Aa3 RATING AFFECTS $181.5 MILLION IN POST SALE WATER AND SEWER SYSTEM REVENUE BONDS
Clearwater (City of) FL Water and Sewer Ent.
Water and Sewer Revenue Refunding Bonds, Series 2011
Expected Sale Date
water and sewer revenue
NEW YORK, Jun 30, 2011 -- Moody's Investors Service has assigned an Aa3 rating to the City of
Clearwater's (FL) $47.6 million Water and Sewer Revenue Refunding Bonds, Series
2011. The Aa3 rating applies to $181.5 million post-sale water and sewer bonds.
The bonds are secured by the net revenues of the combined water, sewer and
reclaimed water systems. Proceeds from the Series 2011 bonds will refund
$46.9 million in outstanding Series 2002 Bonds to achieve an estimated
$2 million net present value savings (4.2% of refunded par), without extending
SUMMARY RATING RATIONALE
The Aa3 rating is based on the system's mature and stable customer
base, well-managed financial operations supported by annual rate
increases, satisfactory debt service coverage, and the system's strong
As a mature system, support for debt service and capital costs are largely
dependent on regular future rate increases; officials have demonstrated a long
history of adopting rate increases on a timely basis. Also, 53% of the capital
program, which has increased as a function of upgrading and maintaining
regulatory compliance, is being funded with additional debt proceeds, with about
$87 million in new debt expected through 2016. Future capital challenges facing
the utility include compliance with total maximum daily load (TMDL) requirements
by the state and upgrading treatment of bio-solids.
Stable, favorable financial performance
Coastal location presents typical Florida water supply challenges and costs
DETAILED CREDIT DISCUSSION
SECURITY PROVISIONS ARE ADEQUATE
Security provisions include a common debt service reserve funded in cash at
maximum annual debt service, a rate covenant of 1.15 times annual debt service
(including a 1.0 times covenant for all reserves and other required payments),
and an additional bonds test of 1.20 times of maximum annual debt service.
Security provisions also include a modified open loop flow of funds, which
enables the city to use excess water and sewer monies for other city purposes.
Some comfort is gained from the provision that the rate covenant requires
annual net revenues be sufficient to pay 1.15 times annual debt service and that
net revenues after the payment of debt service are sufficient to make a transfer
to the Renewal and Replacement Fund equal to 5% of the prior year's revenues.
Additionally, payments to the city's General Fund are set by city policy to
equal 5.5% of prior year total operating revenue.
STABLE AND MATURE CUSTOMER BASE WITH REGIONALLY FAVORABLE RESIDENT
Moody's believes that the stable and relatively large customer base
will continue to support system operations. Located approximately 22 miles west
of the city of Tampa (long term issuer rated Aa1), the system's over 25.5 square
mile service area serves a population of roughly 150,000, including the city's
permanent population (107,685), transient population, and portions of
unincorporated Pinellas County. The service area is primarily
residential, representing 80% of all customer accounts, with the
commercial sector comprising the majority of the remaining 20% of the
customer base. The city's economy is showing some indication of
stabilization: taxable values declined 30% between fiscal 2008 and fiscal
2011 and preliminary fiscal 2012 taxable assessed values are $7.6 billion, a
more modest 2.8% decline. This is a marked improvement from the previous three
years in which values fell 10%, 13% and 11% in the years from 2009 to 2011.
The economic base is composed of tourism, a retiree population (represented by
the city's 44.5 median age) and related professional and other services,
including health care. Resident per capita personal income ($41,000) has trended
above state and national averages and the 9.4% unemployment rate in April 2011
is lower than that for the state (10.4%) but above the U.S. (8.7%).
Mirroring the mature nature of the city, the system has a relatively static
number of water and sewer customers, although expansion of the reclaimed water
system has increased average flow by 85% over the past five years. Sale of
reclaimed water has reduced the use of potable water for irrigation and also
helps the city to meet certain permitting requirements for its waste facilities.
In fiscal 2010 the system provided service to a total of approximately 39,971
water, 33,041 sewer and 2,782 reclaimed water customers, including both city
residents and businesses. There is no large customer dependency, with the
revenues of the top ten system customers comprising 11.7% and 10.2%,
respectively, of water and sewer revenues in fiscal 2010.
