Fitch Rates Miami Dade County, FL's Water and Sewer Revs, Series 2015 'A+'

SAN FRANCISCO--()--Fitch Ratings assigns its 'A+' rating to the following Miami-Dade County bonds, issued on behalf of the county's water and sewer department:

--Approximately $480 million water and sewer revenue and refunding bonds, series 2015.

Proceeds of the 2015 bonds will advance refund outstanding debt for level savings and pay costs of issuance. The refunding will not extend bond maturity. Bonds are expected to price via negotiated sale the week of May 18.

Fitch also affirms its 'A+' rating on the following outstanding bonds:

--Approximately $2.18 billion water and sewer revenue bonds.

The Rating Outlook is Stable.

SECURITY

Bonds are secured by a first lien on net revenues of the combined water and sewer system.

KEY RATING DRIVERS

LARGE DIVERSE SERVICE AREA: The department provides water and sewer services to most of the county. Continued growth in the service area has offset the impact of increasing industry efficiencies and conservation efforts that are reducing water and sewer flows nationally. Demand in the county has remained relatively stable and is predominantly residential.

ADEQUATE FINANCIAL MARGINS: Financial margins are stable with Fitch-calculated debt service coverage of revenue bonds at 1.7x in fiscal 2014. Fitch expects coverage ratios will remain at or above 1.5x, without connection fees, based on the department's most recent financial forecast. Liquidity is adequate with 162 days cash at the end of fiscal 2014.

SIGNIFICANT CAPITAL NEEDS: The department has a 10-year $13.5 billion capital improvement plan (CIP) for both systems driven by the need to replace aging infrastructure and to comply with multiple regulatory mandates. The majority of investment will be funded with additional debt issuance that will increase debt levels rapidly in the next few years to above-average levels. Capital needs extend beyond the 10-year CIP.

WEAK FINANCIAL FORECASTING: The absence of well-defined financial policies coupled with the lack of timely long-term financial and rate forecasts is a growing concern, particularly as debt issuance and capital spending ramps up over the coming years.

ONGOING RATE PRESSURE: Rate sensitivity is a credit concern despite the system's very low combined rates. Rate increases occurred in fiscals 2014 and 2015 following two years of no increases. The department expects to need annual rate increases in the range of 6% through the current forecast period but final rate action occurs in conjunction with the county's budget adoption process each year.

RATING SENSITIVITIES

PACE OF DEBT ESCALATION: Rating stability will be predicated on the timeliness and sufficiency of future rate increases to absorb the rapid pace of additional debt issuance projected by the department.

CREDIT PROFILE

The department provides water and sewer services to the entire county through direct retail service and through wholesale water and sewer contracts with 14 and 12 municipal systems, respectively. The department also provides sewer treatment services to Homestead Air Reserve Base.

The county sets wholesale rates annually to cover wholesale costs, but retail revenues for water and sewer services account for the majority of department revenues at 82%. Retail customers have been stable with five-year average growth of less than 0.5% in both systems. Water sales have been stable to both groups of customers at between 231 and 236 million gallons per day (mgd).

FINANCIAL PERFORMANCE IS ADEQUATE

Financial performance in fiscal 2014 was healthy with senior lien debt service coverage of revenue bonds, including connection fee revenues, of 1.93x. All-in debt service coverage was 1.75x including subordinate state revolving fund loans. Senior and all-in coverage levels excluding cash connection fees were 1.72x and 1.55x, respectively. Liquidity was adequate at $155.3 million, or 162 days of operations, including the department's current cash and investments, the rate stabilization fund and the general reserve fund.

Financial performance in fiscal 2015 will likely be weaker than in fiscal 2014 given an additional $30 million in expenditures and increasing debt service costs. Department financial projections provided in a 2013 Black & Veatch consulting engineer's report indicate that revenue bond coverage is expected to remain at or above 1.5x and all-in debt service coverage is projected to remain above 1.4x through fiscal 2019 with anticipated rate increases and additional debt.

ONGOING RATE INCREASES NEEDED TO SUPPORT PLANNED DEBT

Despite very low combined rates, Fitch views the system's rate flexibility as limited, as indicated by the county's decision not to impose rate increases in fiscals 2012 and 2013, despite escalating debt service costs. Moderate rate increases of 8% and 6% were adopted in fiscals 2014 and 2015 as capital needs were clarified with the sewer system consent decree modification.

Debt service costs will continue to increase given the magnitude of additional debt expected to be issued. Expenditure levels are relatively fixed and much of the planned capital spending is needed to meet regulatory requirements, so Fitch views flexibility on the expenditure side as limited.

WATER CAPITAL DRIVEN BY SUPPLY DIVERSIFICATION AND INFRASTRUCTURE REPLACEMENT

The department faces a very large capital plan that is primarily driven by regulatory requirements. Of the 10-year $13.5 billion CIP, $3 billion relates to the water system. Water system CIP projects include distribution system expansion, repair and replacement of existing infrastructure, compliance with the safe drinking water act, and reflect requirements of the department's 20-year water use permit. The new water permit strives to protect groundwater resources by reducing use of the department's sole water source, the Biscayne aquifer, by requiring the development of alternative water supplies. To comply with the water use permit, the department will begin withdrawing water from the Floridan aquifer and treating the water at its 10mgd reverse osmosis plant. The plant, which was recently constructed and is undergoing testing before entering commercial operation, is jointly owned with the city of Hialeah.

