November 9, 2012 / 6:06 PM / 5 years ago

TEXT-Fitch affirms St. Petersburg, Fla. utility revs at 'AA'

Nov 9 - Fitch Ratings affirms its rating on the following St. Petersburg,
Florida (the city) public utility (the utility) revenue bonds:

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

The Rating Outlook is Stable.

The city anticipates selling approximately $37.3 million parity bonds, series
2013A and approximately $38.5 million parity refunding bonds, series 2013B in
December 2012, which will be rated by Fitch closer to the pricing date.

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: Financial metrics remain 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 material decrease to coverage levels.

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

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.

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 PRIMARILY REPLACEMENT AND UPGRADE OF EXISTING ASSETS

The utility's 2013-2017 capital improvement plan (CIP) totals $190.3 million, of
which approximately 65% will be debt funded, including the anticipated 2013A
bonds. Future issuances are tentatively scheduled for 2015 and 2017. 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
will 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 appear reasonable. Retail water sales were flat in
fiscals 2011 and 2012 following a cumulative 19% decline from 2006 to 2010.

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 annually rate increases over the next 10 years of 3.75% 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 very stable, 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 unaudited financials, all-in debt service coverage in fiscal 2012 is
expected to decline to 1.68x, or 1.08x after transfers. Coverage levels are
expected to remain at or above this level through the five year forecast.

The city makes consistent 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 balance sheet, funded from the sale of
water supply facilities to Tampa Bay Water (TBW) in 1999, is 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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