ADEQUATE WATER SUPPLY AND TREATMENT CAPACITIES WITH ALTERNATE WATER
TREATMENT AND SUPPLY BEING ENHANCED
Moody's believes that good planning for long-term water supply and sufficient
water and sewer system capacities position the system to meet the long-term
needs of the largely built-out area, although future potential regulatory
requirements may be costly. The water system purchases a five-year average of
69% of its supply from Pinellas County under a 30-year agreement (to 2035) and
produces the remaining 31%. The water system has experienced an annual decline
in average demand from 14.1 MGD in 2006 to 10.8 MGD in 2010 due to use of
reclaimed water, water restrictions, conservation and the softened economy.
The city's own water supply is derived from 19 production wells (6.25 MGD
permitted withdrawal capacity) supplied by the Floridan Aquifer, and the
Pinellas agreement allows for a maximum purchase of 15 MGD. The city is planning
to decrease its reliance on the county for its water supply by increasing its
own well production (19 wells to 38 wells) and treatment capacity. Officials
hope to provide 70% of their requirements (10 MGD) from their own supply sources
by 2014. The city initiated operation of a 3.6 MGD reverse osmosis (RO) plant in
fiscal 2004 (being expanded to 4.6 MGD by 2012) and are constructing a new 6.25
MGD RO plant. Current treatment capacity, from the system's three plants, is
28.5 MGD in relation to 14.3 MGD average. Peak system flows in fiscal 2010, by
plant are East 6.5 MGD, Northeast 11.6 MGD and Marshall Street 11.5 MGD.
Pinellas County is under contract to obtain up to 100% of its water (about 70
MGD) from Tampa Bay Water (rated Aa2), the exclusive supplier of water to the
Tampa Bay region. The city's consumptive use permit with Southwest Florida Water
Management District (SWFWMD) expired in December 2010, and officials are
reportedly seeking an additional 1.75 MGD withdrawal increase on renewal from
the current 6.25 MGD permit level. The application process is reportedly
underway and city officials are anticipating a permit in Fall of 2011. Water
storage is adequate at 22 million gallons. The water system is reportedly in
compliance with all material state and federal regulations. The system has a
regular meter change-out program and unaccounted for water is reportedly below
The city also operates a sewage collection system and three wastewater treatment
plants, with a total design capacity of 28.5 MGD, of which an average of 14.3
MGD, or 50.2%, was used during fiscal 2010. Plants operate under five-year FDEP
permits (to October 2011 and March 2012), which are expected to be renewed.
Usage has remained stable over the last four years. The city is under a consent
order (CO) on its Marshal Street plant due to exceeding limits on the discharge
of disinfection byproducts (DBPs). Higher DBP levels are permitted during the CO
period, ending in December 2013. The city estimates improvements to bring the
plant in compliance could cost between $50,000 and $4 million. Most of
wastewater effluent is disposed to surface waters, with about 4.4 MGD (including
wholesale allocation to Pinellas County) resold through the city's reclaimed
water program. There are reportedly about 4,000 parcels that have septics, and
these are required to tie into the system if the septics fail and if facilities
are available. Sludge is currently being treated to a Class B standard and land
applied, although treatment will likely have to be upgraded as future
regulations are imposed. Officials anticipate meeting upgraded standards
through a thermal dryer project estimated to cost $23.2 million funded over
three years (fiscal 2015 to fiscal 2017). Officials are also addressing state
parameters for TMDL levels by going to a zero discharge system by 2014.
Infiltration/inflow is currently estimated at about 10%. The city has an
interlocal agreement with the City of Safety Harbor (expiring 2018) related to
the Northeast WWTP (13.5 MGD), whereby the city and Safety Harbor share
plant O&M costs (effective cost reimbursement).
The reclaimed water system has a 14 MGD permit and 15 MG of storage in relation
to the 4.4 MGD distributed currently (including wholesale sold under the
Pinellas County agreement).