In addition, the department must build an additional 20mgd reverse osmosis plant that will also treat water from the Floridan aquifer. The South Miami Heights water treatment plant is required to be completed by 2019. The two reverse osmosis plants will provide a slight diversification of water supply (25mgd), albeit small compared to overall demand (230.8mgd in 2014). The plants will satisfy the balance of requirements in the 2007 water permit.

LARGE SHARE OF CAPITAL PLAN RELATES TO SEWER

The remaining $10.5 billion in the 10-year CIP relates to the sewer system, including $1.6 billion in requirements based on a consent decree with the Florida Department of Environmental Protection (FDEP) and another $3.3 billion related to the state's ocean outfall legislation. The 2013 consent decree replaces previous consent orders and requires sewer system treatment and collection system repairs. The 2008 ocean outfall state legislation requires the department to end its use of ocean outfalls for sewer effluent disposal by 2025, which will require major system redesign and investment.

CIP EXECUTION IS CRITICAL; NEEDS PRIMARILY DEBT FUNDED

The department must execute a multitude of capital projects simultaneously to meet regulatory deadlines. Timely execution of the CIP is viewed as a risk. Recent upper management changes appear designed to bring additional expertise to the department in this area. However, the absence of defined financial policies and internal long-term financial and rate forecasting are concerning, given the magnitude of capital needs.

Five-year (2016-2020) capital needs are projected at $4.9 billion, of which management estimates that around 88%, or $4.3 billion, will be debt financed. The department's free cash flow-to-depreciation is consistently below 100% (65% in fiscal 2014), limiting available cash flow to fund capital replacement.

Debt levels are already above average for the sector at $2,952 per customer (although this does include the department's wholesale customers) and debt-to-net plant assets of 66%. Debt per customer may climb to over $6,200 over the next five years. Fitch expects that with timely rate recovery, the department can absorb costs related to the additional debt at the current rating level.

Additional information is available at 'www.fitchratings.com'

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);

--'2015 Water and Sewer Medians', December 2014;

--'2015 Outlook: Water and Sewer Sector', December 2014.

Applicable Criteria and Related Research:

2015 Outlook: Water and Sewer Sector

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=818410

2015 Water and Sewer Medians

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=818409

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

Additional Disclosure

Solicitation Status

http://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=984300

ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: HTTP://FITCHRATINGS.COM/UNDERSTANDINGCREDITRATINGS. IN ADDITION, RATING DEFINITIONS AND THE TERMS OF USE OF SUCH RATINGS ARE AVAILABLE ON THE AGENCY'S PUBLIC WEBSITE 'WWW.FITCHRATINGS.COM'. PUBLISHED RATINGS, CRITERIA AND METHODOLOGIES ARE AVAILABLE FROM THIS SITE AT ALL TIMES. FITCH'S CODE OF CONDUCT, CONFIDENTIALITY, CONFLICTS OF INTEREST, AFFILIATE FIREWALL, COMPLIANCE AND OTHER RELEVANT POLICIES AND PROCEDURES ARE ALSO AVAILABLE FROM THE 'CODE OF CONDUCT' SECTION OF THIS SITE. FITCH MAY HAVE PROVIDED ANOTHER PERMISSIBLE SERVICE TO THE RATED ENTITY OR ITS RELATED THIRD PARTIES. DETAILS OF THIS SERVICE FOR RATINGS FOR WHICH THE LEAD ANALYST IS BASED IN AN EU-REGISTERED ENTITY CAN BE FOUND ON THE ENTITY SUMMARY PAGE FOR THIS ISSUER ON THE FITCH WEBSITE.

Contacts

Fitch Ratings
Primary Analyst
Kathy Masterson
Senior Director
+1 415-732-5622
Fitch Ratings, Inc.
650 California Street, 4th Floor
San Francisco, CA 94108
or
Secondary Analyst
Andrew Destefano
Director
+1 212-908-0284
or
Committee Chairperson
Chris Hessenthaler
Senior Director
+1 212-908-0773
or
Media Relations:
Elizabeth Fogerty, +1 212-908-0526
elizabeth.fogerty@fitchratings.com

Contacts

Fitch Ratings
Primary Analyst
Kathy Masterson
Senior Director
+1 415-732-5622
Fitch Ratings, Inc.
650 California Street, 4th Floor
San Francisco, CA 94108
or
Secondary Analyst
Andrew Destefano
Director
+1 212-908-0284
or
Committee Chairperson
Chris Hessenthaler
Senior Director
+1 212-908-0773
or
Media Relations:
Elizabeth Fogerty, +1 212-908-0526
elizabeth.fogerty@fitchratings.com