OREANDA-NEWS. Fitch Ratings has affirmed the following Sarasota, FL (the city) revenue bonds:

--\$55 million in outstanding water and sewer revenue bonds 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 system (the system).

KEY RATING DRIVERS

STRONG FINANCIAL PROFILE: Finances are strong with healthy debt service coverage (DSC) in each of the past three fiscal years. A scheduled decline in debt service will improve coverage further beginning in fiscal 2016. Liquidity is expected to remain high despite plans to use some of the cash for capital spending.

CONSISTENT CAPITAL RE-INVESTMENT: The system increased its annual investment in infrastructure capacity a few years ago, focusing capital spending on system upkeep, repair and replacement. Strong expected cash flows and excess liquidity are expected to allow for full-funding of the five-year capital plan from pay-go sources.

DECLINING DEBT BURDEN: Debt has been on the decline since the city's last bond issuance in 2011. Ratios have been moderating slowly as bonds amortize and are equivalent to the medians for the 'AA' category. The debt burden is expected to decline further with no plans for additional debt.

HIGH USER CHARGES: The average residential customer bill has been on the rise, and at \$87 for 5,000 gallons for combined service in fiscal 2015 is already 2.5% of median household income (MHI). Adoption of ongoing rate increases to fund capital spending mitigates the risk of rate sensitivity.

HEALTHY SYSTEM CAPACITY: Water supplies and treatment capacity for the water and wastewater systems are well positioned to support the service area with its limited expected growth. Capital needs relate primarily to renewal and replacement of the wastewater collection and water delivery systems.

IMPROVING LOCAL ECONOMY: Solid employment growth over the past several years has lowered the city's unemployment rate to 4.4% in March 2015. Sarasota remains a popular tourist and retiree destination with local employment tied to economically sensitive service and tourism-based industries.

RATING SENSITIVITIES
CONTINUED STRONG FINANCIAL MANAGEMENT: A demonstrated trend of consistent capital investment from rates, strong debt service coverage and high liquidity levels could result in positive rating action.

CREDIT PROFILE
Sarasota (GO bonds rated 'AA+' by Fitch) is located along the Gulf of Mexico on the southwest coast of Florida. Sarasota is the largest city and county seat of Sarasota County (implied ULTGO rated 'AAA' with a Stable Outlook). The city is a mature and mostly residential community of 53,000 residents.

STRONG FINANCIAL PERFORMANCE EXPECTED TO CONTINUE
The system's financial performance has strengthened over the past several years as improving local economic and housing conditions coupled with annual rate increases and declining debt service have led to a rise in operating revenues, financial margins, and debt service coverage (DSC). DSC reached 2.0x in fiscal 2012 (excluding the Build America Bonds, or BABs subsidy), improving further in fiscals 2013 and 2014 (series 2002A bonds fully matured in fiscal 2012). DSC was 2.7x in fiscal 2014 and is much-improved from the 1.7x recorded just four years prior.

Other financial metrics, including liquidity and free cash flow (FCF), have also improved. FCF increased from approximately \$2.5 million in fiscal 2010 to \$11 million by fiscal 2014, or a very strong 137% of annual depreciation, providing significant funding for the system's manageable capital program. Stronger liquidity is due to a combination of the receipt of approximately \$20 million in proceeds from the sale of city-owned land in fiscal 2011 (no longer needed as a disposal site for reclaimed water) and increasingly greater FCF. The system ended fiscal 2014 with \$42 million in unrestricted cash and investments, or a robust 662 days of cash on hand.

An additional scheduled decline in annual debt service is expected to lead to even stronger financial results. Projections provided by the city from a 2014 rate study show DSC surpassing 4.5x (excluding the BAB subsidy) in fiscal 2016, and to more than 5.0x by fiscal 2017. The projections include reasonable assumptions for customer growth and annual rate increases (4%-6%). The pro forma results are very strong even without future rate increases, and results are likely attainable given the lack of near-term borrowing plans.

RATES HIGH NATIONALLY BUT COMPARABLE TO PEERS
With full autonomy over rate setting, the city has historically implemented moderate and timely rate increases. Since fiscal 2009, the city has raised rates by approximately 30%. Monthly rates for combined service are high at \$87 for 5,000 gallons of use for the typical residential customer in fiscal 2015, or 2.5% of MHI. Rates above 2% of MHI typically exceed Fitch's rate affordability threshold and may indicate constraints on future rate raising flexibility.

However, several factors help mitigate these concerns; the city has systematically raised rates in the past, allowing ratepayers to adjust to smaller and more frequent rate adjustments, and rates are generally comparable to neighboring systems, limiting potential future political pushback for approving additional increases, if necessary.

Fitch views the rate structure, which is a combination of fixed monthly fees and inclining block volumetric charges, as providing a higher degree of revenue stability to rates based on volume alone. Of note, Sarasota's fixed monthly charge for the represents a proportionally high amount of the total bill (close to 50%), leaving the system less susceptible to changes in demand than many of its peers. Average monthly usage in Sarasota is below the national average (which is 7,500 gallons) given the large seasonal resident and retiree population. A tiered water rate structure provides incentive to conserve.

MANAGEABLE, INTERNALLY-FUNDED CIP TO RESULT IN LOWER DEBT BURDEN
The system's debt burden is moderate with fiscal 2014 ratios in line with the medians for water and sewer utilities rated in the 'AA' category. In fiscal 2014, debt to net plant assets declined to 37% from a peak of 63% in fiscal 2010, and debt per customer, at \$1,642 is below the 'AA' median (\$1,934).

The city is mature, and existing infrastructure, including treatment capacity and water supply, is sufficient for the long term, limiting capital spending to critical water and sewer infrastructure upkeep and renewal. Inclusive of carry-over projects, the capital improvement plan (CIP) is a manageable \$77 million through fiscal 2019 and will continue renewal and replacement of the system.

As a result of the pay-go funding of the capital plan and relatively rapid amortization of existing debt (47% of principal retired in 10 years), Fitch projects the debt burden will continue to decline. By 2019, debt per customer is projected to be less than \$1,300, and debt carrying costs, which are currently reasonable at 15% of gross revenues will decline to just 9% (assuming the pro forma rate increases).

SOLID OPERATING PROFILE, DIVERSE AND RESIDENTIAL CUSTOMER BASE
The system provides water supply, treatment and delivery to 18,200 water customers, and wastewater collection, treatment and disposal services to more than 17,800 sewer connections mainly within the city's 24 square mile geographic area. The customer base is mostly residential and diverse with limited concentration from large commercial users. The largest customer, Sarasota County, represents just 3.7% of total revenues, and the leading 10 make up just over 12%. Raw water supply is derived from the Floridan Aquifer. Total permitted withdrawal capacity of 13.7 million gallons per day (mgd) is more than twice the current average demand, and capable of meeting the city's long-term supply needs.