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

NEW YORK--()--Fitch Ratings affirms the 'AAA' rating on Hillsborough County, FL's (the county) approximately $166 million in outstanding utility system revenue bonds.

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 demonstrated by solid annual financial margins and cash flows, strong debt service coverage (DSC) and liquidity, cash-funding of capital needs, and low debt levels.

VERY LOW DEBT BURDEN: System leverage remains low. Annual debt service is expected to decline further with scheduled maturity of the series 2001 bonds.

HIGHER, STILL MANAGEABLE CAPITAL PROGRAM: Capital needs through 2019 total $400 million and include system renewal and replacement as well as expansion and consolidation of wastewater treatment facilities. Significant excess annual cash flows coupled with high existing cash balances allows the county to cash-fund all of the proposed capital projects.

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 has declined to 6% in May 2014, which is lower than state and national levels.

RATING SENSITIVITIES

RATING STABILITY EXPECTED: The rating is sensitive to shifts in various credit characteristics, including financial and operating performance as well as debt and capital management. The Stable Outlook reflects Fitch's expectation that such shifts are unlikely over the next several years.

CREDIT PROFILE

Hillsborough County (general obligation bonds rated 'AAA' by Fitch) owns and operates the system which services approximately 500,000 residents located in the unincorporated areas of the county. The system served over 148,000 mostly residential water accounts and roughly 136,000 sewer accounts in fiscal 2013. The county, located on central Florida's western coast, is the fourth most populous county in the state with a 2013 population of approximately 1.3 million.

CONSERVATIVE SYSTEM MANAGEMENT UNDERPINS THE 'AAA' RATING

The system, which is 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 very 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 3.0x DSC of all debt (excluding connection fees) over the past three years, and very sizable unrestricted cash balances of nearly $290 million in fiscal 2013, which was equivalent to 794 days cash on hand. Including approximately $58 million of renewal and replacement funds, liquidity was equal to 953 days cash.

Debt is conservatively managed. Significant investment in the system has been accomplished mainly with cash resources, limiting long-term debt outstanding to just $167 million as of fiscal-end 2013. 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, leverage ratios continue to approximate the medians for system's rated 'AAA'. Debt totaled just 19% of net capital assets, $587 per customer, and a very low 0.4% of system equity in fiscal 2013. In addition, debt carrying costs were just 8% of gross revenues for the same period.

Capital needs remain manageable despite an increase in the five-year capital improvement plan (CIP) to $400 million through fiscal 2019 (the previous CIP totaled $250 million). The CIP includes system renewal, rehabilitation and upgrades as well as expansion and improvements to the Northwest wastewater reclamation plant, a $100 million project that will allow the county to decommission older facilities. The consolidation is projected to provide long-term savings of $80 million over 20 years. Even with an increase in identified capital needs, no new debt is expected over the intermediate term; management expects to rely on existing cash, sizable expected excess annual cash flows and other sources (impact fees and grants) 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'), Pasco County ('AA' rated water and sewer revenue bonds), and the cities of Tampa ('AAA' water and sewer revenue bonds), St. Petersburg ('AA' rated utility revenue bonds), and New Port Richey.

The county received 49.3 million gallons per day (mgd), or about 31% of TBW's total 2013 production of 158 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 2014. 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

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 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:

Revenue-Supported Rating Criteria

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

U.S. Water and Sewer Revenue Bond Rating Criteria

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=715275

2014 Water and Sewer Medians

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

2014 Outlook: Water and Sewer Sector

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

Additional Disclosure

Solicitation Status

http://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=845936

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Contacts

Fitch Ratings
Primary Analyst
Andrew DeStefano
Director
+1-212-908-0284
Fitch Ratings, Inc.
33 Whitehall Street
New York, NY 10004
or
Secondary Analyst
Larry Levitz
Director
+1-212-908-9174
or
Committee Chairperson
Doug Scott
Managing Director
+1-512-215-3725
or
Media Relations
Elizabeth Fogerty, New York, +1-212-908-0526
elizabeth.fogerty@fitchratings.com

Contacts

Fitch Ratings
Primary Analyst
Andrew DeStefano
Director
+1-212-908-0284
Fitch Ratings, Inc.
33 Whitehall Street
New York, NY 10004
or
Secondary Analyst
Larry Levitz
Director
+1-212-908-9174
or
Committee Chairperson
Doug Scott
Managing Director
+1-512-215-3725
or
Media Relations
Elizabeth Fogerty, New York, +1-212-908-0526
elizabeth.fogerty@fitchratings.com