connections, respectively, with the majority being residential connections. Economic prospects within the authority service area are favorable due to low unemployment rates and high wealth levels.

In addition to the sources of information identified in Fitch's U.S. Municipal 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);

--'2014 Water and Sewer Medians' (December 2013);

--'2014 Outlook: Water and Sewer Sector' (December 2013).

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

Revenue-Supported Rating Criteria

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

2014 Outlook: Water and Sewer Sector

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=724357

2014 Water and Sewer Medians

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=724358

Additional Disclosure

Solicitation Status

http://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=838920

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Contacts

Fitch Ratings
Primary Analyst
Teri Wenck, CPA
Associate 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
Amy Laskey
Managing Director
+1-212-908-0568
or
Media Relations:
Elizabeth Fogerty, +1-212-908-0526 (New York)
elizabeth.fogerty@fitchratings.com