TEXT-Fitch affirms St. Augustine, Fla. water, sewer revs at 'AA-'
Jan 28 - Fitch Ratings takes the following rating action on St. Augustine, FL revenue bonds: --Approximately $8.5 million water and sewer system revenue bonds outstanding affirmed at 'AA-'. The Rating Outlook is Stable. SECURITY The bonds are secured by a senior pledge of the net revenues of the city's water and sewer system, including connection fees. SENSITIVITY/RATING DRIVERS IMPROVED FINANCIAL PERFORMANCE EXPECTED: The system ended fiscal 2011 with satisfactory debt service coverage net of transfers of 1.6x. Coverage is expected to improve due to lower debt service costs and stable financial operations in fiscal 2012 and 2013. Liquidity is strong. MODERATE DEBT PROFILE: The debt burden continues to improve with outstanding debt equal to a manageable 35% of net assets and $1,200 per customer. With no plans to issue additional bonds, debt ratios should moderate further over the next several years. HIGH RATES: User charges are high, especially relative to the below-average income levels of the area. Automatic rate adjustments based on a consumer price index are expected to continue, allowing the system to generate sufficient cash flows to meet fixed costs and anticipated capital funding. AMPLE WATER SUPPLY: The system has sufficient groundwater resources to meet customer needs for the foreseeable future. Treatment capacity is ample for both water and sewer. MANAGEABLE CAPITAL NEEDS: The city does not have a formal long-term capital plan. However, capital spending has outpaced system depreciation over the past five years, and the system utilizes internal sources for its ongoing rehabilitation and replacement projects. LIMITED BUT STABLE ECONOMY: The economy is concentrated in tourism, although employment in government, healthcare and education, and manufacturing provides some diversity. Positive employment growth throughout the county has led to a declining unemployment rate the past two years. CREDIT PROFILE St. Augustine (implied GO rating of 'AA-' with a Stable Outlook by Fitch) is located on Florida's northeast coast, approximately 35 miles south of Jacksonville. The unemployment rate for the county is low (6.5% in November 2012) relative to the state and nation. However, median household income is just 79% of the state average, and 72% of the national average. SMALL BUT STABLE AND MOSTLY RESIDENTIAL CUSTOMER BASE The water and sewer system serves residents of the city as well as portions of unincorporated St. Johns County. The system is relatively small, serving just 11,249 water customers, 8,675 sewer customers, and about 30,000 residents in total in 2012. Overall, the customer base is mostly residential, and it demonstrated some resilience to the economic and housing downturn of the past several years. The system's infrastructure and water supply are more than sufficient to meet the long-term needs of the community, limiting future capital needs to system renewal and replacement. STABLE FINANCIAL PROFILE TO IMPROVE Financial margins have improved over the past five years as a result of modest annual rate increases and management's ability to hold down operating and maintenance expenses. Operating revenues increased by about 11% since fiscal 2008, which is notable given the decline in one-time connection fees over the past few years. The system ended fiscal 2011 with roughly $5.7 million in net revenues for debt service (including about $674,000 in connection fees, and net of system transfers), which provided about 1.6x coverage of annual debt service. Preliminary results for fiscal 2012 show improved coverage margins thanks to a combination of lower annual debt service (due to a recent bond refinancing) and solid fiscal controls. Debt service coverage is projected to improve to about 2.0x (net of transfers and connection fees). Liquidity is strong, providing the system with some financial flexibility. At fiscal 2011 year-end, the system had nearly $8 million in unrestricted cash and investments (net of about $8 million of bond proceeds), which is equivalent to 416 days of operations. Fitch anticipates liquidity will decline due to expected pay-go funding of system capital repair and replacement, but should remain at healthy levels. MANAGEABLE DEBT BURDEN AND CAPITAL NEEDS The system currently has just $24 million in bonds outstanding, leading to a moderate overall debt burden. Debt ratios have been on the decline for the past several years despite a small new money issue in 2012 as part of a larger refunding issuance. The city has identified approximately $12 million in capital repair and replacement projects to be completed over the next couple of years. Roughly $4 million will be funded with the 2012 proceeds, with the remainder funded from cash. No additional bonds are projected at this time, which should allow debt ratios to moderate further over the next few years. RATES ARE RELATIVELY HIGH, COLA INCREASES EXPECTED The city has full rate-setting authority and reviews rates annually during the budget process. Rates are structured with a minimum fixed monthly charge for service and commodity charges-based on consumption. The fixed monthly charge comprises nearly 50% of the total bill, which Fitch views favorably as revenues are not as dependent on flows. However, the average residential customer living within the city limits pays roughly $82 for combined service (assuming 7,500 gallons of use), which is a high 2.6% of median household income. Rates have been adjusted annually based on changes in a consumer price index; this practice is expected to continue. 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. In addition to the sources of information identified in the U.S. Municipal Revenue-Supported Rating Criteria, this action was additionally informed by information from Creditscope. Applicable Criteria and Related Research: --'Revenue-Supported Rating Criteria' (June 12, 2012); --'U.S. Water and Sewer Revenue Bond Rating Criteria' (Aug. 3, 2012); --'2013 Water and Sewer Medians' (Dec. 5, 2012); --'2013 Outlook: Water and Sewer Sector' (Dec. 5, 2012). Applicable Criteria and Related Research: 2013 Water and Sewer Medians U.S. Water and Sewer Revenue Bond Rating Criteria Revenue-Supported Rating Criteria