Jan 18 - Fitch Ratings assigns an 'AAA' rating to the following Palm Beach
County, FL revenue bonds:
--Approximately $74 million water and sewer system revenue refunding bonds,
Bond proceeds will be used to advance refund a portion of the outstanding series
2006A bonds for interest savings, and pay issuance costs.
The bonds are scheduled for negotiated sale the week of Jan. 28.
In addition, Fitch affirms the following:
--Approximately $180 million outstanding water and sewer system revenue bonds at
The Rating Outlook is Stable.
The bonds are secured by a first lien on and pledge of the net revenues of the
county's water and sewer system, and the connection fees.
KEY RATING DRIVERS
STRONG FINANCIAL PERFORMANCE AND MANAGEMENT: Financial margins are strong and
have generated significant cash flows and debt service coverage (DSC). Liquidity
has roughly tripled over the past five years, standing at a very strong 564 days
cash on hand in fiscal 2012 (unaudited).
LOW RATES AND DEBT BURDEN: The average residential bill for combined service is
about $56 per month, which is just 1.3% of median household income, and
considered low in comparison to neighboring systems. The system's credit profile
benefits from a history of pay-as-you-go capital financing that helped keep its
debt burden low.
LARGE PAY-GO CAPITAL PLAN: Capital needs are comprehensive and will address
system upgrade and improvement projects including treatment plant upgrades,
transmission and collection system replacement, and pump/lift station
improvements. The totally cash-funded plan is expected to cost $340 million over
the next six years.
LARGE AND STABLE CUSTOMER BASE: The system provides service to a large, stable,
and mostly residential customer base. The economy is diversifying, and coupled
with desirable quality of life, above-average wealth levels, and strong
population growth projections, Fitch believes the county's long-term economic
prospects remain favorable.
Palm Beach County (GO's rated 'AAA' by Fitch) is located on Florida's southeast
Atlantic coast approximately one-hour north of Fort Lauderdale. The system
serves a large service area covering 1,200 square miles (largely unincorporated
county areas), and approximately 226,000 mostly residential retail water
connections, 207,000 sewer accounts, and several wholesale customers through
Connections are about 95% residential with the ten largest customers comprising
a moderate 13% of total system revenues in 2012. The county's largest customer
is the Glades Utility Authority (GUA), which the system began serving on a
wholesale basis in 2009. Overall, the customer base has demonstrated modest
growth and is expected to remain stable.
POTENTIAL GUA ABSORPTION EXPECTED TO BE CREDIT NEUTRAL
The county is planning to absorb GUA into its utility system within the next
several months. Fitch believes the system is fully capable of absorbing GUA with
little impact to its operating or financial profile.
GUA was established in 2009 through interlocal agreement between the county and
the cities of Belle Glade, Pahokee, and South Bay as a regional partnership for
the purpose of providing utility services to the western portions of the county,
which includes the cities and surrounding areas. GUA's governing board is made
up of 7 members, including three members appointed by the county. GUA has
roughly 10,000 retail accounts.
The county completed construction of a water treatment plant to provide treated
water to the cities on a wholesale basis, prior to GUA's formation. The plant
and related transmission assets, along with other utility assets from each of
the cities were transferred to GUA's operation and control as part of GUA's
creation, and pursuant to the interlocal agreement. GUA is a separate legal and
operating entity with full control over utility management, operations, and
finances. GUA also has full autonomy in setting rates.
County staff reports that GUA was unable to implement a rate increase and began
experiencing financial difficulties shortly after commencing operations. The
county filed a lawsuit in late 2012 in order to have a receiver appointed, and
has since taken steps to fully absorb the GUA and all of its utility assets into
its own operations. The county will also absorb a small amount of GUA-related
debt as part of the transfer, and expects to have all parties formally agree to
the termination of the interlocal agreement and transfer of GUA assets and
operations within a few months.
LOW DEBT BURDEN PARTIALLY PAID FOR BY LOCAL ELECTRIC UTILITY
The system will have roughly $180 million in senior lien bonds outstanding after
issuance. The debt burden is low evidenced by a debt to plant ratio of 22%, and
debt per customer of just $446. Debt carrying costs are also a very reasonable
10% of gross revenues. All of these ratios compare favorably to Fitch's medians
for 'AAA' rated systems (which are 26% debt to plant, $1,213 per customer, and
18% of gross revenues).
