TEXT - Fitch rates Tampa Bay Florida, utility system revs 'AA+'
Jan 15 - Fitch Ratings assigns an 'AA+' rating to the following Tampa Bay Water, A Regional Water Authority, FL (TBW, or the authority) revenue bonds: --Approximately $76 million utility system revenue bonds, series 2013. Bond proceeds will be used primarily to fund the C.W. Bill Young Reservoir (the reservoir) reconstruction project, capitalized interest through October 2014, make a reserve fund deposit, and pay issuance costs. The bonds are scheduled for negotiated sale the week of Jan. 28. In addition, Fitch affirms the following: --Approximately $900 million outstanding utility system revenue bonds at 'AA+'. The Rating Outlook is Stable. SECURITY The bonds are secured by a pledge of TBW's net revenues, which include the moneys received from rates, fees, rentals, and other income collected for use of the water system. A debt service reserve, fully-funded with cash, provides additional security. KEY RATING DRIVERS ESSENTIAL SERVICE PROVIDER: TBW is the region's exclusive wholesale water provider serving 2.3 million residents through several very highly rated member utilities. TBW's operating profile is strong, and its role in regional service delivery and resource development, strong infrastructure and financial management, and autonomy over rates are important rating factors. JOINT MEMBER PAYMENTS: The member payments, which include provision for operating costs, capital needs, and debt service, are joint, not several in nature. However, the payments are an absolute and unconditional obligation of each member, and are paid as an operations and maintenance (O&M) expense of each member's utility system, ahead of their respective debt service. TYPICAL LOW COVERAGE, STRONG LIQUIDITY: Financial margins and debt service coverage are adequate but typical for a wholesale system. Cash balances have historically been very strong, and are expected to improve further in fiscal 2012 (results are not yet audited). Strong liquidity and autonomous rate setting provide management with significant financial flexibility in light of the narrow debt service coverage margins. MANAGEABLE DEBT AND CAPITAL NEEDS: The debt profile is manageable despite recent completion of a large long-term capital improvement program that included construction of the reservoir. Despite additional costs related to the reservoir, Fitch does not expect the debt burden to rise appreciably over the near term. CREDIT PROFILE LARGE REGIONAL WHOLESALE PROVIDER TBW is a large wholesale water provider serving the three-county area of the Tampa-St Petersburg metropolitan statistical area (MSA). TBW enjoys exclusive rights to provide treated water to its members, most of which carry high credit ratings by Fitch, and has played a key role in developing and delivering high quality water from various sources. TBW has successfully expanded and diversified its water supply and production capabilities, providing solid intermediate-term water capacity while meeting the regional challenges and mandates to reduce groundwater use. Governance is provided by a nine-member board of directors appointed by the six member governments, somewhat insulating policy decisions from potential political intrusion. A tenured and capable management team is responsible for daily operations. Long-range capital and resource planning is updated frequently, and rates are considered annually during the budget process. The board has autonomy over rate setting, and rates have been increased annually to maintain stable financial performance. A FUNDAMENTALLY STRONG OPERATING PROFILE INFORMS THE HIGH RATING TBW's six member agencies include Pinellas, Pasco, and Hillsborough counties, and the cities of Tampa, St. Petersburg, and New Port Richey. Hillsborough's water and sewer system revenue bonds are rated 'AAA' with a Stable Outlook by Fitch. Tampa's utility system is rated 'AA+', and St. Petersburg and Pasco County's systems are rated 'AA', all with Stable Outlooks. Pinellas County, which has no water utility debt outstanding, and New Port Richey are not rated by Fitch. Under the master water supply contract, the members unconditionally agree to pay for the costs of service at the rates specified by the authority. TBW applies a uniform rate in determining the member payments, which for fiscal 2012 was $2.56 per 1,000 gallons. Member payments are designed to cover both the fixed and variable costs of the authority and include provision for operating, administrative and maintenance costs, annual debt service, and amounts for renewal and replacement and capital improvement of facilities and operating reserves. Rates are determined by TBW based on annual estimates of all of the costs associated with delivery of service to the member governments. Member payments are several, not joint. However, members irrevocably agree to make monthly payments, and such payments shall be made without set-off, counterclaim, or abatement. In addition, member payments are made as an O&M expense of the member's utility, which Fitch believes to be a strong security feature. TBW also maintains strong operating fundamentals, including long-term capital and resource planning, significant and ongoing infrastructure investment, high cash reserves, and autonomy over rates. SOLID SYSTEM INFRASTRUCTURE