Fitch Rates St. Petersburg, FL's Utility Revs 'AA'; Outlook Stable
--Approximately $30 million public utility revenue bonds, series 2015.
The bonds are expected to sell via competition on the week of November 2. Proceeds will be used to finance the costs of various water and sewer rehabilitation and replacement capital improvements, make a deposit to the debt service reserve fund, and pay issuance costs.
In addition, Fitch affirms its 'AA' ratings for the following outstanding city bonds:
--Approximately $342 million in outstanding utility system revenue bonds.
The Rating Outlook is Stable.
The bonds are secured by a first lien pledge of the net revenues of the city's public utility system (the system), which includes the water fund (including wastewater and reclaimed water) and the stormwater system.
KEY RATING DRIVERS
SOUND FINANCIAL PERFORMANCE AND METRICS: Debt service coverage (DSC) was a robust 2.2x on the senior bonds and 2.0x all-in in fiscal 2014. Coverage net of transfers to the general fund (GF) remains slim at just 1.3x all-in. However, liquidity remains ample and rates are competitive, providing some financial flexibility to the system.
WELL-MANAGED SYSTEM: Fitch views positively the city's various formal policies, comprehensive rate and capital planning, and ongoing system reinvestment. The system benefits from a solid operating profile and ample capacity.
LIMITED EXCESS CASH FLOW: The system makes large annual transfers to the GF totaling 10% of operating revenues (roughly $13 million in fiscal 2014). The transfers are formulaic and capped by city policy. However, the transfers absorb most of the excess cash flow that could otherwise be used for capital projects, increasing the need for debt funding for capital improvements.
RISING BUT MANAGEABLE DEBT BURDEN: Most of the system's capital needs will be funded by additional bonds, increasing leverage and debt service costs over the next five years. While a long-term trend of rising leverage is a concern, Fitch expects the debt burden to remain consistent with the medians for similarly rated systems.
COMPETITIVE RATES TO RISE: Rates remain competitive with other regional utilities and affordable relative to median household income (MHI). Planned rate increases should provide timely cost recovery and help offset higher expected operating and debt carrying costs.
STABLE FINANCIAL PERFORMANCE, MANAGEABLE DEBT EXPECTED: The rating could face downward pressure if significant additional debt is needed beyond the current forecast and/or if the city fails to maintain sound financial metrics and liquidity.
St. Petersburg is located in Pinellas County (sewer revenue bonds rated 'AA' by Fitch), approximately 20 miles southwest of Tampa.
COMBINED UTILITY COVERS MOSTLY BUILT-OUT SERVICE AREA
The system provides water, wastewater (including reclaimed water) and stormwater service for an estimated 300,000 residents located within the city and adjacent areas of the county. The revenues of all four utilities are pledged to the bonds, although the storm system is accounted for and operated as a separate enterprise.
The system serves approximately 91,000 mostly residential water accounts (81,000 sewer accounts). The customer base is diverse and stable, posting positive customer growth trends after several years of declines following the housing collapse and economic recession. Future customer growth is expected to be limited by the largely developed nature of the city.
SOLID OPERATING PROFILE, WELL-MANAGED SYSTEM
The city does not own any drinking water resources but is one of six member governments of Tampa Bay Water (TBW), a special district of the state created by inter-local agreement to plan, develop, and deliver a high-quality water supply to the region. TBW (utility system revenue bonds rated 'AA+') has existing water supplies to meet member needs for at least the next 15-20 years, or perhaps longer depending on growth and conservation efforts.
The city operates a wastewater collection system and three treatment facilities. The city treats to advanced secondary standards, producing recycled water which is sold through the city's extensive reclaimed water distribution system and disposed of through deep injection wells. Capacity in the system is strong with treatment capabilities at the three plants at roughly 60% of average daily flows. The plants are not designed to discharge into surface water, limiting environmental concerns for the system.
CAPEX PRIMARILY FOR IMPROVING ASSETS
The city plans to debt-fund the majority of the system's roughly $200 million five-year capital improvement plan (CIP) through 2020. The CIP addresses ongoing upgrade and rehabilitation of existing water distribution, sewer collection and treatment assets. The CIP includes additional upgrade and replacement projects and the construction of a biosolids-to-energy facility that will generate electricity from the sludge by-product and reduce the city's sludge disposal and electricity costs.
