NEW YORK--(BUSINESS WIRE)--Fitch Ratings assigns an 'A+' rating to the City of Riviera Beach Utility Special District (CRBUSD, or the district), FL's approximately $25 million utility system refunding revenue bonds, series 2014.
The Rating Outlook is Stable.
The bonds are secured by a senior lien pledge of the net revenues of the water and sewer system (the system).
KEY RATING DRIVERS
STRONG FINANCIAL PERFORMANCE: The system's financial profile has strengthened in recent years. Operating margins approximate 30% and debt service coverage (DSC) has averaged 3.5x over the past four years. Both free cash flow (FCF) and days of operating cash on hand are ample.
COMPREHENSIVE CAPITAL PLANNING: The district has outlined an ambitious and comprehensive Master Plan to meet urgent and historically deferred system needs. The current five-year capital improvement plan (CIP) through fiscal 2018 totals $46.6 million.
POTENTIAL DEBT-RELATED PRESSURE: Debt metrics are high relative to the system's net plant; however, debt is affordable on a per customer basis and carrying costs are comfortably met by recurring revenues. The use of additional new debt to fund increased capital needs may weaken current debt metrics.
RISING BUT COMPETITIVE RATES: Charges for combined water and sewer service total about $55, which is regionally competitive but approaching Fitch's affordability threshold at 1.8% of median household income (MHI). Anticipated future rate increases may raise charges high enough to surpass the threshold of 2% of MHI in the five-year forecast and pressure the utility's ability to absorb additional debt.
FOCUSED MANAGEMENT TEAM: The current management team has demonstrated a willingness and ability to enact substantial system improvements, including the implementation of comprehensive financial and debt policies as well as long-term rate and capital plans.
SOMEWHAT WEAK SERVICE TERRITORY: The local economy is somewhat limited and the city's top employers are fairly concentrated. The city's unemployment rate and MHI both fare poorer than those of the state and nation. The city's location within Palm Beach County's deep and diverse employment base and the system's strong liquidity somewhat mitigate these concerns.
IMPACT OF FUTURE DEBT ON CREDIT PROFILE: The rating is sensitive to shifts in credit fundamentals including financial performance, debt management, operational stability and rate-raising flexibility. Fitch will monitor the impact that current projections of anticipated new bond issuances will have on these various system dynamics to determine potential future rating movement.
The City of Riviera Beach (the city) is located in Palm Beach County (the county, GOs rated 'AAA' by Fitch) in southeastern Florida, approximately five miles north of the city of West Palm Beach and 90 miles north of Miami. The city has a population of 33,348 in 2014. The CRBUSD was formed in 2004 to acquire, manage and maintain the water and sewer services for the city and adjacent communities. The Special District Board, which consists of city council members, governs the CRBUSD. Day-to-day operations are primarily managed by Riviera Beach municipal employees.
The city's top four employers include a Veterans Affairs Medical Center, Tropical Shipping, Cheney Brothers (food distribution), and Pepsi Cola Bottling Distributors. Employer concentration is high, accounting for over 30% of the workforce; however, Fitch expects the Veterans Affairs hospital, the city's largest employer by far, to remain a relatively stable entity.
STRONG FINANCIAL MANAGEMENT SUPPORTING SOUND DSC AND LIQUIDITY
Prior to fiscal year 2010, general financial metrics were fairly weak due to economic contraction, rising operational costs, and to a prior disinclination to raise utility rates. Since then, the CRBUSD's relatively new, albeit seasoned, management team has taken proactive steps to steer the system's finances and operations towards greater efficiency and sustainability. Under this guidance, financial performance has improved with the implementation of a series of new financial policies as well as the establishment of significant utility rate increases in a 2009 rate plan.
DSC has strengthened since fiscal year 2010, resulting in roughly 3.2x coverage for senior lien debt and 3.0x for total debt service in fiscal year 2013. FCF was a solid 204% of depreciation that same year, and averaged 243% annually over the previous four fiscal years. This positive growth has yielded a combined $17.6 million in unrestricted cash and renewal and replacement (R&R) fund reserves, equating to a healthy 441 days' of operations.
ELEVATED YET CURRENTLY COMPETITIVE RATES
The CRBUSD has independent rate setting authority and is responsible for adopting, by resolution, utility rate schedules. Assuming 5,000 gallons of use, rates are a slightly elevated $55 for combined water and sewer service, however are comparable to neighboring systems. The combined bill equates to 1.8% of MHI, approaching Fitch's affordability threshold of 2% for combined systems. When compared to average customer use nation-wide, which is closer to 7,500 gallons, rates are well in excess of the 2% benchmark.