AND RESOURCE CAPACITY Water resources are diverse and are comprised of groundwater, treated surface water from the Hillsborough and Alafia rivers and the Tampa Bypass Canal, and desalinated seawater. TBW has been successful in cultivating its supply portfolio, while lowering its reliance on groundwater pumping. The system has a total permitted water supply capacity of 240 million gallons per day (mgd), which is well in excess of current demand of 164 mgd. TBW is one of the few systems in the country that can process seawater. The desalination plant was completed in 2008 and can provide almost 29 mgd of supply to the system (with expansion capabilities to 35 mgd). Treated seawater is combined with treated surface and groundwater before it is distributed. Two interconnections with the city of Tampa provide some redundancy. A total of nine treatment facilities including the surface water treatment plant, which has a 120 mgd capacity, and the desalination plant, provide ample capacity to meet the system's long-term needs. The 15 billion gallon above-ground surface water reservoir was completed in 2005. The embankment is structurally sound. However, the internal erosion plates have cracked, requiring reconstruction. In 2009, the board approved moving forward with permitting, design, procurement, and construction of the reservoir project that will cost roughly $140 million. In August 2012, the board selected Kiewit Infrastructure Group as the design/build firm. The project is expected to begin next month and take about two years to complete. During construction, TBW will utilize its other surface water sources and desalination capabilities, but has also been granted on a temporary basis the ability to exceed its withdrawal allocation from the groundwater wells by the water management district. Fitch does not expect water supply interruptions while the reservoir is being repaired, but acknowledges operating performance may come under pressure especially if drought conditions materialize. STRONG FINANCIAL MANAGEMENT AND LIQUIDITY OFFSETS MODEST COVERAGE Like many wholesale systems, TBW displays only modest annual debt service coverage - roughly 1.1x from net revenues historically, and about 1.3x including available reserves. However, the strength of the member payments, a historically strong financial position, and the ability to raise rates provides strong support for the high rating. The rates are established during the annual budget process and members are billed monthly for service. Liquidity remains strong. The authority ended fiscal 2011 with $69 million in unrestricted cash and investments, which included renewal and replacement reserves equivalent to 471 days cash on hand. Management anticipates an increase in liquidity for fiscal 2012. However, most of the increase has been set aside to fund legal costs associated with a recent lawsuit against the reservoir's original design firm. Pro forma financials provided by management show debt service coverage similar to past results. The forecast assumptions appear reasonable but include the refinancing of the 2011A and 2011B bonds prior to large scheduled bullet maturities beginning in fiscal 2016. Modest annual rate increases and attainable increases in demand from each of the members are also factored into the forecast. Fitch does not anticipate TBW will have trouble gaining market access for the refinancing of the 2011A and 2011B bonds. SOLID ECONOMIC UNDERPINNINGS of the SERVICE AREA Located midway down the western coast of Florida, the Tampa Bay region serves as the economic center for Florida's Gulf Coast, with major sectors in business services, government, healthcare, education, and tourism. The economy continues to recover from the magnified effect of the recent downturn in the economy, with solid employment level increases over the past 12 months. Preliminary BLS employment data for November 2012 indicates a 3.3% increase in MSA jobs over the same month in 2011. The Tampa MSA unemployment rate remains somewhat elevated at 8.1% in November 2012, but is well below the 10.3% rate recorded in November 2011. MANAGEABLE CAPITAL NEEDS AND DEBT BURDEN TBW's debt burden remains manageable despite having about $1 billion of total debt outstanding. For fiscal 2012, debt is about 87% of net capital assets, which is somewhat high, but is just $447 on a per capita basis. Also, long-term capital needs appear to be limited, as water supply and treatment capacity are both ample. This should allow debt ratios to decline over time. The current five-year capital plan totals about $200 million and principally includes the reconstruction of the reservoir. The 2013 bonds are back-loaded with principal payments beginning in fiscal 2033. However, the bonds mature in fiscal 2039 and the existing debt structure allows for the 2013 bonds to wrap around existing debt service with a decline in debt service over time. Annual debt service is expected to be level through 2016. A spike in debt service beginning in 2017 from scheduled bullet maturities related to the 2011A and 2011B bonds are anticipated to be handled with a refinancing of those bonds to smooth-out the debt service over time. Fitch expects the authority will maintain the ability to access markets and will take appropriate steps to manage this risk.