ABOVE AVERAGE DEBT RATIO; FUTURE BORROWING IS EXPECTED, SUPPORTED BY APPROVED
Moody's believes that the current above average debt ratio will remain high in
light of expected future borrowing. The fiscal 2010 debt ratio of 50.5% is above
average. According to the city's rate study, additional borrowing over the
fiscal 2011 to fiscal 2016 capital program of about $87 million will likely
maintain the above average debt ratio. Per the city's 2011 to 2016
Capital Improvement Program, nearly 53% of city's $121.3M capital program is
being funded with bond proceeds. About $55.1 million (45.4%) is for water
projects and $66.2 million (54.6%) is for wastewater projects. Capital funding
is required for continued renewal and replacement and upgrades to each system,
consistent with the enterprise's master plan.
Moody's believes that debt levels will remain above average but manageable due
to already approved annual rate increases of 7% for fiscal 2011, and 4.5% for
fiscal 2012 through 2016. The average monthly residential bill of $50.56 in
fiscal 2011 (based on 4,000 gals. per month) is among the top half of bills for
utilities in the region. The average bill is projected to increase to $57.50 by
2014 after the previously-mentioned increases. Debt repayment (31.5% in 10
years) is below average.
The system has no variable rate debt, derivative products or issues with debt
service reserve sureties (all reserves are funded in cash).
SATISFACTORY UTILITY FINANCES WITH ADEQUATE DEBT SERVICE COVERAGE
Moody's believes that continued timely implementation of rate increases will
continue to provide satisfactory debt service coverage and maintain the system's
overall favorable condition. Annual debt service coverage increased from 1.43
times in 2005 to 1.88 times in fiscal 2009, then making an expected decline in
FY2010 to 1.51 times. This decline is largely the result of debt service
increasing to about $14 million from $11 million in 2009 as payment on the
$68 million Series 2009A began. Coverage going forward is projected to remain in
a range of between 1.59 times and 2.0 times from fiscal 2011 to 2016, including
debt service from future borrowings, but before the transfer to the General
Fund, which is sized at 5.5% of prior year revenues. Maximum annual debt service
coverage is currently 1.39 times based on fiscal 2010 net revenues. Net revenue
has increased 50% over the last five years through 2010 to accommodate debt
service increases as well as maintaining operating and capital reserves. A
credit positive is the system's financial policy of maintaining an unrestricted
working capital reserve equal to three months (25%) of operations and
maintenance expenses and purchased water expenses. Net working capital as a
percent of operating expenses is a strong 200%. Unrestricted cash and
investments of $29 million in fiscal 2010 equaled about 77.5% of
WHAT COULD MAKE THE RATING GO UP:
- Improved debt service coverage and liquidity
- Improved demographic resident profile
WHAT COULD MAKE THE RATING GO DOWN:
- Deterioration of debt service coverage or liquidity
- Prolonged and deepening economic decline
Security: Net revenues of combined water, sewer and reclaimed water system.
Fiscal 2010 Customer Accounts,
Reclaimed Water: 2,438 (an additional 402 pay the availability fee)
Post-Sale Parity Debt Outstanding: $181.5 million
Expected Borrowing (2012 to 2016): Approx. $87 million
Ten Years: 31.5% update
Twenty Years: 57.2% update
Thirty Years: 100% update
Fiscal 2010 operations,
Operating Ratio: 67.2%
Debt Ratio: 50.5%
Debt Service Coverage: 1.51 times
Coverage of estimated maximum debt service, based on FY 2010 net revenue: 1.39
Per Capita Income as % of State (1999): 113.8%
Median Family Income as % of State (1999): 103.8%
Unemployment Rate, April 2011: 9.4% (State, 10.4%; U.S. 8.7%)
The principal methodology used in this rating was was Analytical Framework For
Water And Sewer System Ratings published in August 1999.
Information sources used to prepare the credit rating are the following: parties
involved in the ratings and public information.
Moody's Investors Service considers the quality of information available on the
credit satisfactory for the purposes of assigning a credit rating.
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MOODY'S ASSIGNS Aa3 RATING TO CITY OF CLEARWATER (FL) WATER AND SEWER REVENUE REFUNDING BONDS, SERIES 2011
Moody's Investors Service, Inc.
250 Greenwich Street
New York, NY 10007