NEW YORK--(BUSINESS WIRE)--Fitch Ratings has assigned an 'AA+' rating to the following city of Tallahassee, FL (the city) revenue bonds:
--$45 million consolidated utility system revenue and refunding bonds, series 2015.
The bonds are expected to sell on Sept. 16 via negotiation. Proceeds will be used to provide funding for various system-wide capital improvements, current refund all of the outstanding series 2005 bonds for debt service savings and pay issuance costs.
In addition, Fitch affirms the following ratings:
--$323 million in outstanding consolidated utility system revenue bonds (prior to the refunding) at 'AA+'.
The Rating Outlook is Stable.
SECURITY
The bonds are secured by a senior lien pledge of the net revenues of the city's water and sewer utilities, a gross lien on the storm drainage system (together, the consolidated system), and available system development charges.
KEY RATING DRIVERS
STABLE RESIDENTIAL CUSTOMER BASE: Tallahassee serves as the state's capital and is also home to both Florida State University and Florida A&M University, which together provide a stable underlying employment base. The customer base is diverse and mostly residential.
SOLID FINANCIAL PROFILE: Financial performance has been solid with stable results recorded over the past four years. In fiscal 2014, debt service coverage (DSC) calculated on a net revenue basis was 2.0x. Liquidity remains strong.
MANAGEABLE CAPITAL PROGRAM: With the completion of the advance wastewater treatment projects to lower nutrient loading, capital spending will focus on system-wide maintenance and renewal. Funding will come mainly from pay-as-you-go sources, although some additional debt is currently anticipated.
DEBT BURDEN TO REMAIN ELEVATED: The previously large capital program left the system with a slightly elevated debt burden relative to peer systems. Slow amortization of existing debt coupled with the 2015 issuance and a small amount of future debt will keep debt ratios somewhat high for the foreseeable future.
COMPETITIVE USER CHARGES: Water and sewer rates have increased fairly significantly over the past decade to fund necessary capital improvements. However, rates are competitive relative to peer systems and future increases should be manageable. Storm fees are manageable and have not been raised in several years.
RATING SENSITIVITIES
STABLE FINANCIAL PERFORMANCE EXPECTED: A decline in financial metrics could put downward pressure on the rating.
CREDIT PROFILE
The city of Tallahassee (Fitch 'AA' implied general obligation rating) is located in northwest Florida about 20 miles north of the Gulf of Mexico.
STABLE EMPLOYMENT BASE ANCHORED BY PUBLIC SECTOR
The city serves as the state's capital and the county seat of Leon County, and is home to two large public educational institutions: Florida State University (dormitory revenue bonds rated 'AA' by Fitch Ratings) and Florida A&M. Combined undergraduate and graduate enrollment for fall 2014 for the two universities was roughly 52,000.
Government and educational institutions provide a stabilizing force for employment and have historically insulated the area from high jobless rates and weak housing market trends prevalent throughout much of the state during recessionary periods. The unemployment rate for the Tallahassee metropolitan statistical area has been relatively stable over the past 12 months, posting a June 2015 rate of 5.5%. The below-average wealth and income indicators are reflective of the area's large student population.
STABLE OPERATIONS, ABUNDANT LONG-TERM SUPPLY
The city owns and operates the water, sewer and stormwater management systems, which were consolidated along with the natural gas system into a single underground utilities department in 2008. However, each utility is still accounted for as a separate enterprise fund, and each is operated as a self-sufficient stand-alone utility. Only the revenues from the water, sewer and storm utilities are pledged to bondholders.
The system serves approximately 280,000 residents within the city and portions of Leon and Wakulla Counties through approximately 84,000 retail customers in fiscal 2014. Wholesale water service is also provided to the city of St. Marks. The storm system contains roughly 90,000 equivalent residential units. The customer base is predominantly residential and stable with no customer concentration.
The system's operating profile is stable, which Fitch views favorably. Raw water supply is abundant and relatively clean with treatment limited to chlorination and fluoridation at the well sites prior to distribution. In addition, completion of the advanced wastewater treatment (AWT) projects is viewed to be significant as the system comfortably meets the updated numeric nutrient limits. Sewer treatment capacity is solid and the system is not facing any regulatory issues. The average age of plant is somewhat high, although distribution and collection system pipes are well maintained as evidenced by acceptable levels of unaccounted for (and unbilled) water and relatively low water line breaks and sewer overflows per 100 miles of pipes.