The county used series 2009 bond proceeds to finance reclaimed water treatment,
storage, and pumping facilities, and about 20 miles of transmission pipeline,
enabling it to sell reclaimed water to Florida Power & Light (FP&L, issuer
default rating of 'A'/Stable Outlook). The county entered into an agreement with
FP&L to sell 22 mgd (on average) of reclaimed water to be used as a cooling
source for a power generating facility located just west of West Palm Beach.
The agreement is for an initial 30-year period (with 10-year renewal options).
FP&L has agreed to pay the entire debt service for the 2009 bonds plus some
operating and capital costs. The county began to receive these payments, which
includes approximately $4 million for debt service, in fiscal 2011. Even without
these revenues, the county demonstrates very strong debt service coverage on a
pro forma basis.
EXCELLENT FINANCIAL PERFORMANCE TRENDS EXPECTED TO CONTINUE
System financial performance has historically been strong. Since fiscal 2008, an
increase in rates has led to a 50% rise in operating revenues and generation of
significant cash flows. Debt service coverage, which has been strong
historically, increased from 2.6x from all revenues in fiscal 2007, to over 4.0x
by fiscal 2012 (unaudited).
Non-operating revenues, including connection/impact fees, and investment and
other income, have also provided a significant source of revenues to the system.
Connection fees have averaged a healthy $7.8 million annually since 2007 (4% of
total revenues), and payments from FP&L for reclaimed water are expected to be
in excess of $5 million annually. When excluding the FP&L payments and the
connection fees, DSC is a still very strong 3.7x.
Similarly, the system's liquid resources increased from about $78 million in
fiscal 2012 (including a small amount of renewal and replacement funds) to $157
million by fiscal 2012, which is equivalent to a very strong 1.5 years of
operations. Liquidity is expected to decrease somewhat over the next few years
as capital projects are financed with cash. However, the system is expected to
continue generating over $60 million annually in excess cash flow, which is more
than sufficient to pay for the roughly $48 million in anticipated annual capital
costs as outlined in the capital improvement plan (CIP). As a result, cash
balances are expected to remain high over the longer-term.
Pro forma financial results provided by the county show a continuation of
historically strong results. The forecast's reasonable assumptions include the
addition of a small amount of subordinate GUA-related debt service (assuming GUA
is absorbed), the addition of approximately $4 million in net revenues from
GUA's retail customers, no customer growth, annual rate indexing based on
inflation expectations, and no additional debt.
DSC for the senior lien bonds from all revenues is projected to be no less than
3.9x through the forecast, and 3.3x excluding connection fees and FP&L payments.
When including the relatively modest amount of subordinate debt from GUA, all-in
coverage is at least 3.7x from all revenues, and 3.1x excluding connection fees
and payments from FP&L.
RATES ARE LOW, PROVIDING FINANCIAL FLEXIBILITY
Rates are structured with a monthly base charge and an inclining block commodity
charge per 1,000 gallons of use, and have been on the rise since fiscal 2008.
The combined monthly bill for service remains low at roughly $56 for 7,000
gallons, and compares favorably to rates charged by neighboring systems.
The average residential bill is just 1.3% of median household income, which is
below Fitch's affordability threshold (2%) and provides management with
flexibility to raise rates in the future. Manageable automatic annual rate
increases tied to inflation are expected to keep financial margins strong and
are viewed positively by Fitch. The county has full authority over rate setting.
SOLID INFRASTRUCTURE, CAPITAL PLAN FOCUSED ON SYSTEM UPGRADES
Raw water is supplied by two groundwater sources with permitted daily withdrawal
of 87 million gallons per day (mgd), which is comfortably in excess of average
daily demand of 52 mgd in 2012. Water treatment capacity is ample with several
treatment facilities combining to provide 103 mgd of capacity. The county owns
and operates a water reclamation facility, and is a partial owner (34%) with the
city of West Palm Beach in another reclaimed facility. Sewer system treatment
capacity is also solid with treatment plant utilization at roughly 70%.
Below average annual capital spending - as evidenced by capital expenditures to
depreciation ratio of less than 100% in four of the past five years - and a rise
in the average age of plant suggests the system has some deferred maintenance.
However, the system's six-year $340 million CIP is comprehensive and will
include water plant and well improvements, improvements to transmission mains,
sewer plant and lift station rehab, and various other projects. The CIP is
expected to be 100% funded with internally generated cash, which Fitch believes
is feasible given the large liquidity position and significant expected annual
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:
Revenue-Supported Rating Criteria
U.S. Water and Sewer Revenue Bond Rating Criteria
2013 Water and Sewer Medians
2013 Outlook: Water and Sewer Sector