NEW YORK--(BUSINESS WIRE)--Fitch Ratings affirms the 'AA-' rating on the following Clearwater, Florida revenue bonds:
--Approximately $168.6 million water & sewer revenue bonds, series 2003 ($1.4 million), series 2006 ($26.4 million), series 2009A ($67.7 million), series 2009B ($27.4 million), and series 2011 ($45.7 million).
The Rating Outlook is Stable.
SECURITY
The bonds are secured by the net revenues of the water and sewer system.
KEY RATING DRIVERS
ADEQUATE FINANCIAL COVERAGE: Revenue growth and prudent expense budgeting have resulted in steadily rising debt coverage levels and greatly improved liquidity over the past five years.
SUBSTANTIAL DEBT LOAD: The system's long-term debt is high on a per-customer basis, and represents nearly three quarters of the system's net assets.
STRATEGIC CAPITAL PLANNING: The utility's six-year capital improvement plan funds significant wastewater system improvements to ensure regulatory compliance, as well as projects that will increase potable water production and groundwater supply replenishment.
STRATEGIC RATE SETTING: The utility has proactively planned multi-year, steady rate increases, successfully buffering the impacts of declining customer demand, wholesale water rate increases passed down from the county, and a stagnating economic environment.
IMPROVING ECONOMIC BASE: Clearwater is the county seat of Pinellas County. Though adversely affected in recent years by economic stagnation, the city's proximity to the economic hub of the surrounding Tampa Metropolitan Statistical Area (MSA) provides economic stability.
RATING SENSITIVITIES
SYSTEM ALREADY HIGHLY LEVERAGED: Additional borrowing in the near term beyond amounts currently forecast would likely pressure operations and could negatively impact the rating.
CREDIT PROFILE
IMPROVING SERVICE AREA ECONOMY
Clearwater, the county seat of Pinellas County, is located in the middle of the west coast of Florida along the Gulf of Mexico, approximately 20 miles west of Tampa and 15 miles north of St. Petersburg. The system's service area includes the city, with an estimated population of about 107,000, and a small portion of surrounding unincorporated sections of the county. The combined system's customer base is diverse, with little concentration among its largest users.
The number of active customer accounts has declined recently given the economic downturn and a weak residential housing market, and is expected to remain flat over the next five years. Positively, the city's unemployment rate, measured at 7.3% in January 2013, has decreased over the past two years and currently ranks below both the state and national averages. The city stands on its own as a popular and successful tourist destination, though local employment benefits greatly from the city's proximity to the deep and diverse Tampa MSA employment base. The system continues to achieve strong collection rates at or close to 100%.
SOUND FINANCIAL PERFORMANCE AND DEBT COVERAGE
The system's fiscal 2012 financial results were positive with operating margins close to 40% and debt service coverage (DSC) of senior lien bonds a solid 1.8x. The system ended fiscal 2012 with very strong liquidity - days cash on hand including cash reserves for renewal and replacement was over 550 days, and depreciation was funded at a rate of 182%. Financial margins are expected to remain healthy, as stronger-than-expected cash reserves will permit the system to cash-fund its capital improvement plan in the near term and forgo a previously planned debt issuance.
SYSTEM HIGHLY LEVERAGED
The system's debt profile is higher than the medians for systems rated in the 'AA' category by Fitch. The long-term debt-per-customer in fiscal 2012 was $2,318, which is almost 30% higher than the median of $1,828. Similarly, debt-to net-plant is almost 50% higher than the median, and debt-per-capita, at $1,615, is more than three times the average for 'AA' rated systems. Amortization of existing debt is slow, with only 65% of outstanding debt retired in 20 years. As a result, out-year carrying costs will not improve substantially; debt-per-customer levels are projected to be similar to current levels (assuming some future additional borrowing).
ABUNDANT SUPPLY AND CAPACITY
Available water supply and treatment capacity are well in excess of average demand. Water sources are derived partially from city-owned well fields drawing from the Floridan aquifer, as well as from Pinellas County. The system is expanding its reverse osmosis and ultraviolet disinfection treatment capabilities in order to increase internal water production and decrease dependence on the county.
Treatment capacity at the city's three wastewater treatment facilities is twice that of its average daily flows, leaving sufficient capacity for the foreseeable future. The system's wastewater treatment processes include nutrient removal, anaerobic digestion, sludge thickening, and expanding the availability of reclaimed water for irrigation purposes. In addition, the system is decreasing the volume of effluent discharged into surface water by constructing a groundwater replenishment facility that will recharge the aquifer after indirect potable reuse.
STANDARD UTILITY RATES
The average customer pays roughly $53 for a combined water and sewer bill based on 4,000 gallons consumed per month. This charge represents 1.5% of median household income (MHI), which is below the Fitch affordability standard of 2.0% MHI. The utility's rate structure and service costs encourage conservation, and are comparable to peer systems. As more customers seek savings through the use of reclaimed water versus potable water for irrigation, the system may see a reduction in revenues due to a lower reclaimed water charge. However, Fitch believes this will be partially mitigated by the system increasing internal water production and decreasing purchases from the county.
Additional information is available at 'www.fitchratings.com'
In addition to the sources of information identified in the 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 12, 2012;
--'U.S. Water and Sewer Revenue Bond Rating Criteria', August 3, 2012;
--'2013 Water and Sewer Medians', dated Dec. 5, 2012;
--'2013 Outlook: Water and Sewer Sector', dated Dec. 5, 2012.
Applicable Criteria and Related Research:
2013 Water and Sewer Medians
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=695756
U.S. Water and Sewer Revenue Bond Rating Criteria
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=684901
Revenue-Supported Rating Criteria
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=681015
Additional Disclosure
Solicitation Status
http://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=791586
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