ELEVATED BUT COMPETITIVE RATES
Rates are set by the city and are structured with base fees and volumetric charges with an inclining block rate charged per thousand gallons. Fixed monthly charges comprise a favorable 30% of the total bill, providing some stability to the revenue base. The majority of customers fall under the first tier, which includes the first 7,000 gallons used.
Rates have been on the rise; since 2006, water and sewer rates have been increased by roughly 40%. Beginning in fiscal 2012 and going forward, the city implemented annual inflation-adjusted increases for both water and sewer service. However, in fiscal 2015 the city raised water rates by roughly 7% (and sewer by 1.7%), increasing the residential bill to $75 for combined service assuming 7,000 gallons.
At $75, the bill is regionally competitive but comprises an elevated 2.3% of median household income. According to the city, as a result of conservation the average residential customer uses closer to 5,000 gallons per month. Fitch views the automatic rate adjustments and the city's willingness to increase water rates above the inflation-adjusted rate in fiscal 2015 favorably as it demonstrates some rate flexibility remains.
Monthly stormwater fees are based on a structure's impervious surface area. The current fee is $7.95 per equivalent residential unit, which is equal to about 2,000 square feet. Like the water and sewer charges, the stormwater fee is also competitive. The fee has not been raised since 2010, and no further increase is expected in the near term. The city will undergo a formal rate analysis for its water and sewer charges in early 2016.
STABLE FINANCIAL PERFORMANCE EXPECTED
System financial results were strong historically with solid financial margins and cash flows producing strong DSC and robust annual free cash flow (FCF). However, the issuance of the series 2010 bonds led to a sharp rise in debt service and a subsequent decline in financial metrics. While lower, financial metrics are still solid.
When calculating DSC using gross storm system revenues, coverage totaled 2.2x in fiscal 2014. However, Fitch believes calculating coverage using net revenues for all three enterprises more appropriately reflects actual results and provides a better picture of long-term system operating performance. On a net revenue basis, DSC was below average but solid at 1.9x in fiscal 2014. Coverage of all system obligations, including annual transfers to the general fund, was satisfactory for the rating at 1.7x in fiscal 2014.
Liquidity is strong on a consolidated basis with over $58 million in aggregate unrestricted cash and investments from all three funds at the end of fiscal 2014. When coupled with approximately $36 million in renewal, replacement and improvement fund balances, system liquidity totaled over $94 million, or about 528 days cash on hand. While liquidity is well above average, most of the cash is held in the storm system fund with the expectation for a portion of cash to be used to fund future storm system capital projects.
After the current issuance, annual debt service (ADS) will increase by roughly $2 million in fiscal 2017 to reflect the new money portion of the series 2015 bonds, but remain roughly level through 2041. Fitch expects the rate increases in fiscal 2015 (and inflation adjustments for fiscal 2016) to more than offset the rise in ADS, allowing financial metrics to remain stable.
ELEVATED LEVERAGE BUT MANAGEABLE FUTURE CAPITAL NEEDS
The system had roughly $320 million in total debt outstanding as of fiscal 2014, consisting of five parity series of fixed-rate long-term bonds. The debt profile remains elevated with most debt ratios above the medians for similarly rated utilities. While still elevated, debt metrics have been on a steady decline since the system's last new money issuance in 2010. Debt-to-net plant totaled 46% in fiscal 2014, which is near the median of 50% and much lower than the 2010 ratio of 71%.
Debt per customer of $2,083 is also above the median for 'AA' category, but considered manageable relative to the $2,446 per customer recorded five years ago. Debt ratios are expected to remain near these levels going forward given the slow principal amortization of existing debt (after issuance, just 25% of principal will retire over the next 10 years) and the potential for a small amount of additional bonds in 2017 or 2018. Debt carrying charges are reasonable at 21% of gross revenues, although this is partially attributable to the slow amortization.
The system's updated five-year capital improvement plan (CIP) for fiscals 2016-2020 totals $165 million, which is similar in size and scope to the one presented to Fitch in 2014. The CIP is manageable and lower than earlier versions that included the wastewater treatment plant upgrades. Most of the CIP will address renewal, replacement and improvement (RR&I) of system assets and requires only a small amount of additional bonds (about $20 million). Management expects the majority of the capital plan will be funded with RR&I funds and other pay-as-you go sources, which while feasible could lead to a decline in liquidity.
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
https://www.fitchratings.com/creditdesk/press_releases/content/ridf_frame.cfm?pr_id=990417
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https://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=990417
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