Fitch Affirms Panama City Beach, FL's Utility Revs at 'AA'

NEW YORK--()--Fitch Ratings has affirmed the 'AA' rating for the following Panama City Beach, FL (the city) revenue bonds:

--Approximately $44.5 million in outstanding utility system revenue bonds series 2009 and 2012.

The Rating Outlook is Stable.

SECURITY

Bonds are payable from net revenues of the city's water and sewer system (the system), including system development charges as well as public service tax (PST) revenues. The bonds are further secured by a cash-funded debt service reserve fund.

KEY RATING DRIVERS

STRONG FINANCIAL PERFORMANCE: System debt service coverage (DSC) and available liquidity is strong and is forecast to improve further according to unaudited fiscal 2015 results. Overall financial flexibility is additionally supported by supplementary revenues generated by a PST as well as comparably low customer rates.

MODERATE DEBT POSITION & CAPITAL PROGRAM: Debt levels are moderate and are expected to continually decline given no additional debt plans in the near-term. The system's five-year capital improvement plan (CIP) is expected to be funded entirely by cash unless additional state grants are acquired.

CONCENTRATED BUT STABLE ECONOMY: The tourism and military-based service area economy is inherently limited but continues to improve after a severe economic decline and rise in unemployment experienced in 2008.

RATING SENSITIVITIES

ECONOMIC CLIMATE: The service territory's relatively small size and concentration of tourism and military sectors largely limits the rating from further improvement.

CREDIT PROFILE

Panama City Beach is located along the Gulf Coast in the western portion of the Florida Panhandle, midway between the cities of Pensacola and Tallahassee. The city's utility service territory has approximately 33,000 residents in the city and in the unincorporated areas of the county. The local population triples to about 100,000 people during the peak summer tourism season.

The city is a wholesale water customer of Bay County through a long-term take-or-pay bulk water contract that expires in 2042. The contract grants exclusive rights to the city to distribute water to certain unincorporated areas of the county, which accounts for two thirds of the system's 21,000 water customer base. The take-or-pay contract requires the city to pay for an annual minimum of 5.1 billion gallons regardless of actual consumption. The city has historically consumed less than the minimum amount and therefore paid a differential payment to the county, which since 2010 have been very minimal, averaging only about .8% of annual revenues. The city-owned and operated wastewater utility serves 12,000 sewer customers.

STRONG FINANCIAL PERFORMANCE

The system has historically maintained very strong financial results, generating positive margins despite the negative impacts in recent years of both the economic and housing market downturn and the BP oil spill. In fiscal 2014, net system revenues yielded over 4.5x senior lien DSC and 3.2x all-in DSC, the latter including subordinate state revolving fund loans. When including an additional approximately $3.5 million in PST revenues available to the system, DSC levels improve even further to 5.7x and 4x for senior lien and all-in DSC respectively. Preliminary unaudited fiscal 2015 results show DSC increasing to 5.7x and 3.4x for senior and all-in coverage, respectively, not including PST revenues.

Liquidity, as measured by days' cash on hand (DCOH) from unrestricted cash and investments has averaged over 400 days since at least fiscal year 2006. Liquidity was exceptional in fiscal 2014; $43.7 million in unrestricted cash and investments equated to 810 DCOH. Preliminarily, unaudited fiscal 2015 results show over $48 million in cash equating to approximately 962 DCOH. Cash levels remain robust through the five years despite management's intention to cash-fund the majority of its CIP needs.

LOW RATES PROVIDE FINANCIAL FLEXIBILITY

The city has full rate-setting authority and typically has enacted modest yet consistent annual rate increases that fully pass through bulk rate charge increases from the city's wholesale water provider Bay County, and that help buffer against potential economic volatility. The average combined residential monthly bill totals about $52 and equates to a low 1.2% of median household income (MHI), falling below Fitch's affordability indicator of 2% of MHI. System affordability is favorable relative to regional peer systems and provides financial flexibility should rates need to be raised.

