TEXT-Fitch rates St. Petersburg, Fla. public utility revs 'AA'

Wed Dec 5, 2012 5:03pm EST

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Dec 5 - Fitch Ratings assigns its 'AA' rating on the following St.
Petersburg, Florida (the city) public utility (the utility) revenue bonds:

--$38.1 million public utility revenue bonds, series 2013A;
--$39.5 million public utility revenue refunding bonds, series 2013B.

Bonds are expected to price on Dec. 18, 2012 in a competitive sale. Proceeds of
the series 2013A bonds are expected to fund a wastewater treatment plant project
that is expected to provide long-term operational savings, fund a debt service
reserve fund and pay costs of issuance. Proceeds of the series 2013B bonds will
refund outstanding series 2003 bonds for savings and pay costs of issuance.

Fitch also affirms its rating on the city's parity outstanding bonds as follows:

--$257.6 million utility revenue bonds at 'AA'.

The Rating Outlook is Stable.

SECURITY

The bonds are secured and payable by an irrevocable first lien on the net
revenues of the utility.

KEY RATING DRIVERS

HEALTHY FINANCIAL METRICS: Debt service coverage levels are healthy, although
have experienced a decline, as anticipated, from previously high levels as a
result of additional debt issuance. Liquidity remains strong, providing good
financial flexibility to the system.

DEBT LEVELS INCREASING: Capital needs, which primarily consist of repairs and
upgrades to existing infrastructure, will be funded primarily by additional
debt. Fitch does not expect the increased leverage and debt service costs over
the next five years to result in a further decrease to coverage levels.

ANNUAL RATE INCREASES EXPECTED: Rate flexibility appears strong and rates are in
line with other regional utilities. Fitch expects the city should be able to
implement the annual rate increases needed to fund planned capital spending.

FORMALIZED RATE STUDY: Fitch views the city's formal annual rate study as a
positive credit factor that should provide timely cost recovery and mitigate the
net revenue impact of sales declines and cost pressures.

SOLID OPERATING PROFILE: The city benefits from a water supply provided by its
participation in Tampa Bay Water (TBW), the region's highly rated wholesale
water supply authority. The city provides its own wastewater services, which
includes a substantial recycled water system.

WHAT COULD TRIGGER A RATING ACTION

FURTHER DECLINE IN COVERAGE: Any further decline in debt service coverage levels
could pressure the rating.

CREDIT SUMMARY

COMBINED UTILITY COVERS LARGELY BUILT-OUT SERVICE AREA

St. Petersburg is located in Pinellas County (Fitch sewer revenue bond rating
'AA+'), approximately 20 miles southwest of Tampa. The city's utility system is
composed of assets providing water, wastewater, reclaimed water and stormwater
service for an estimated 300,000 residents located throughout the region.
Revenues of all four utilities are pledged to the bonds. The customer base is
largely residential in nature. Average daily demand declined between 2006 and
2010, a reflection of conservation policies of the city and a declining housing
market leading to an increase in home foreclosures and vacancies. Future growth
will be limited by the largely developed nature of the city.

AMPLE SYSTEM CAPACITY

The city does not own any drinking water resources but is one of six member
governments of 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 (rated 'AA+' by Fitch) has existing water supplies to meet member
need at least over the next 10 to 15 years.

The city operates four wastewater treatment plants and a collection system. The
recycled water is sold through the city's extensive recycled water distribution
system and disposed of through injection wells. No discharge is emitted into
Tampa Bay, limiting environmental concerns for the system.

CAPITAL SPENDING RELATES TO REPLACEMENT AND UPGRADE OF EXISTING ASSETS

The utility's 2013-2017 capital improvement plan (CIP) totals $190.3 million, of
which the majority will be debt funded, including the 2013A bonds. The series
2013A bonds will fund the decommissioning of the oldest wastewater treatment
plant and divert flows to one of the other three treatment plants. The project
should save the city operating and maintenance costs over time. The CIP also
includes a $32 million waste to energy facility that will generate electricity
from the sludge by-product and reduce the city's sludge disposal costs and
electricity costs.

Remaining capital spending relates primarily to repair and replacement of the
water distribution and wastewater collection systems. Approximately $16.8
million of the total relates to storm water projects. The additional borrowing
will increase debt ratios slightly above 'AA' category rating median levels.
Debt amortization is also slow, with principal payout at 26% and 57% in 10 and
20 years, respectively.

RATES SHOULD KEEP PACE WITH COST INCREASES

Rate setting is done annually with rate adjustments put into place for each
utility at the beginning of the fiscal year. Management conducts an independent
rate study annually, which is viewed favorably by Fitch. The study includes a
10-year rate forecast based on planned operation and capital spending
incorporates additional debt. Assumptions used in rate planning rely on a
zero-growth scenario, which appears reasonable. Retail water sales were flat in
fiscals 2011 and 2012 following a cumulative 19% decline from 2006 to 2010.
Fitch assumes any further decline in consumption would be mitigated by the
city's annual rate action.

Followed by 7.5% rate increases in fiscals 2011 and 2012, a more modest 2.75%
rate increase was adopted in fiscal 2013. The prior years included the
additional debt costs associated with the 2010 bond issuance. The rate study
projects annual rate increases over the next 10 years of 4.25% in fiscal 2014
and 3.75% thereafter for each system. Rates are in line with regional utilities
and the city appears to have solid rate flexibility with regard to future needed
increases.

DEBT SERVICE COVERAGE DECLINES; LIQUIDTY STRONG

Financial operations have been healthy, supported by annual incremental rate
increases that have supported rising operating and debt service obligations.
However, coverage levels have declined from previous high levels with the
additional debt issuance. Debt service coverage of all-in annual debt service
(ADS) in fiscal 2011 was 1.9 times (x) (including junior lien state revolving
fund payments). Debt service coverage after the transfer payment to the general
fund (which represents payments in lieu of taxes and franchise fees) was 1.3x.

Based on preliminary unaudited financials, all-in debt service coverage in
fiscal 2012 is projected in line with 2011 levels. Coverage levels are expected
to remain around this level through the five year forecast. Free cash flow
(after payment of debt service and transfers) is modest(below annual
depreciation in the last five years), resulting in a reliance on debt funding
for most capital needs.

The city makes transfers from the water and stormwater funds to the general
fund. The transfer payments absorb much of the excess cash flow from the
utilities, increasing the utility's use of debt funding for capital. Transfers
are based on a formula that provides payments to the city in lieu of taxes and
franchise fees, so Fitch expects them to be stable and predictable. 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 $109.5 million in unrestricted
cash and investments or 475 days cash on hand at the close of fiscal 2011. A
significant portion of the utility's reserves were funded from the sale of water
supply facilities to TBW in 1999 and are designated solely for water purchases
and the development of water production and transmission facilities. Management
intends to keep reserves at the current levels.

Additional information is available at 'www.fitchratings.com'. The ratings above
were solicited by, or on behalf of, the issuer, and therefore, Fitch has been
compensated for the provision of the ratings.

Applicable Criteria and Related Research:
--'Revenue-Supported Rating Criteria' (June 12, 2012);
--'Water and Sewer Revenue Bond Rating Guidelines' (Aug. 3, 2012).

For information on Build America Bonds, visit 'www.fitchratings.com/BABs'.

Applicable Criteria and Related Research:
Revenue-Supported Rating Criteria
U.S. Water and Sewer Revenue Bond Rating Criteria
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