TEXT - Fitch rates Venice, Florida utility system revs
Dec 6 - Fitch Ratings assigns an 'AA' rating to the following City of Venice, Florida (the city) revenue bonds: --Approximately $20 million utility system revenue bonds, series 2012 rated 'AA'. Bond proceeds will be used to fund the 2012 Project, which consists of improvements to the city's Eastside Water Reclamation Facility as well as other utility system improvements. The bonds are scheduled for negotiated sale the week of Dec. 10. 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 RECENT FINANCIAL PERFORMANCE: The overall management and performance of the system, including its finances, has improved over the past several years. The system reversed a trend of negative net assets and/or net working capital as well as low debt service coverage with solid recent results. The system ended fiscal 2011 with 3.6x coverage of total system obligations and liquidity equivalent to over 370 days of operations. AVERAGE DEBT BURDEN: After issuance, the debt burden will increase but remain close to the median for systems rated in the 'AA' category. Limited additional issuance is planned which should keep debt levels moderate. MANAGEABLE CAPITAL NEEDS: The capital improvement plan (CIP) is manageable despite fairly low capital investment in the system over the past five years. HIGH RATES RELATIVE TO INCOME: The average monthly residential bill for combined service is high at $96 in fiscal 2013 for 5,000 gallons. The adoption of a long-term rate plan that will raise rates by about 3% annually helps offset concerns over the system's ability to raise rates in the future to preserve financial margins. STABLE CUSTOMER BASE AND SERVICE AREA: Venice is located in southwest Florida, along the Gulf of Mexico in Sarasota County. The extensive beachfront attracts a significant retiree population and tourism. The county's economy continues its healthy employment expansion through 2012, following positive results from 2011. CREDIT PROFILE STRONG MANAGEMENT HAS LED TO IMPROVED SYSTEM PERFORMANCE The system has benefitted from a change in management and oversight that began several years ago, which is evidenced by a combination of strong financial performance, the adoption of rate increases, and the reemergence of long-term infrastructure and capital planning. Strong financial performance followed the system's rate increases in fiscals 2008 and 2011, with total debt service coverage (DSC) approaching 2.0x in fiscal 2008 after the system posted just 1.4x DSC the year prior. Total DSC has continued to trend higher each year, reaching 3.6x in fiscal 2011.
Liquidity has also markedly improved since fiscal 2007 from virtually no days cash and a negative working capital position. By fiscal 2010 the system had improved unrestricted cash to $5.6 million and posted positive net assets. Fiscal 2011 showed further improvement in liquidity, ending with over $9 million in unrestricted resources, or a strong 378 days cash. ADOPTED RATE HIKES WILL INCREASE ALREADY HIGH RATES System rates are high both in comparison to peer systems and median household income. After fairly significant but necessary rate increases were implemented over the past few years, the average residential bill rose to $93 for combined water and sewer service (assuming 5,000 gallons of use) by fiscal 2012. The recent adoption of a multi-year rate increase will hike rates another 15% through 2017, pushing rates to a very high 3% of median household income. As a result of the high rates, Fitch is somewhat concerned about the system's long-term rate raising ability. However, Fitch notes the adopted rate resolution demonstrates a willingness to raise rates to preserve strong financial margins. The city's cut-off provisions for delinquent accounts are slightly stronger than standard provisions and help ensure ultimate payment. Customer deposits are required before service is rendered, and if service is discontinued for non-payment the city requires a fee to return service and all past due amounts to be paid. In addition, statutes allow for liens to be placed on property owners with past due accounts. According to management, bad debt write-offs have been less than $5,000 annually for the past two years. DEBT BURDEN IS MODERATE INCLUDING THE SERES 2012 BONDS Long-term capital planning has resulted in a five-year CIP for fiscals 2013-2017 totaling $52 million. This compares to previously low annual capital spending for fiscals 2007-2011 of just $5 million in total. The CIP is weighted toward sewer projects, including addressing inflow/infiltration (I&I), the addition of reclaimed water storage capabilities, and treatment plant upgrades that will increase capacity. Significant water projects include new reverse osmosis (RO) membranes that will increase plant efficiencies, water meter replacement, and various additional improvements. The city expects to fund the capital program with the 2012 bonds, internal sources, and the proceeds of a 1% infrastructure sales tax beginning in 2015. A small amount of additional borrowing is also possible. The previously low debt burden will increase with the issuance of the 2012 bonds, but overall the debt profile will be moderate. After issuance, Fitch estimates pro forma debt to net plant to approach 50%, which is slightly higher than the median for 'AA' rated systems (45%), and debt per customer to approach $1,500 (slightly below the median for the rating). With limited additional bonding plans beyond this issuance, Fitch expects the debt burden will decline over the medium term. SUFFICIENT WATER SUPPLIES AND UTILITY TREATMENT CAPACITY The city's potable water system consists of groundwater withdrawals from two municipal wellfields and a centralized water treatment plant. Raw water is supplied by the Intermediate Aquifer, which is regulated by a 20-year water use permit from the Southwest Florida Water Management District (SWFWMD). The system is currently permitted for an average daily withdrawal of 6.9 million gallons per day (mgd). Water supply is well in excess of current demand of about 3 mgd. The 20-year permit was renewed in 2008. The treatment plant has a current max day treatment capacity of 4.5 mgd, which can be expanded to 6.23 mgd as needed; however, there are no current plans to do so. The plant's current water recovery rate is about 50%. The addition of new reverse osmosis (RO) membranes is expected to increase the plant's output. All wastewater is collected and directed to the city's Eastside water reclamation facility through a system of gravity sanitary sewer mains, lift stations and force mains. The plant is an advanced treatment facility with a permitted capacity of 6 mgd based on a three-month rolling average daily flow. The plant will be expanded to 8 mgd, which is well in excess of current flows. COASTAL LOCATION ATTRACTS RETIREES AND TOURISTS Venice is located on the Gulf of Mexico in Sarasota County (implied general obligation rating of 'AAA' by Fitch), approximately 70 miles south of Tampa. The city has a significant retiree population and, with its extensive beachfront, attracts a noteworthy amount of tourism. The government and health-care sectors are also well represented. The customer base is diverse, stable, and mostly residential. The water and sewer systems served roughly 11,000 retail connections in 2012. The system also provides reclaimed water services to an additional 3,000 accounts. The service area covers 16 square miles and is bounded by the Gulf of Mexico to the west and unincorporated Sarasota County on all other sides. The year-round resident population of the city is approximately 22,000. However, the system serves a larger population during the winter months and service is extended into unincorporated parts of the county for an estimated total population of 32,000. The city also provides bulk sewer service to the county via an interlocal agreement whereby the county has reserved 3 mgd in the city's sewer plant and sends flows on an as-needed basis. The city charges the county a wholesale rate. Currently, county flows are roughly 34% of total flows to the plant.