DEBT BURDEN TO RISE, REMAIN MANAGEABLE
With total outstanding debt as of fiscal-end 2014 of $337 million, the debt profile is manageable. Key debt metrics including debt per customer ($1,964) and debt-to-net fixed assets (54%) are near the medians for systems rated in the 'AA' category by Fitch. Debt carrying costs are currently low at 17% of gross revenues. However, following this issuance additional borrowings totaling approximately $130 million (including subordinate lien state revolving fund loans) will increase debt ratios to roughly $2,500 per customer (water and sewer only) by fiscal 2019, which would be relative high compared to similarly rated utilities.
Carrying costs will remain a moderate 19%-23% of gross revenues over the financial forecast, but debt amortization is slow, with payout of existing principal (including the proposed 2015 bonds) at just 23% over the next 10 years (and just 57% over 20 years), ensuring the debt burden will remain above the medians for the foreseeable future. The city expects to continue to fund system renewal and maintenance at approximately $25 million annually beyond the current capital plan.
RATES SHOULD KEEP PACE WITH COST INCREASES
Rate setting is done annually with adjustments put into place at the beginning of the fiscal year. Rates consist of base charges, which at roughly 30% of the total bill bring some consistency to the revenue base, and inclining-block volumetric fees to promote conservation. In addition, the monthly bill includes charges for TBW service. Water and sewer rates have been on the rise with incremental increases adopted in each of the past 13 fiscal years. Since fiscal 2008, water rates are up 45% while sewer rates are roughly 33% higher.
The city retains some rate-raising flexibility as rates remain affordable despite the increases, and monthly bills are in line with regional utilities. In fiscal 2016, the average residential customer using 7,500 gallons pays about $90 per month for combined service (water, sewer, and storm), which is a somewhat elevated 2.3% of MHI. However, Fitch notes the average residential user consumes closer to 4,000 gallons per month.
The city undergoes an independent rate study, which it updates annually. The rate analysis helps provide consistency and transparency to the rate-setting process. The most recent rate study (updated in September 2015) includes an updated 10-year financial and rate forecast based on planned capital spending, incorporating additional debt and long-term operating costs. The forecast indicates the system will need annual rate increases of 3.75% in fiscals 2016 and 2017, followed by a 1.5% increase in fiscal 2018 and annual 3.25% increases thereafter. The increases are considered manageable given the current level of user rates and the history of city-council support for rate increases.
STABLE FINANCIAL PERFORMANCE, STRONG LIQUIDITY EXPECTED
Financial operations have been healthy, supported by sound fiscal oversight and annual incremental rate increases. DSC levels have weakened from previous highs with the issuance of additional debt over the past several years, although coverage is solid for the rating. In fiscal 2014, DSC on the senior bonds totaled 2.2x, and coverage including subordinate lien state revolving fund payments was 2.0x. However, Fitch notes coverage of all fixed charges, including transfer payments to the general fund (which represents payments in lieu of taxes and franchise fees) was a much slimmer 1.3x in fiscal 2014.
DSC is projected to remain close to these levels in fiscal 2015 and through the remainder of the financial forecast. Projected DSC levels are low but adequate for the rating, and somewhat offset by the strong liquidity position and rate-raising flexibility. However, Fitch believes the modest free cash flow (after payment of operations, debt service and transfers) will result in reliance on debt funding for most future capital needs. Fitch expects stability and predictability in the transfers to the general fund as they are based on a formula that provides payments to the city in lieu of taxes and franchise fees. The utility includes the transfers in its rate-setting process and they are paid subordinate to debt service.
The utility maintains a strong balance sheet with $123 million in unrestricted cash and investments or 525 days cash on hand at the close of fiscal 2014. A significant portion of the utility's reserves were funded from the sale of water supply facilities to TBW in 1999. These reserves are designated solely for water purchases and the development of water production and transmission facilities, but can be used for any system-related purpose. Management intends to keep reserves at similar levels going forward.