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MOODY'S ASSIGNS Aa3 RATING TO THE CITY OF CLEARWATER'S (FL) WATER AND SEWER REVENUE REFUNDING BONDS, SERIES 2010

12 Oct 2010

Aa3 RATING AFFECTS $184.8 MILLION IN POST SALE WATER AND SEWER SYSTEM REVENUE BONDS

Clearwater (City of) FL Water and Sewer Ent.
Municipality
FL

Moody's Rating

ISSUE

RATING

Water and Sewer Revenue Refunding Bonds, Series 2010

Aa3

  Sale Amount

$47,645,000

  Expected Sale Date

11/15/10

  Rating Description

Water and Sewer Revenue

 

Opinion

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.

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 management team.

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 WEALTH INDICES

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 RATE INCREASES

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 expenses.

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

KEY STATISTICS:

Security: Net revenues of combined water, sewer and reclaimed water system.

Fiscal 2009 Customer Accounts,

Water: 39,935

Sewer: 33,084

Reclaimed Water: 2,782

Post-Sale Parity Debt Outstanding: $184.83 million

Expected Borrowing (2012 to 2016): Approx. $64 million

Bond Payout

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 times

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%)

RATING METHODOLOGY

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 Moody's website.

REGULATORY DISCLOSURES

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 Analytics' information.

Moody's Investors Service considers the quality of information available on the credit satisfactory for the purposes of assigning a credit rating.

MOODY'S adopts all necessary measures so that the information it uses in assigning a credit rating is of sufficient quality and from sources MOODY'S considers to be reliable including, when appropriate, independent third-party sources. However, MOODY'S is not an auditor and cannot in every instance independently verify or validate information received in the rating process.

Please see ratings tab on the issuer/entity page on Moodys.com for the last rating action and the rating history.

The date on which some Credit Ratings were first released goes back to a time before Moody's Investors Service's Credit Ratings were fully digitized and accurate data may not be available. Consequently, Moody's Investors Service provides a date that it believes is the most reliable and accurate based on the information that is available to it. Please see the ratings disclosure page on our website www.moodys.com for further information.

Please see the Credit Policy page on Moodys.com for the methodologies used in determining ratings, further information on the meaning of each rating category and the definition of default and recovery.

Analysts

John Incorvaia
Analyst
Public Finance Group
Moody's Investors Service

Susan Kendall
Backup Analyst
Public Finance Group
Moody's Investors Service

Julie Beglin
Senior Credit Officer
Public Finance Group
Moody's Investors Service

Contacts

Journalists: (212) 553-0376
Research Clients: (212) 553-1653


Moody's Investors Service
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New York, NY 10007
USA

MOODY'S ASSIGNS Aa3 RATING TO THE CITY OF CLEARWATER'S (FL) WATER AND SEWER REVENUE REFUNDING BONDS, SERIES 2010
No Related Data.
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