TEXT - Fitch affirms Winter Park, Fla. water & sewer system revs
Feb 27 - Fitch Ratings has affirmed the rating on the following Winter Park, FL revenue bonds: --Approximately $1.3 million water & sewer revenue bonds, series 2002, at 'AA-'. The Rating Outlook is Stable. KEY RATING DRIVERS Strategic Rate Raising & Restructuring: Planned rate increases coupled with the phased elimination of existing subsidies will preserve available cash balances and high debt service margins without placing an undue burden on residential rate payers. Strengthening Financial Profile: The city's water and sewer system (the system) has demonstrated improving operating margins and strong debt service coverage (DSC). For fiscal 2012 (unaudited), DSC was over 2.0 times (x), and liquidity was solid at 160 days of operations. Manageable Debt and Capital Needs: The debt burden is high with 70% debt-to-net-plant ratio, though this is offset by manageable annual debt service payments, a balanced five-year $17 million capital program, and no plans for future bond issuances. Stable Economic Base: The customer base is mostly residential and stable, and the service area economy is beginning to show signs of growth due to increased residential and commercial construction activity. Solid Legal Covenants: Legal provisions are considered solid with a 1.25x rate covenant and additional bonds test. In addition, the bonds are covered by a cash-funded debt service reserve fund. RATING SENSITIVITY Rate Increases Necessary for Ongoing Stability: The system's liquidity is sensitive to the progress of adopted multi-year rate increase and phased elimination of existing water and sewer subsidies. Fitch will continue to assess the system's financial position as future rate increases are implemented. Continued improvement in system liquidity could lead to upward rating movement. Credit Profile RESIDENTIAL CUSTOMER BASE REMAINS STABLE The Winter Park community is wealthy relative to state and Orange County levels, has a declining unemployment rate and a fairly steady population with slight seasonal variation. There is no concentration of customers, with the largest customers accounting for less than 5% of revenues. The city owns and operates a water treatment system and a sewer conveyance network, serving approximately 40,000 mostly residential customers. The service area, which includes the city and some unincorporated areas of the county, where residents pay a surcharge for service, covers approximately 22 square miles and approximately 70,000 residents. The city is almost completely developed, limiting future customer growth and capital needs. FINANCIAL OUTLOOK STEADY System financial operations have stayed strong due to annual rate increases which provided for debt service coverage at a solid 2.1x in fiscals 2011 and 2012. The system makes annual transfer payments to the city's general fund, which by ordinance is equal to 15% of the rolling three year average of non-sewer revenues. Fitch views transfers above 5% to be high, but for fiscal 2012, the transfer was roughly $2 million, or a more modest 7% of revenues. The annual transfer could be (and has been) increased by ordinance, although no further changes are anticipated at this time. When incorporating the annual transfer, net revenues covered debt service and system transfers at 1.7x in fiscal 2012, which is still considered strong. The system's liquidity position is below the medians for similarly rated systems, but is expected to improve over the next several years given the system's solid operating margins and limited pay-as-you-go capital needs. Days cash on hand improved to 160 days in fiscal 2012 (unaudited) from just 55 days in fiscal 2009. RATES ARE LOW, CITY APPROVES RATE RESTRUCTURING The average monthly residential bill for combined service of $70 (based on 8,000 gallons of use) remains affordable for residents. The system charges a surcharge for customers living outside of the city limits. Since last review, management has conducted an independent rate study to restructure its rate system and streamline existing subsidy arrangements so that rates for water and sewer are more consistent with actual costs of service. Fitch views this initiative as a credit positive, as consistent annual rate increases will be necessary for the system to maintain its current financial strength. INFRASTRUCTURE CURRENT, CAPACITY SUFFICIENT Water is supplied from the Lower Floridan Aquifer and treated at one of four city-owned treatment facilities with a combined capacity to treat up to 28.8 million gallons per day (mgd), well in excess of average daily demand of 9.8 mgd in 2012. The average age of plant is favorable at 10 years, and line breaks per 100 miles are considered to be minor. The city provides sewer collection only, and wastewater is sent to various nearby utilities including the city of Orlando for treatment and disposal. Total available treatment capacity at the various treatment plants is 8.2 mgd versus average daily flows of 5.2 mgd in 2012. Orlando's water and sewer system (rated 'AAA' by Fitch) treats wastewater from several other cities, but has expanded capacity in recent years and is equipped for projected flows well into the future. DEBT CARRYING COSTS ARE MANAGEABLE, DEBT BURDEN TO TREND LOWER OVER TIME The system shoulders a relatively high debt burden of $75 million. However, the impact of this burden is offset by both modest annual debt service payments (at only 20% of gross revenues), as well as a manageable capital improvement program. Debt to net plant is high at 70% in fiscal 2012, though Fitch expects debt ratios will decline over time as the city plans to cash-fund its remaining capital program. As of 2012, the outstanding long-term debt per customer of $1,907 exceeds the 'AA' median of $1,615 but is also on the decline. Debt amortization is somewhat slow with just 38% of outstanding principal retired over the next 10 years. However, the utility pays off its debt at a more rapid pace thereafter, retiring 88% within 20 years and all bonds fully in 25 years. Given the below average amortization over the intermediate term, Fitch expects debt ratios will remain slightly above average for the foreseeable future. Legal provisions include a 1.25x net revenue rate covenant as well as an additional bonds test requiring MADS coverage of 1.25x of net revenue over a 12-consecutive month period.
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