OREANDA-NEWS. Fitch Ratings has affirmed the 'AA' rating on the following city of Sunrise, FL's (the city) outstanding revenue bonds:

--Approximately $116 million in outstanding utility system revenue bonds series 2010A, 2010B, and 2010C.

The Rating Outlook is Stable.

SECURITY
The bonds are secured by a senior lien pledge of the net operating revenues of the city's combined water, sewer, and natural gas system (the system). The 2010 bonds are not covered by a debt service reserve.

KEY RATING DRIVERS
STRONG FINANCIAL MANAGEMENT: Financial metrics are very strong with financial margins, debt service coverage (DSC) and liquidity all exceeding their respective 'AA' category medians.

STABLE RETAIL SYSTEM: The system provides water, sewer, and natural gas service to a mainly residential retail customer base consisting of the city and surrounding areas. The customer base is stable and benefits from its location in Broward County, FL, which provides diverse employment options.

MANAGEABLE LEVERAGE: Debt is a manageable and debt carrying costs are a very affordable 14% of gross revenues. Debt will rise with an expected new money issuance in 2018, although the debt burden is projected to remain near the medians for utility systems rated in the 'AA' category by Fitch.

COMPREHENSIVE CAPITAL PLAN: The city's planned capital spending totals $295 million through 2020. The capital improvement program (CIP) is comprehensive and includes water supply development. The majority of the CIP is expected to be pay-go funded with roughly $100 million in additional debt currently anticipated.

SOMEWHAT ELEVATED WATER/SEWER RATES: The average monthly bill for water and sewer service is a somewhat high 2.3% of median household income assuming 7,000 gallons of use. On the positive side, the city passed automatic inflation-adjusted rate increases which will raise charges modestly going forward. Additionally, the city reports average use to be less than 7,000 gallons per month.

AUTOMATIC PASS-THROUGH: The city purchases natural gas for retail delivery to approximately 10,000 retail customers. Gas rates are subject to commodity price volatility. However, the city's automatic pass through adjustment provides full cost recovery of purchased natural gas when prices rise.

RATING SENSITIVITIES
STRONG FINANCES DESPITE ADDITIONAL DEBT: The rating on Sunrise, FL's utility system bonds could move upward in the future if the system is able to maintain a trajectory of strong financial results while absorbing sizeable planned debt and capital expenditures over the next several years.

CREDIT PROFILE
STABLE RETAIL SYSTEM LOCATED IN WEALTHY BROWARD COUNTY
The city owns and operates the system, which provides mainly retail service to approximately 215,000 residents located within city limits as well as to customers residing in Weston, Davie, Tamarac and the town of Southwest Ranches. The water and wastewater systems are similarly sized with roughly 84,000 equivalent residential connections, while the gas system serves a noticeably smaller retail customer base of approximately 10,000 accounts.

The predominantly residential customer base has been relatively stable, and given the service area's relatively built-out nature, customer growth is expected to be manageable. The city's unemployment rate has been steadily trending downward to 4.7% in January 2016, which is below the state and national figures (both 5.1%). Income levels are slightly below the state average and bad debt as a percentage of revenues remains exceptionally low.

STRONG FINANCIAL PERFORMANCE A CREDIT POSITIVE
Financial performance has generally been strong aided by customer growth trends during the housing boom and, more recently, to rate increases as growth trends subsided. The system has consistently generated robust operating margins of 45% or greater annually since 2010. The high margins have led to continued strong debt service coverage (DSC) and significant free cash flow.

In fiscal 2015, DSC reached 3.7x. When including transfers to the city's general fund (GF), coverage was a still healthy 3.4x, having climbed steadily in each of the past three fiscal years. The system historically made annual transfers to the GF equal to 2.5% of gross revenues. However, in fiscals 2013 and 2014 the city decided to make one-time transfers above the formula amounts, leading to much higher transfers of close to 10% of gross revenues in those years.

As expected, the higher transfers were temporary and for fiscal 2015 the city normalized the formula to 2.5% of gross revenues plus $2.1 million, adjusted for inflation. Fitch believes the system's robust annual margins allow it to comfortably absorb transfers at this level going forward. While not expected, a significant and prolonged increase in transfers could pressure the system given the already moderately high rates and planned capital spending. Pro forma finances provided by the city indicate strong financial metrics will be maintained with DSC of no less than 2.9x through 2020, and 2.6x net of transfers. The forecast is based on reasonable assumptions including manageable annual rate increases and the added debt service from projected new debt.

The system ended fiscal 2015 with approximately $41.5 million in unrestricted cash, which is equivalent to 267 days cash on hand. When the system's considerable renewal and replacement fund balances are included, liquidity is over 700 days. Liquidity is expected to decline given the large anticipated capital spending from pay-as-you-go sources but should remain favorable. Continuation of the overall strong financial profile over the next few years in light of the expected increases in debt service costs and capital expenditures could lead to upward movement of the rating.

ELEVATED RATES RAISE SOME LONGER-TERM AFFORDABILITY CONCERNS
Water and sewer rates were increased in fiscal 2008 (10.5%) and sharply in fiscal 2010 (40%) after many years of rate stability. With the 2010 increase, the city also instituted automatic annual rate adjustments based on inflation, which Fitch views favorably as it provides baseline revenue growth that is outside of the political process.

Over the past three years, inflation-adjusted rate increases totaled a cumulative 14%, raising the typical residential customer's bill to approximately $97 for combined service in fiscal 2016 assuming 7,000 gallons of use per month, a somewhat elevated 2.3% of median household income. Nevertheless, rates are competitive relative to other nearby systems. The city anticipates rates will increase by a manageable 3.3% annually through the forecast to meet the increased annual debt service expected in fiscal 2018, which should keep rates competitive to other area providers.

COMPREHENSIVE CAPITAL PLAN INCLUDES ADDITIONAL DEBT
An updated CIP for the system through fiscal 2020 totals a fairly substantial $295 million. The comprehensive spending plan is weighted toward various wastewater projects, including pipeline capacity improvements, treatment plant improvements and reuse system upgrades. Planned spending for the benefit of the water system includes treatment plant upgrades and development of long-term water supply, among other projects. Beyond the current CIP, capital spending drops off significantly, falling to just $28 million annually and focusing solely on renewal and replacement needs.

Approximately 34% of the fiscal 2016-2020 CIP will be financed with around $99 million of future bond proceeds in the 2018 timeframe, which Fitch believes is manageable given the currently favorable debt profile, strong financial margins and sizable cash balances. Currently, most system debt metrics compare favorably to the medians for the 'AA'-category: total debt was just $1,260 per connection (excluding gas customers), 2.4x equity and 3.6x funds available for debt service, although debt to net plant remains slightly elevated at 55%. While the debt burden will rise with the planned new debt, metrics are projected to remain manageable and near rating category medians.

SMALL NATURAL GAS SYSTEM
The city's natural gas system provides service to customers located in the city and, pursuant to franchise agreements, portions of Tamarac, Weston, and Lauderhill. The system contracts with Florida Gas Utility (FGU) for its gas supply. FGU serves as a joint action agency formed by interlocal agreement for the purpose of securing and managing natural gas supply for 23 member municipal gas systems.

Intermediate term franchise agreements are in place with the cities of Tamarac and Weston, while the agreement with Lauderhill expires later this year. The Lauderhill agreement contains automatic five year renewal terms. Gas system revenues comprise less than 10% of total system revenues and gas charges contain a commodity price adjustment that allows cost fluctuations to be automatically passed onto customers.