Fitch Rates Tampa Bay Water, FL's Utility System Revs 'AA+'; Outlook Stable
Fitch Ratings assigns an 'AA+' rating to the following Tampa Bay Water, A Regional Water Supply Authority, FL (TBW) revenue bonds:
--$100.6 million utility system refunding revenue bonds, series 2016A;
--$32.8 million taxable utility system refunding revenue bonds, series 2016B.
The bonds are expected to sell via negotiation on Jan. 12.
Proceeds of the 2016A bonds will be used to advance refund the outstanding series 2008 bonds for annual savings (matching maturities), and pay issuance costs. Proceeds of the 2016B bonds will be used to advance refund a portion of the outstanding Series 2011B bonds (the 2019 maturity) and pay issuance costs. After issuance, TBW will have refinanced all of the medium-term notes associated with the 2011A and 2011B bonds.
The Rating Outlook is Stable.
The bonds are secured by a pledge of TBW's net revenues, which include the moneys received from rates, fees, rentals, and other income collected for use of the water system by the member utilities. Members irrevocably agree to make monthly payments for the provision of wholesale service, including debt service on the bonds, and such payments are made without set-off, counterclaim, or abatement. A debt service reserve, fully funded with cash at an amount equal to the standard 'lesser of' three-pronged test, provides additional security for all outstanding bonds, including the 2016 bonds.
KEY RATING DRIVERS
ESSENTIAL SERVICE; STRONG UNDERLYING CREDITS: TBW is the region's exclusive wholesale water provider serving 2.3 million residents through six member utilities. Fitch maintains ratings on five of the six entities, ranging from 'AAA' to 'AA'. TBW's operating profile is strong and its role in regional service delivery and resource development, sound financial management, and autonomy over rates are important rating factors.
INHERENT FLEXIBILITY: Financial margins and debt service coverage (DSC) are low but typical for a wholesale system. Strong liquidity and autonomous rate setting provide management with significant financial flexibility.
MANAGEABLE DEBT AND CAPITAL NEEDS: The debt profile is expected to remain manageable with the recent completion of a large long-term capital program and intermediate-term needs focused on routine replacement and renewal.
DIVERSE, RECOVERING ECONOMY: The Tampa-St. Petersburg-Clearwater economy serves as the economic anchor for Florida's Gulf Coast. Employment growth remains solid.
RATING STABILITY EXPECTED: The rating is sensitive to shifts in various credit fundamentals including financial performance and debt. The Stable Outlook reflects Fitch's expectation that such shifts are unlikely in the near term.
TBW's six member agencies include Pinellas, Pasco, and Hillsborough counties, and the cities of Tampa, St. Petersburg, and New Port Richey.
LARGE REGIONAL WHOLESALE PROVIDER; STRONG UNDERLYING CREDITS
TBW is a large wholesale water provider serving the three-county area of the Tampa-St Petersburg metropolitan statistical area (MSA). TBW enjoys exclusive rights to provide treated water to its six member utilities. Hillsborough's water and sewer system revenue bonds are rated 'AAA' with a Stable Outlook by Fitch. Fitch rates Tampa's utility revenue bonds 'AAA' and St. Petersburg and Pasco County's revenue bonds 'AA', all with Stable Outlooks. Pinellas County has no water utility debt outstanding, although Fitch rates the county's sewer revenue bonds 'AA' with a Stable Outlook. New Port Richey is not rated by Fitch.
TBW plays a key role in developing and delivering high-quality water from various sources and has successfully expanded and diversified its water supply and production capabilities, providing solid intermediate-term water supply while meeting the regional challenges and mandates to reduce groundwater use.
The nine-member board of directors is appointed by the six member governments, somewhat insulating policy decisions from potential political intrusion. A tenured and capable management team is responsible for daily operations. Long-range capital and resource planning is updated frequently, and rates are considered annually during the budget process. The board has autonomy over rate setting and has increased rates as needed to maintain stable financial performance.
The members unconditionally agree to pay for the costs of service at the rates specified by the authority pursuant to the master water supply contract. TBW applies a uniform rate in determining member payments, which for the past several years has equaled $2.56 per 1,000 gallons. Rates are determined by TBW based on annual estimates of the prorated costs associated with delivery of service to the member governments.
