NEW YORK--(BUSINESS WIRE)--Fitch Ratings affirms the 'AA' rating for the following Sarasota County, FL (the county) revenue bonds:
--Approximately $156.8 million in outstanding utility system revenue bonds.
The Rating Outlook is revised to Positive from Stable.
SECURITY
The bonds are secured by the net revenues and legally available impact fees derived from the operation of the county's water and sewer system (the system).
KEY RATING DRIVERS
IMPROVING FINANCIALS DRIVE POSITIVE OUTLOOK: All-in debt service coverage (DSC) has trended higher over the past three years, ending fiscal 2012 with over 2.3x coverage, and 2.0x excluding connection fees. Senior lien debt service coverage was even stronger. Other financial metrics have trended higher as well, bolstering the system's financial flexibility.
ECONOMY CONTINUES TO RECOVER: The county's economy was adversely impacted during the economic recession, but in recent years has demonstrated significant signs of improvement and growth.
MODERATE DEBT BURDEN: Overall debt levels are declining and capital needs are manageable. Minor near-term additional bond issuances will support targeted capital needs but not impair currently modest leverage metrics.
SOLID OPERATING PROFILE: The utility actively manages both existing assets and prudently plans for future supply and treatment provision. Water supply sources are ample and diverse, and wastewater capacity is expanding and improving.
SUCCESSFUL EXPANSION CAPABILITY: The utility plans to continue the effective acquisition of smaller utilities and thousands of new water and sewer customers while maintaining reliable service and financial stability.
RATING SENSITIVITIES
ABSORPTION OF FUTURE CUSTOMERS: The county's ability to maintain and/or improve its strong fiscal and operational profile despite the capacity and financial pressures entailed by the absorption of a significant number of new customers would likely result in upward rating action.
CREDIT PROFILE
Sarasota County (Fitch implied 'AAA' general obligation rating) is located along the Gulf of Mexico in central Florida, approximately 50 miles south of the city of Tampa. The county is home to an estimated 356,000 permanent residents. This number increases to closer to 500,000 residents during the winter months, as it is a popular destination for wealthy retiree and tourists. The utility service territory has roughly 220,000 residents, a number that is growing as more unincorporated residents and independent utilities are absorbed into the county's consolidated system.
SOLID FINANCIAL PERFORMANCE
The system's finances have been well managed historically with solid annual cash flow margins producing strong senior DSC in-line with other Fitch 'AA' rated system, and healthy liquidity. Senior lien DSC has exceeded 2.0x annually for the past five years when including connection and developer impact fees. Without such fees, coverage has still been solid at between 1.9x and 2.1x historically. In fiscal 2012, net revenues yielded senior DSC of 3.2x and 2.8x when excluding connection fees. All-in debt service coverage for the same period, including subordinate debt from state revolving fund (SRF) loans, was also favorable at 2.3x and just over 2.0x when excluding connection fees.
The system's liquidity position continues to improve, ending fiscal 2012 with $76 million in unrestricted cash, equivalent to 533 days cash. Free cash to depreciation, which measures surplus revenues available to fund depreciation expense, was strong at 118% in fiscal 2012, indicating sufficient capability to maintain system assets from current resources. The system's coverage levels and liquidity represent significant improvements over prior years, and are expected to stay strong throughout the utility's relatively conservative five-year pro forma forecast.
Utility charges have historically been increased annually at a modest 2% rate. The monthly $71 per month charge for combined water and sewer service (assuming an average consumption of 4,000 gallons of use) is slightly more elevated than peer systems. This charge represents approximately 1.7% of median household income, providing sufficient flexibility below Fitch's 2% threshold for affordability assuming current consumption rates hold. The county has opted to suspend rate increases for fiscals 2011 through 2014 due to strong cash reserves and in order to offer relief to ratepayers.
REBOUNDING ECONOMY
After a significant economic setback during the recession and its aftermath, the county's economy is experiencing a sustained recovery, with modest increases in building permit activity, a more substantial rise in sales tax collections, an uptick in housing prices, and a decline in foreclosure activity. Though the economy remains tied to economically sensitive tourism and real estate, it also has a solid health care and education presence. Wealth indices are supported by a significant affluent retiree population and are therefore above the state and national averages. Employment continues to expand, and as of July 2013, the 7.1% unemployment rate decreased from the prior year's rate of 8.7%.
