Fitch Rates Tamarac, FL's Series 2016 Utility System Revs 'AA'; Outlook Stable
--Approximately $21.8 million utility system refunding revenue bonds, series 2016A;
--Approximately $4.1 million utility system refunding revenue bonds, series 2016B (taxable).
The bonds are expected to sell via negotiated sale during the week of October 17th or 24th. Proceeds will be used to finance wastewater-related capital improvements, refund the series 2009 bonds, and pay issuance costs.
In addition, the following bonds have been affirmed at 'AA':
--Approximately $12.1 million outstanding utility system refunding revenue bonds, series 2009 (pre-refunding).
The Rating Outlook is Stable.
The bonds are secured by net utility system revenues.
KEY RATING DRIVERS
CONSISTENTLY STRONG FINANCIALS: All-in debt service coverage (DSC) finished fiscal 2015 at a very strong 11.6x. Liquidity is also strong, ending fiscal 2015 at 660 days cash. However, changes to the bond indenture will allow for transfers and inter-fund loans from the utility to the general fund that are expected to reduce utility cash flow after debt service and liquidity, albeit to levels still considered strong for the rating.
LOW DEBT BURDEN: The utility system's debt burden is very low compared to similarly rated systems. Fiscal 2015 finished with about $12 million in debt, which translates to a very low debt-per-customer level of $317.
MANAGEABLE CAPITAL NEEDS: A portion of the 2016 bond proceeds will be used to finance a wastewater inflow and infiltration project, which is modest in size. The city's remaining capital improvement plan (CIP) focuses on standard system renewal and maintenance projects. Overall, the CIP is manageable, which should result in the maintenance of strong debt and financial metrics.
ADEQUATE SUPPLY: The city utilizes local wells for its water supply and contracts with Broward County for wastewater treatment. Both sources are sufficient to service the city's mostly built-out service area.
WELL-MANAGED SYSTEM: Fitch views the city's various formal policies, comprehensive rate and capital planning, and ongoing system reinvestment positively.
MAINTENANCE OF FINANCIAL PROFILE: Potential weakening of Tamarac, FL's liquidity position due to capital spending and inter-fund transfers should be offset by the utility system's other robust credit metrics, including its strong DSC and low debt profile. Maintenance of these strong metrics could lead to positive rating movement.
Tamarac's utility system provides water and sewer services to a population of approximately 63,000 in northwest Broward County (GO bonds rated 'AAA'). The city was created as a retirement community and remains primarily residential despite some recent diversification.
FINANCIAL PROFILE REMAINS STRONG
A notable reduction in debt service costs in fiscal 2010, combined with increases in operating revenue attributable to higher rates, have resulted in increasingly strong all-in DSC. Emblematic of this trend, all-in DSC was a very high 11.6x at the end of fiscal 2015. Liquidity has also improved over the last five years due to low debt carrying costs, moderate capital spending, and rate increases. Fiscal 2015 ended with a five-year high of 660 days cash, and has been above 350 days since 2011.
With the series 2016 bond issuance, the city is restating and amending its master bond resolution to allow for limited transfers to its general fund (payments in lieu of taxes - which are not to exceed 10% of the prior year's gross revenues) and, as long as amounts in surplus funds exceed $5 million, to permit loans for non-system-related capital improvements. Fitch believes these changes could result in lower free cash and/or liquidity balances. However, given the system's strong financial profile and liquidity, we do not believe these changes will create any negative credit implications.
A revenue sufficiency analysis completed last year conservatively forecasts DSC to decline to a minimum of 3.7x, a level still considered to be very strong by Fitch, by 2020. The study included new costs of debt service (associated with the 2016 bonds) and no rate increases through 2018, at which point rates are projected to increase by a manageable 2.5% annually. Because of the lower costs of actual debt service versus what was projected in the 2015 study, Fitch believes outperformance of the forecast is likely.
CAPITAL NEEDS, DEBT MANAGEABLE
The system's CIP totals a manageable $30.7 million expected to be spent over the next five years. At approximately $12 million, the largest of such projects is meant to address inflow and infiltration issues related to the sewer treatment process by upgrading associated pipe technology. The series 2016 bonds are expected to fund the majority of these upgrades. The remaining portion of the CIP is for standard system repair and rehabilitation. Given the age of plant, which has climbed to a somewhat elevated 19 years, capital investment is key to managing system risk.
Fiscal 2015 debt per customer and debt-to-net plant were very low and should not increase significantly with this bond issue. Including the 2016 bonds, debt per customer at the end of five years is projected to remain low at approximately $554. Debt amortization, however, is sluggish with principal payout of 27% and 67% in 10 and 20 years, respectively.
ADEQUATE SUPPLY POSITION
The city is allocated 7.6 millions of gallons per day (mgd) through a consumptive-use permit with the South Florida Water Management District. The city's water treatment plant currently treats average daily flows of about 5.7 mgd and has a design capacity of 20 mgd and a permitted capacity of 16 mgd, providing ample treatment capacity. The city projects supply to be sufficient for the next 20 years.
On the sewer side, the city currently reserves 8.5 mgd of treatment capacity at Broward County's North Regional Wastewater Treatment Plant (Broward County's utility system revenue bonds rated 'AA+') and has additional capacity from Fort Lauderdale's facilities. Capacity is sufficient to treat the city's flows and the county has indicated to the city that it would be able to purchase more capacity if needed.
LIMITED BUT IMPROVED LOCAL ECONOMY
The city's demographics continue to shift to a younger population, although the average age is still above the U. S. median. While the city remains primarily residential, recent economic developments have begun to diversify the tax base. In addition, the area benefits from its proximity to the Fort Lauderdale/Miami employment centers.