PST REVENUES PROVIDE ADDITIONAL SUPPORT

The city's PST is a tax levied on the purchase of electricity, gas, and communications within the city that generated $3.9 million in fiscal 2014. The PST is an additional revenue source that is pledged to bondholders. However, the city can remove the PST from the lien of the bond resolution if system net revenues equal to at least 1.25x maximum annual debt service for senior lien debt for three consecutive years. Although this threshold has been met, the city has indicated it has no intention of releasing the tax from the lien. Because of the system's strong financial results apart from the PST, Fitch does not consider the pledge of PST revenues to be a significant rating factor.

MODERATE DEBT, MANAGEABLE CAPITAL NEEDS

Previously elevated debt ratios show continued improvement to levels that are now considered moderate. Total debt represented 52% of net fixed assets in fiscal 2014, consistent with Fitch Rating's 'AA' sector median of 50% and is projected to continue to decline as debt amortizes at a fairly rapid pace (47% in 10 years and 86% in 20 years). Debt per customer peaked in fiscal 2009 at $2,368 but as of fiscal 2014 declined to a low $1,732. Debt represents only 3.8x of the funds available for debt service and minimal debt issuance plans going forward and a lack of major capital needs should maintain steadily declining metrics.

The system's five-year fiscal 2016 - 2020 CIP totals $62 million and is expected to be 75%/25% cash- and grant-funded. In addition to significant renewal and replacement of standard system assets, the plan includes several large items that comprise nearly half of the total CIP costs. The construction timelines and cost expenditures of these projects are long-term and will likely extend beyond the five-year window, thereby inflating actual current spending expectations. These projects are also expected to be partially funded by state grants, which if not attained the projects or partial phases therein will not occur. Management indicates that most capital needs can be deferred if and when needed, and that no additional debt will be necessary for capital funding given the system's robust and available cash balances.

STABLE BUT CONCENTRATED ECONOMY

The nine-mile stretch of Panama City Beach is one of the most popular tourist beach destinations in Florida. Prior to the 2008 economic downturn, the city built significant water and sewer infrastructure in anticipation of future development that was subsequently not realized. The local economy is currently rebounding, with new projects underway in the north side of the area of both temporary and permanent residential housing and commercial development that is already accommodated for by the existing system infrastructure. Management expects sustained customer growth given this economic development activity.

The BP oil spill in 2010 had a severe impact on the local economy, scaling back that year's tourism season. However since 2011 the economy had regained momentum with the tourism industry being one of the area's top economic drivers. As of August 2015 the city's unemployment rate fell to 5.2%, well below the prior year's rate of 6.4%. Wealth levels are positive at 110% of the state MHI and 97% of that of the nation.

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

Revenue-Supported Rating Criteria (pub. 16 Jun 2014)

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

U.S. Water and Sewer Revenue Bond Rating Criteria (pub. 03 Sep 2015)

https://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=869223

Additional Disclosures

Dodd-Frank Rating Information Disclosure Form

https://www.fitchratings.com/creditdesk/press_releases/content/ridf_frame.cfm?pr_id=993944

Solicitation Status

https://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=993944

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Contacts

Fitch Ratings
Primary Analyst
Eva Rippeteau, +1-212-908-9105
Associate Director
Fitch Ratings, Inc.
33 Whitehall Street
New York, NY 10004
or
Secondary Analyst
Andrew DeStefano, +1-212-908-0284
Director
or
Committee Chairperson
Kathy Masterson, +1-512-215-3730
Director
or
Media Relations
Sandro Scenga, New York, +1-212-908-0278
sandro.scenga@fitchratings.com

Contacts

Fitch Ratings
Primary Analyst
Eva Rippeteau, +1-212-908-9105
Associate Director
Fitch Ratings, Inc.
33 Whitehall Street
New York, NY 10004
or
Secondary Analyst
Andrew DeStefano, +1-212-908-0284
Director
or
Committee Chairperson
Kathy Masterson, +1-512-215-3730
Director
or
Media Relations
Sandro Scenga, New York, +1-212-908-0278
sandro.scenga@fitchratings.com