MODERATING DEBT BURDEN
The system's debt burden has moderated over time, currently reflecting ratios that are comparable to other systems rated in the rating 'AA' category. The system's outstanding indebtedness totals approximately $278 million, including close to $71 million in subordinate debt, including SRF loans.
Debt per customer was moderate in fiscal 2012 at $1,785, consistent with the rating category median of $1,828. For the same period, total debt represented only 45% of net plant and debt service for the year constituted a manageable 22% of gross revenues. These metrics are comparable to the 'AA' medians of 49% and 22%, respectively.
The county is projecting a roughly $105 million five-year capital improvement plan (CIP), which will be funded by a variety of sources including proceeds from the county's local option one-cent infrastructure sales tax, existing bond proceeds, and pay-go sources. Issuance of a small amount of additional debt is also projected, although when incorporated into the existing manageable debt structure, should not result in a marked increase debt metrics. The CIP will primarily fund renewal and replacement projects as well as regulatory compliance projects.
SOLID OPERATING PROFILE
Water supply is derived from a combination of sources, including groundwater from the Upper Floridan Aquifer and bulk water supply from the neighboring systems of Manatee County, FL (revenue bonds rated 'AA+' by Fitch) and the Peace River-Manasota Regional Water Supply Authority, FL (PRMRWSA, revenue bonds rated 'AA-' by Fitch). Existing water supply and treatment capacity are ample, although the county is actively improving storage and steadily acquiring utilities for long-term viability. Moreover, the county is continually upgrading and enhancing the electro-dialysis reversal and reverse osmosis treatment technologies at its water treatment plants in order to ensure a long-term ability to treat brackish water for portable use.
Wastewater treatment is also ample. The county treats the majority of its own flows but contracts for approximately 9% of total flows with the City of Venice, FL through a bulk treatment agreement. The utility's five wastewater treatment plants combined have the capacity to treat 24 million gallons per day, and several are in the process of completing projects associated with various regulatory compliance concerns. All capital needs are addressed through dedicated capital funding included in the five-year CIP.
SUSTAINABLY EXPANDING CUSTOMER BASE
The county's utility system, which serves mostly unincorporated areas of the county, provides water and sewer services to a mostly residential customer base of roughly 75,500 water and 63,300 wastewater accounts. Customer growth trends have slowed. However, the system projects it will continue to add new accounts as it absorbs thousands of existing residences who are either customers of smaller utilities or who are still using septic systems and well water. The county plans to acquire the assets of the Dolomite Utility Corporation (Dolomite) by 2014, which will imply the absorption of 4,500 and 7,300 water and wastewater residential and commercial customers, respectively.
In addition, the county has mandated that all existing septic owners in the service territory connect to the county sewer collection and transmission system. As septic owners are provided an incentive of $1,000 cash and a 20-year loan to cover connection costs and impact fees, most residents connect to the system within 90 days of notice. The county has made significant infrastructure outlays to the point at which it is capable of connecting approximately 100 new accounts (mostly sewer) to the system per month. The county is 42% towards its final goal of converting 15,400 septic users into the system and has budgeted funding in its operating budget for incentives for the conversion of an additional 4,482 users in the five-year CIP.
The county has incorporated both the expected operating expenses and capital costs associated with the acquisition of these new customers into a five-year financial projection. The pro forma shows a substantial increase in operating costs between fiscals 2013 and 2014, accounting for the outlays of septic conversion incentives. Projections also include the additional debt issuance for the possible acquisition of Dolomite. Throughout the five-year forecast the system is expected to maintain solid financial metrics despite the absorption of new accounts. Fitch views the projections as reasonable given the utility's demonstrated past ability to absorb nearly 6,500 accounts to date.
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:
--'U.S. Water and Sewer
Revenue Bond Rating Criteria' (July 31, 2013);
--'2013 Water and
Sewer Medians'(Dec. 5, 2012);
--'2013 Outlook: Water and Sewer
Sector'(Dec. 5, 2012).
Applicable Criteria and Related Research:
U.S. Water and Sewer
Revenue Bond Rating Criteria
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=715275
2013
Water and Sewer Medians
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=695756
2013
Outlook: Water and Sewer Sector
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=695755
Additional Disclosure
Solicitation Status
http://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=802731
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