Fitch Affirms Seacoast Utility Authority, FL's Water & Wastewater Revs at 'AA'; Outlook Stable
OREANDA-NEWS. Fitch Ratings affirms the 'AA' rating on following Seacoast Utility Authority, Florida (the authority) bonds:
--$90.75 million water and sewer revenues bonds, series 2009A, 2009B and 1989A.
The Rating Outlook is Stable.
The bonds are secured by a first-lien pledge of net revenues of the water and sewer system (the system) and investment income. The authority has a cash-funded debt service reserve.
KEY RATING DRIVERS
FINANCIAL FLEXIBILITY: The system financial position is solid, with debt service coverage (DSC) at or near 2x for the last four years. Liquidity for fiscal year 2015 is strong at over 1,000 days of cash on hand (DCOH), but modest declines are expected as the authority plans to finance 100% of the capital improvement plan (CIP) with cash.
DECLINING DEBT PROFILE: Debt metrics compare favorably to Fitch's 'AA' rating category medians. Debt levels will continue to decline as the authority has no plans for additional debt in the near term.
AFFORDABLE RATES: Rates remain very affordable and provide ample financial flexibility to the authority.
ADVANCED TREATMENT AND ADEQUATE SUPPLY: Recent facilities upgrades and renewed water use permits provide the system with sufficient water supplies and treatment capacity to meet demand requirements through projected buildout.
DIVERSE SERVICE AREA: The economic base of the service area is very stable and diverse and characterized by high wealth levels.
STABILITY EXPECTED: Significant leveraging or unforeseen regulatory burdens placed on Seacoast Utility Authority could pressure the rating. Given the authority's financial flexibility and recently updated facilities, this is viewed by Fitch as unlikely to occur.
The authority was established in 1988 when it acquired the assets of a private water and wastewater utility. Created by an inter-local agreement between Palm Beach County, the city of Palm Beach Gardens, the village of North Palm Beach, and the towns of Juno Beach and Lake Park, the authority serves a 65-square-mile service area in northeastern Palm Beach County.
STRONG LIQUIDITY AND GOOD COVERAGE PROVIDE FINANCIAL FLEXIBILITY
Financial metrics continue a positive trend with robust liquidity and stable debt service coverage. Senior-lien annual debt service (ADS) coverage (excluding connection fees) for fiscal 2015 was over 2x. Management projections, which appear reasonable and somewhat conservative, point to ADS coverage of 1.8x to 1.9x through fiscal 2019. By fiscal 2020 a significant portion of the authority's debt fully matures, resulting in a $4.7 million drop in ADS and DSC jumps to over 3x.
Authority liquidity is very strong, averaging over 900 DCOH for the last five fiscal years. Liquidity is expected to decline modestly but remain high for the rating level, as the authority plans to cash-fund its CIP for at least the next five years.
DECLINING DEBT BURDEN
The authority's CIP totals a manageable $72 million or $1,095 per customer. The cash-funded CIP focuses on the renewal and replacement of system assets. Debt metrics have been declining with debt per customer of $1,614 aligning closely to the 'AA' category median of $2,050, and debt to net plant for fiscal 2015 was 39%, compared to Fitch's 'AA' rating category median of 47%. Annual capital costs are anticipated to increase to about $20 million within the next 10 years, up for the current $14 million. Cash balances are very robust and able to handle the increased costs. With the lack of future borrowing planned, levels will continue to decline.
NEW TECHNOLOGY AND RENEWED PERMIT PROVIDE ADEQUATE SUPPLY
The authority recently completed construction of a new water treatment plant with a 30.5 millions of gallons per day (mgd) capacity to replace the two lime softening plants. The new plant improves the quality of water delivered and represents a more efficient alternative to renewal and replacement of aging lime softening infrastructure. Furthermore, the new plant diversifies water supply beyond the sole fresh water aquifer in use historically. The new plant and accompanying wells provide for the treatment of brackish Floridian aquifer water supplies. Similar to investments being made by other regional water utilities, the authority's decision to access the deeper brackish Floridian aquifer helps reduce pressure on Florida's fresh groundwater supplies.
Treatment plant capacity exceeded the 2015 demand of 15 mgd by over 50%. Water is still supplied to the authority primarily by a freshwater surficial aquifer and permitted through the South Florida Water Management District (SFWMD). The authority was awarded a 20-year SFWMD water use permit application in October of 2012.
Wastewater is treated at a system-owned and operated plant. The majority of effluent from the wastewater system is sold as recycled water. A deep injection well disposes of the small portion of effluent that is not recycled. Current wastewater treatment capacity exceeds demand by over 50%.
AMPLE RATE AFFORDABILITY
Fitch sees the authority's rate structure and flexibility as positive credit factors. Rates are structured with a substantial fixed component which provides for stable revenue to support operations. The authority also has a history of raising water and sewer rates as needed. Following three years of above average rate increases, adopted in fiscal 2010, the authority's governing board voted to adjust rates annually based on the consumer price index (CPI).
Management did not adjust rates in fiscal 2013 due to favorable financial results and cost containment but resumed indexed increases in fiscal 2014. On average, rates are increased by 3% and the authority continues to budget for 3% annual rate increases for at least the next five years. Rates maintain flexibility, registering 1.2% of median household income (MHI) and well below Fitch's 2% MHI affordability threshold.
STABLE, WEALTHY SERVICE TERRITORY
The system provides retail service to over 35,000 and 31,000 water and wastewater connections, respectively, with the majority being residential connections. Economic prospects within the authority service area are favorable due to low unemployment rates and high wealth levels.