Fitch Rates Peace River/Manasota Regional Water Supply Auth, FL's Utility Revs 'AA-'; Outlook Stable

NEW YORK--()--Fitch Ratings assigns an 'AA-' rating to the following Peace River/Manasota Regional Water Supply Authority, FL (the authority) revenue bonds:

--Approximately $57 million utility system refunding revenue bonds series 2014B;

--Approximately $24 million utility system refunding revenue bonds, series 2015 (forward delivery).

Both series of bonds are expected to sell via negotiation the week of Oct. 20. The 2014B bonds are expected to close on Nov. 4, 2014. The series 2015 bonds are expected to close on July 7, 2015.

Series 2014B proceeds will be used to advance refund all or a portion of the outstanding series 2005A bonds for interest savings and pay issuance costs. Series 2015 proceeds (forward delivery) will refund all or a portion of the outstanding series 2005B bonds for interest savings and pay issuance costs. Both refundings will produce level annual savings.

In addition, Fitch affirms the following:

--Approximately $159 million in outstanding utility system revenue bonds (prior to the refunding).

The Rating Outlook is Stable.

SECURITY

The bonds are secured by a senior lien pledge of the net revenues of the authority.

KEY RATING DRIVERS

LARGE REGIONAL WHOLESALE WATER PROVIDER: The authority is an independent special district that provides wholesale water supply to four public utility systems via long-term contract. The four customers are located in southwest Florida.

SOLID CONTRACTUAL PAYMENT OBLIGATION: Contract provisions are strong and include an irrevocable commitment to pay whether or not water is delivered (take-or-pay) once it is allocated. Contract payments are an operating expense of each member's respective utility system, with priority over debt service, if any. The lack of step-up provisions is largely offset by the ability to reallocate water in the event of a member default and the authority's sound liquidity position.

STABLE FINANCIAL PERFORMANCE, STRONG LIQUIDITY: Financial oversight is strong and results are considered solid for a wholesale system.

MIXED DEBT PROFILE: Outstanding debt is an above average 57% of net plant though this level is more typical for a wholesale utility. Amortization of existing debt is weak with just 19% of outstanding principal retired over the next 10 years. Water supply is secure with the completion of the regional reservoir in 2010, and near-term capital needs are modest, focusing on system upkeep, renewal and replacement.

RATING SENSITIVITIES

OPERATIONS, FINANCES AND DEBT MANAGEMENT: The rating is sensitive to shifts in various credit fundamentals including financial and operating performance and capital and debt management. The Stable Outlook reflects such changes are not anticipated over the next several years.

CREDIT PROFILE

INDEPENDENT REGIONAL WHOLESALE WATER AGENCY

The authority is an independent special district and regional water supply authority created by an interlocal agreement in 1982 (and amended in 2005) to provide wholesale water to four member public agencies (the Counties of Charlotte, Sarasota, DeSoto and Manatee) and one non-member public agency (City of North Port). Charlotte and Sarasota Counties together were allocated about 90% of authority water in fiscal 2013. Water is not currently provided to Manatee County. The service area is large and diverse and includes approximately 500,000 residents.

AMPLE WATER SUPPLY AND TREATMENT CAPACITY LIMIT CAPITAL NEEDS

The authority transports, stores, distributes, and treats water primarily derived from the Peace River. Significant growth in the service area prior to the recession led to the authority doubling the treatment capacity at its water treatment plant to 48 million gallons per day (mgd) and construction of a 6.6 billion gallon reservoir as part of the regional expansion program that began in fiscal 2006. Overall, system capacity and water resources are ample, and customer demand has been stable; fiscal 2013 demand was approximately 25 mgd, well below the plant's maximum treatment capabilities. As a result, the authority's capital needs are limited to system upkeep and maintenance, which officials expect will total roughly $2 million annually.

SOLID CONTRACT PROVISIONS

Water supply is provided under a master water supply contract adopted by the member agencies (and North Port) in 2005 concurrent with the amended interlocal agreement. The contract expires in 2040 with an option to renew for another 35 years, and cannot be terminated before the final maturity of the bonds.

The contract does not contain a step-up provision in case of a customer default. However, Fitch believes the contract's take-or-pay provision, generally strong demand for water within the state, and the high costs and lengthy procurement process for obtaining, treating and delivering alternative sources provides significant and positive support for the rating. Contractual payments are paid monthly as an operating expense of the customer's utility system, which have demonstrated at least average credit characteristics on their own.

STABLE FINANCIAL PERFORMANCE AND STRONG LIQUIDITY

Financial performance remains stable following weaker results demonstrated in fiscals 2008 and 2009 resulting from lower demand due to the recession and drought conditions. Financial results improved and have been largely stable over the past four fiscal years. In fiscal 2013, debt service coverage (DSC) totaled 1.6x, which is considered healthy for a wholesale provider. Fitch views favorably the authority's sound financial oversight and rate structure, which is heavily-weighted toward fixed charges and includes annual debt service and budgeted capital needs. Estimated fiscal 2014 financial results are similar to results for fiscal 2013.

Liquidity is robust. The authority ended fiscal 2013 with 528 days cash on hand. Available resources include unrestricted cash and investments as well as utility operating reserves, rate stabilization funds and amounts set aside for system renewal and replacement. Given the very manageable cash-funded capital plan, liquidity is expected to remain strong. The strong liquidity provides a solid cushion for operations and debt service in the unlikely event of a default by one of the customers. None of the customers has ever had a late payment or payment default.

Pro forma financial results provided by the authority's rate consultant show a continuation of sound margins and cash flows. DSC is projected to be near budgetary targets of 1.5x in fiscal 2015, before improving to 1.7x in fiscal 2016 and through the remainder of the forecast (fiscal 2019). The pro forma includes limited growth in customer demand, reasonable operating cost escalators, modest pay-as-you-go capital spending and the issuance of refunding bonds projected to lower annual debt service.

MANAGEABLE DEBT, CAPITAL NEEDS LIMITED TO R&R

The authority has approximately $160 million in total debt outstanding as of fiscal 2013, leading to somewhat mixed debt metrics. Debt per capita (using the estimated 500,000 population) is very favorable at $326. However, debt is 57% of net plant, nearly 10.0x FADS (funds available for debt service), and 34% of gross revenues. The bond proceeds coupled with a direct bank loan (fixed-rate, with a parity lien on net revenues) will be used to refund most of the outstanding series 2005A and 2005B bonds. As a result, estimated annual interest savings will lower future carrying charges to below 30% of gross revenues, which Fitch views favorably. Amortization will remain very slow, although capital needs are limited to system renewal and replacement, and no additional debt is expected 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=890234

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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
Teri F. Wenck, CPA
Associate Director
+1-512-215-3740
or
Committee Chairperson
Karen Ribble
Senior Director
+1-415-732-5611
or
Media Relations:
Elizabeth Fogerty, +1-212-908-0526 (New York)
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
Teri F. Wenck, CPA
Associate Director
+1-512-215-3740
or
Committee Chairperson
Karen Ribble
Senior Director
+1-415-732-5611
or
Media Relations:
Elizabeth Fogerty, +1-212-908-0526 (New York)
elizabeth.fogerty@fitchratings.com