The system's most recently commissioned rate study updates a 2009 rate plan instituted by the then-new management team that will increase water rates by 4% annually through fiscal year 2019. A one-time boost in wastewater charges by 10%-12% in fiscal year 2015 is also expected, followed by between 3% and 4% annual increases. At this pace, combined utility charges are expected to surpass 2% of MHI by fiscal year 2016 assuming local use of 5,500 gallons. The rate increases are generally viewed favorably as they are automatically implemented and allow ratepayers to absorb smaller and more frequent rate adjustments. However, rate setting flexibility may become constrained over time as affordability becomes an issue for many rate payers, especially given the lower median income of this area.
AMBITIOUS CAPITAL PROGRAM MAY PRESSURE DEBT POSITION
The system's debt burden is mixed. Debt as a percent of the system's net plant is relatively high at 78% (the 'A' median is 54%), but has declined steadily since the acquisition of the system in 2004. On a per customer basis, debt is relatively low at $995 in fiscal year 2013. However, Fitch projects both the debt per customer and debt-to-net-plant will increase over the next five years as management intends to issue additional bonds to fund the majority of its CIP. The utility has ample capacity to cover its current annual debt service (ADS) payments; debt carrying costs represented only 10% of gross revenues in fiscal year 2013, well below the 'A' median average of 24%, and funds available for debt service were ample at 4.2x in 2013, in line with the 'A' median of 4.2x.
The CRBUSD has developed a Master Plan that identifies $46.6 million in capital improvement needs from fiscal years 2014-2018, or an average of $9.3 million per year. This CIP addresses projects divided into the following categories: regulatory, capacity, R&R, water quality, water system security, and facility improvement. Historic capital spending has averaged closer to $3.6 million annually since fiscal year 2008, which has resulted in some reported deferred maintenance. In order to fund the needs prescribed by the Master Plan that will bring the system into a state of good repair, the CRBUSD will likely have to issue additional debt.
The rate study currently underway will determine the city's capacity to issue new money debt and the likely rate increases associated with increased ADS. Based on preliminary forecasts, conservative current estimates of additional debt will more than likely weaken the above debt metrics. Fitch anticipates that metrics should stay in line with the 'A' category once the needed additional debt is issued.
STRONG OPERATIONAL PROFILE
The CRBUSD owns and operates one water treatment plant and a water distribution system as well as a wastewater collection and transmission network. The water system serves the residents of the city, Peanut Island, the Town of Palm Beach Shores, a portion of the City of West Palm Beach, and customers in unincorporated parts of Palm Beach County, for a total service area of approximately 9.5 square miles. The city's water use permit (WUP) was last issued by the South Florida Water Management District in March 2012 for 20 years to allow a withdrawal of 9.1 million gallons per day (mgd) from the surficial Biscayne Aquifer. Average total actual customer consumption averages 7.0 mgd, however, the utility's water treatment plant has a design capacity permitted by the Florida Department of Environmental Protection to treat and supply up to 17.5 mgd, should flows increase. Based on population and water demand forecasted by the CRBUSD WUP consultant, the WUP supply allocation appears adequate to meet demand through the year 2032. The city is in compliance with all relevant regulations, and expects to resolve an outstanding consent order related to chlorine levels by the end of calendar year 2014.
The wastewater system serves the city, the Towns of Palm Beach Shores and Mangonia Park, and Peanut Island, for a combined service area of 10.3 square miles. All flows are conveyed through the CRBUSD's transmission network for treatment and disposal by the East Central Regional Water Reclamation Facility (ECRWRF, or the plant), which is owned by the city and several surrounding municipalities and operated by the City of West Palm Beach. The shared ownership of the ECRWRF was established via an Interlocal Agreement in 1992 and is currently in place through September 2052. The ECRWRF provides wholesale service to the cities of Riviera Beach, West Palm Beach, Lake Worth, and the Town of Palm Beach, as well as unincorporated parts of the county.
The CRBUSD is allotted 8.0 mgd of flows to the ECRWRF, or 11.43% of the plant's 70 mgd capacity, comfortably above its actual flows of 5.0 mgd on average. The city pays for both operational costs and shared debt service obligations to the ECRWRF through its operations and maintenance (O&M) expense budget. Management expects its annual O&M payments to increase by about 75% to a still manageable $3.5 million in fiscal year 2014 due to a large expected debt issuance by the ECRWRF for capital improvements to the system. The city's wastewater network is in full compliance with relevant regulations.
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 and Related Research:
--'Revenue-Supported Rating Criteria' (June 2013);
--'U.S. Water and Sewer Revenue Bond Rating Criteria' (July 2012);
--'2014 Water and Sewer Medians' (December 2013);
--'2014 Outlook: Water and Sewer Sector' (December 2013).
Applicable Criteria and Related Research:
2014 Water and Sewer Medians
2014 Outlook: Water and Sewer Sector
Revenue-Supported Rating Criteria
U.S. Water and Sewer Revenue Bond Rating Criteria