Aa3 RATING AFFECTS $184.8 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 2010
Expected Sale Date
Water and Sewer Revenue
NEW YORK, Oct 12, 2010 -- 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
2010. The Aa3 rating applies to $184.8 million post-sale water and sewer bonds.
The bonds are secured by the net revenues of the combined water, sewer and
reclaimed water systems. 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 $64 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.
Proceeds from the Series 2010 bonds will refund $48.5 million in outstanding
Series 2002 Bonds to achieve an estimated $2.24 million net present value
savings (4.61% of refunded par), without extending final maturities.
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
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 an 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 (estimated at 110,469), 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 continuing to struggle as evidenced by an almost 30%
decline in taxable values between fiscal 2008 and fiscal 2011 (to $7.3 billion).
An additional tax base decline of 7.5% is anticipated in fiscal 2012 as a result
of the ongoing housing market correction.
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 10.8% unemployment rate in June 2010
is lower than that for the state (11.6%) but above the U.S. (9.6%).
Mirroring the mature nature of the city, the system has a relatively static
number of water and sewer customers, although reclaimed water customers have
increased 26% the past five years through fiscal 2009 as the reclaimed system
has expanded and new customers have become available. An expected 24.5% jump in
fiscal 2011 reclaimed water customers (to 3,684) is reportedly associated
with three projects that have come online. In fiscal 2009 the system provided
service to a total of approximately 39,935 water, 33,084 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 11.4% and 9.9%, respectively, of water and sewer revenues
in fiscal 2009.
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 purchased a five-year average of
73.43% of its supply from Pinellas County under a 30-year agreement (to 2035)
and produced the remaining 26.57%. The water system has experienced an annual
decline in average demand since 2006 to 11.5 MGD in 2009 from 14.5 MGD, due to
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 45 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 MGD reverse osmosis (RO) plant in
fiscal 2004 (being expanded to 4.25 MGD by 2012) and are constructing a new 6.25
MGD RO plant. Current treatment capacity, from the system's three plants, is 25
MGD in relation to 11.5 MGD average and 14.6 MGD peak flows in fiscal 2009.
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) expires in December 2010, and officials will
reportedly seek an additional 1.0 MGD withdrawal increase on renewal from the
current 6.25 MGD permit level. 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 10%.
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 13.5
MGD, or 47.7%, was used during fiscal 2009. Plants operate under five-year FDEP
permits (to October 2011 and March 2012), with no expected permit renewal
issues. Usage has remained stable over the last four years. The city has met
stringent treatment standards as all three plants utilize advanced wastewater
treatment processes. 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. The sewer system is currently in
compliance (since 2002) with all material state and federal regulations.
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) and Safety Harbor additionally pays
the city based on usage.
The reclaimed water system has a 14 MGD permit and 10 MG of storage (15 MGD by
2010) 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 2009 debt ratio of 54.1% is above
average. Additional net proceeds over the fiscal 2011 to fiscal 2016 capital
program of about $64 million will likely maintain the above average debt ratio.
Nearly 53% of the 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 6% for
fiscal 2012 and 2013. Additional rate increases of about 4.5% thereafter are
expected to be approved next summer. The average monthly residential bill
of $47.25 in fiscal 2010 (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 $56.81 by 2013 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. Coverage going forward is projected
to remain in a range of between 1.54 times and 1.9 times from fiscal 2010
to 2015, including additional annual debt service expected from planned future
borrowings through 2014. The fiscal 2010 expected drop in coverage to 1.54 times
from 1.88 times in fiscal 2009, despite an estimated $1.0 million increase in
net revenue, is largely the result of debt service increasing to about $14
million from $11 million in 2009. As mentioned previously, annual rate increases
through 2013 have already been adopted. Maximum annual debt service coverage is
currently 1.47 times based on fiscal 2009 net revenues. Net revenue has
increased 46% over the last five years through 2009 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 . Unrestricted cash and
investments of $29.9 million in fiscal 2009 equaled about 79.3% of operating
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 2009 Customer Accounts,
Reclaimed Water: 2,782
Post-Sale Parity Debt Outstanding: $184.83 million
Expected Borrowing (2012 to 2016): Approx. $64 million
Ten Years: 31.5%
Twenty Years: 57.2%
Thirty Years: 100%
Fiscal 2009 operations,
Operating Ratio: 67.4%
Debt Ratio: 54.1%
Debt Service Coverage: 1.88 times
Coverage of estimated maximum debt service, based on FY 2009 net revenue: 1.47
Per Capita Income as % of State (1999): 113.8%
Median Family Income as % of State (1999): 103.8%
Unemployment Rate, June 2010: 10.8% (State, 11.6%; U.S. 9.6%)
The principal methodology used in rating the City of Clearwater FL
was Analytical Framework For Water And Sewer System Ratings rating
methodology published in August 1999. Other methodologies and factors that may
have been considered in the process of rating this issuer can also be found on
Information sources used to prepare the credit rating are the following: parties
involved in the ratings, public information, confidential and proprietary
Moody's Investors Service's information and confidential and proprietary Moody's
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credit satisfactory for the purposes of assigning a credit rating.
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Public Finance Group
Moody's Investors Service
Public Finance Group
Moody's Investors Service
Senior Credit Officer
Public Finance Group
Moody's Investors Service
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MOODY'S ASSIGNS Aa3 RATING TO THE CITY OF CLEARWATER'S (FL) WATER AND SEWER REVENUE REFUNDING BONDS, SERIES 2010
Moody's Investors Service
250 Greenwich Street
New York, NY 10007