NEW YORK--(BUSINESS WIRE)--Fitch Ratings has affirmed the ratings on the following Pasco County, FL (the county) revenue bonds:
--$240 million outstanding water and sewer revenue bonds, series 2006, 2009A, 2009B, 2014A and 2014B at 'AA'.
The Rating Outlook is Stable.
The bonds are payable by the net revenues of the county's water and sewer system (the system) and legally available impact fees. The bonds are also supported by a debt service reserve fund.
KEY RATING DRIVERS
STRONG FINANCIAL PERFORMANCE: The system's finances remain strong, aided by a multi-year rate plan through fiscal 2015 and stable operating performance. In fiscal 2015, debt service coverage (DSC) and free cash flow ratios were strong, boosted in part by significant connection fee revenue. Liquidity was slightly below the categorical medians but still solid.
MANAGEABLE DEBT AND CAPITAL NEEDS: Fitch expects the system's debt burden to remain manageable. The capital improvement plan, which is weighted mostly toward sewer projects, is mainly funded with a combination of existing bond proceeds and other funds on hand, including impact fees. Debt amortization is relatively slow, but no new debt is currently expected over the next five years.
AMPLE SYSTEM CAPACITY: The system has adequate treatment capacity and reliable water supply derived from a combination of local sources and Tampa Bay Water (TBW). Sewer treatment projects will continue as the county consolidates and expands its facilities. TBW's proactive capital planning and ample long-term water supply benefits the system.
RATES NEAR AFFORDABILITY THRESHOLD: Residential rates for combined service are still affordable but approaching 2% of median household income. Manageable rate increases were passed in 2012-2015 as part of a multi-year rate plan. Another manageable increase is expected in 2018, but overall rates should remain affordable and competitive.
LIMITED LOCAL ECONOMY: The service area economy is largely rural, with some tourism and a growing population. Proximity to the city of Tampa and surrounding northern suburban communities provides residents with additional employment opportunities helps offset the limitations in the local economy.
SOUND FINANCES EXPECTED: The rating on the Pasco County utility system's bonds assumes solid financial metrics will be maintained going forward. This expectation is based on a manageable capital program that is largely funded with existing bond proceeds and pay-go sources, which limits additional debt needs. A new independent rate study has been commissioned with recommendations expected later this year. Fitch expects rates will be increased as necessary to maintain sound financial margins in line with historical results.
The system's service area encompasses unincorporated portions of Pasco County and is located on the central west coast of Florida approximately 30 miles northwest of the city of Tampa. The system serves roughly half of the estimated 460,000 county residents through 105,000 water and 85,000 sewer accounts.
AMPLE SUPPLY AND SOUND OPERATIONS
The system purchases approximately 24 million gallons per day (mgd), or 85% of its potable water needs, from TBW (revenue bonds rated 'AA+' with a Stable Outlook by Fitch), a regional wholesale water provider. TBW is a special district created by interlocal agreement to plan, develop, and deliver a dependable and high-quality water supply to Pasco, Pinellas and Hillsborough counties, and the cities of Tampa, St. Petersburg, and New Port Richey.
The county is the fourth largest TBW consumer, accounting for roughly 15% of the wholesaler's ample resources. TBW is mandated to secure long-term supply demands to its customers, and despite continued efforts to diversify supply sources, a recent decline in regional consumption has pushed the need for additional supply out for a number of years. The balance of the county's water demand is derived from smaller but amply stocked groundwater sources.
A total of eight wastewater treatment facilities provide the system with 35 mgd of sewer treatment capacity, well in excess of the average daily flow of 22 mgd in 2015. The system has plans to further centralize its dispersed collection system through the consolidation of smaller plants into fewer larger plants that undergo capacity expansion and improvement. Treatment capacity will remain ample and system improvements will enhance compliance with regulatory requirements.