Member payments, which are designed to cover both the fixed and variable costs of the authority, include provision for operating, administrative and maintenance costs, annual debt service, amounts for capital improvement and operating reserves, are joint, not several in nature. However, the payments are an absolute and unconditional obligation of each member and are paid as an operations and maintenance (O&M) expense of each member's utility system, ahead of their respective debt service. In addition, solid cash reserves and autonomy over rates helps mitigate the lack of an explicit step-up.
DIVERSE WATER RESOURCES PROVIDE OPERATING FLEXIBILITY
TBW maintains strong operating fundamentals, including long-term capital and resource planning and significant and ongoing infrastructure investment. Water resources are diverse and comprise groundwater, treated surface water from the Hillsborough and Alafia rivers and the Tampa Bypass Canal, and desalinated seawater. TBW has been successful in cultivating other sources of water, while meeting requirements to lower its reliance on groundwater. The system has a total permitted water supply capacity of 240 million gallons per day (mgd) from the various sources, which is well in excess of current demand (156 mgd in fiscal 2015).
TBW is one of the few systems in the country that can process seawater. The desalination plant was completed in 2008 and can provide up to 28.75 mgd of supply to the system (with expansion capabilities to 35 mgd). Treated seawater is combined with treated surface and groundwater before it is distributed. Two interconnections with the city of Tampa provide some redundancy. A total of nine treatment facilities including the surface water treatment plant, which has a 120 mgd capacity, and the desalination plant, provide ample capacity to meet the system's long-term needs.
STRONG FINANCIAL MANAGEMENT AND LIQUIDITY OFFSETS LOW COVERAGE
Like many wholesale systems, TBW displays only modest annual DSC with roughly 1.1x annually from net revenues historically and about 1.3x including available reserves. However, the strength of the member payments, historically stable financial results, well-managed operations and the ability to raise rates provides strong support for the high rating. The rates are established during the annual budget process and members are billed monthly for service.
Fitch expects liquidity to remain strong. The authority ended fiscal 2014 with $9.5 million in current unrestricted cash and nearly $17 million in unencumbered renewal and replacement funds, which is equivalent to 150 days cash on hand. When including available non-current unrestricted investments totaling $64 million in fiscal 2014, liquidity is a robust 520 days cash.
Unaudited fiscal 2015 financial results show slightly better results than the approved budget with a decline in operating revenues offset by positive variances in operating expenses; DSC was 1.1x, which is similar to historical results. Cash balances are similar to fiscal 2014. Financial projections in the authority's 2016 approved budget show DSC similar to historical results. The forecast assumptions appear reasonable and include the refinancing of the maturity associated with the 2011B bonds (to be refunded with proceeds) but does not include any additional bonds or the debt service savings from the 2016A bonds to be issued.
DEEP AND DIVERSE ECONOMIC BASE
Located midway down the western coast of Florida, the Tampa Bay region serves as the economic center for Florida's Gulf Coast, with major sectors in business services, government, healthcare, education, and tourism. The economy continues to display solid employment gains. BLS employment data for October 2015 indicate a 3.7% increase in Tampa-St. Petersburg-Clearwater MSA jobs over the same month in 2013, leading to a low unemployment rate of 4.8%.
MANAGEABLE CAPITAL NEEDS AND DEBT BURDEN
TBW's debt burden remains manageable despite having about $1 billion of total debt outstanding as of fiscal 2015. For fiscal 2015, debt was 80% of net capital assets, which is somewhat high but not unusual for a wholesale provider, and just $435 on a per capita basis. Amortization is somewhat slow with only 37% of existing debt retired over the next 10 years. TBW's direct debt is on top of the outstanding debt of most of the members, which would raise the debt per capita figure.
However, long-term capital needs are limited as water supply and treatment capacity are both ample for the intermediate term, which should allow debt ratios to decline over time. Management believes current water supplies will comfortably meet demand for at least another 15 years. The current five-year capital plan through fiscal 2020 totals $80 million and is expected to be partially funded with additional bonds, estimated by management at $32 million, to be issued in 2019.
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.
Revenue-Supported Rating Criteria (pub. 16 Jun 2014)
U.S. Water and Sewer Revenue Bond Rating Criteria (pub. 03 Sep 2015)
Fitch Ratings, Inc.
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Eva D. Rippeteau
Elizabeth Fogerty, +1 212-908-0526