SOUND FINANCES, MOST METRICS ALIGN WITH MEDIANS
The system's historical financial performance has been strong characterized by average DSC of 2.9x from all pledged revenues since fiscal 2011 despite a rise in annual debt service expense. Free cash flow has also been solid averaging 107% over the past five years. Strong revenue performance results from a combination of rate increases and customer growth that led to a 21% rise in operating revenues over the past five years. DSC and free cash metrics compare favorably to the 'AA'-category credits, although performance is somewhat tempered by the significant level of one-time revenues from connection fees, which have equaled over 10% of revenues over the last five years and which could be subject to future volatility. Excluding connection charges, fiscal 2015 DSC was 2.1x, in line with similarly-rated credits.
Fiscal 2015 ended with $36 million in unrestricted cash and investments, which combined with renewal and replacement funds ($16 million) provides a solid, albeit below average, liquidity position equivalent to 267 days cash on hand. Liquidity is considered healthy given the solid margins and manageable capital needs.
Updated financial projections were not available for this review. However, the county has commissioned another independent rate study to be completed later in 2016. Previous financial projections have been generally conservative and assumed minimal customer growth, moderate annual rate increases, and contingencies for lower revenues and higher expenses.
Rates were not raised in 2016, but management reports actual results are tracking close to budget with DSC dipping slightly from previous years (to 2.3x from all revenues and 1.8x without connection fees). A 5.5% rate increase is currently projected by management to be approved for fiscal 2018. The size and frequency of future rate increases is not yet known, although Fitch expects the county will manage the system's finances in line with its currently strong ratings. A rise in indirect cost allocation payments to the county's general fund beginning in fiscal 2017 may lead to slightly lower margins but results are expected to remain sound.
RATES STILL AFFORDABLE, FUTURE INCREASES SHOULD BE MANAGEABLE
The typical customer consumes an average of 6,000 gallons of water per month, resulting in a combined water and wastewater charge of approximately $72. This charge makes up roughly 2% of median household income, equal to Fitch's affordability threshold. The governing body historically has shown support for necessary rate hikes as needed. While the rates do not contain an automatic adjustment for changes in TBW's charges, TBW rate increases have historically been consistent and predictable. Also, the county has representation on TBW's Board, allowing it to have input into and awareness of TBW rate changes as they are contemplated.
MANAGEABLE DEBT BURDEN AND CAPITAL PROGRAM
In fiscal year 2015, the utility's total debt outstanding ($250 million) comprised a manageable 42% of the system's net plant assets and $1,413 per customer, both comparing favorably to the 'AA'-category median averages of 47% and $2,050, respectively. The debt-per-capita metric was elevated that same year at $1,073, but this is largely reflective of the high number of retirees and two-person homes within the service area.
The five-year capital improvement plan (CIP) through 2021 is a manageable $158 million. The CIP, which is an affordable $172 per customer annually, will be largely financed by previously issued bond proceeds ($51 million), impact fee fund balances, and annually recurring cash flow. While direct debt ratios and capital needs are manageable, they are somewhat understated as the system makes annual payments for TBW's water supply capital costs and debt service as operating expense. The majority of the system's direct capital improvement needs focus on sewer and reclaimed water projects, including the expansion and improvement of two wastewater treatment facilities.
STABLE YET LIMITED LOCAL ECONOMY
Pasco County has a primarily retirement and tourism-based economy, with some diversification within the financial and medical services sectors. The limitation of the local economic base was evident as unemployment spiked well above both the state and nation at the peak of the recession. Subsequent steady job growth has helped bring unemployment down to 4.6% as of May 2016 despite a rise in labor participation.
The county's largest employers include several stable governmental agencies, including the school system, with over 9,700 employees, county government (2,700), state government (1,200) and the county sheriff. Large private sector employers include HCA Healthcare (2,500 employees) and various other healthcare providers. While the county's economy is primarily supported by relatively low-wage earning jobs concentrated in retail, retirement service and tourism industries, a large percentage of the county's skilled workforce commutes to neighboring city of Tampa and surrounding communities for employment.
Additional information is available at 'www.fitchratings.com'.
Revenue-Supported Rating Criteria (pub. 16 Jun 2014)
U.S. Water and Sewer Revenue Bond Rating Criteria (pub. 03 Sep 2015)
Dodd-Frank Rating Information Disclosure Form