Fitch Rates St. Petersburg, FL's Utility Revs 'AA'; Outlook Stable

Fitch Ratings assigns an 'AA' rating to the following St. Petersburg, FL (the city) revenue bonds:

--Approximately $31 million public utility revenue bonds series 2014A; and

--Approximately $42 million public utility refunding revenue bonds series 2014B.

The bonds are expected to sell via competition on September 30. Series 2014A proceeds will be used to finance the costs of various water and sewer rehabilitation and replacement capital improvements, make a deposit to the debt service reserve fund, and pay issuance costs. Series 2014B proceeds will advance refund outstanding maturities of the series 2005 bonds for interest savings.

In addition, Fitch affirms the 'AA' ratings for the following outstanding bonds of the system:

--Approximately $275 million in outstanding utility system revenue bonds.

The Rating Outlook is Stable.

SECURITY

The bonds are secured by a first lien pledge of the net revenues of the city's public utility system (the system), which includes the water fund (including wastewater and reclaimed water) and the storm water system.

KEY RATING DRIVERS

SOUND FINANCIAL PERFORMANCE AND METRICS: As expected, debt service coverage (DSC) has declined but remains solid in fiscal 2013. However, coverage net of transfers to the general fund was a slim 1.2x. Strong liquidity and competitive rates provide financial flexibility to the system.

WELL-MANAGED SYSTEM: Fitch views positively the city's various formal policies, comprehensive rate and capital planning, and ongoing system re-investment. The city benefits from a solid operating profile including water supply that is provided by its participation in Tampa Bay Water (TBW), the region's highly rated wholesale water supply authority, and ample capacity. The city provides its own wastewater services, which includes a substantial recycled water system.

LIMITED EXCESS CASH FLOW: The system makes large annual transfers to the general fund, totaling about 10% of operating revenues in fiscal 2013. The transfers are formulaic and capped by city policy. However, the transfers absorb most of the excess cash flow that could otherwise be used for capital projects, increasing the need for debt funding for capital improvements.

RISING BUT MANAGEABLE DEBT BURDEN: Capital needs will be funded by additional bonds, increasing leverage and debt service costs over the next five years. While a long-term trend of rising leverage is a concern, Fitch expects the debt burden to remain consistent with the medians for similarly rated systems.

COMPETITIVE RATES TO RISE: Rates remain competitive with other regional utilities and affordable relative to median household income. Planned rate increases should provide timely cost recovery and help offset concerns of higher expected operating and debt carrying costs.

RATING SENSITIVITIES

STABLE FINANCIAL PERFORMANCE, MANAGEABLE DEBT EXPECTED: The rating could face downward pressure if significant additional debt is needed beyond the current forecast and/or if the city does not implement timely and sufficient rate increases to maintain sound financial metrics and liquidity.

CREDIT PROFILE

St. Petersburg is located in Pinellas County (sewer revenue bonds rated 'AA' by Fitch), approximately 20 miles southwest of Tampa.

COMBINED UTILITY COVERS MOSTLY BUILT-OUT SERVICE AREA

The system provides water, wastewater (including reclaimed water) and storm water service for an estimated 300,000 residents located within the city and adjacent areas of the county. The revenues of all four utilities are pledged to the bonds, although the storm system is accounted for and operated as a separate enterprise.

The system served 91,000 mostly residential water accounts (80,000 sewer accounts) in fiscal 2014. The customer base is diverse and stable, posting positive customer growth trends after several years of declines following the housing collapse and economic recession. Water consumption has stabilized at roughly 23 million gallons per day (mgd) over the past few years despite customer growth, a result of increased water conservation efforts. Positive trends in employment and housing data point to a recovering local economy and housing market.

Future growth, while likely limited by the largely developed nature of the city, will consist of infill development that is currently underway including several apartment complexes and additional commercial space slated for completion over the next several years.

SOLID OPERATING PROFILE, WELL-MANAGED SYSTEM WITH AMPLE 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 (utility system revenue bonds rated 'AA+' by Fitch) has existing water supplies to meet member needs for at least the next 15 years, or perhaps longer depending on growth and conservation efforts.

The city operates a wastewater collection system and four treatment facilities. The city treats to advanced secondary standards producing recycled water, which is sold through the city's extensive reclaimed water distribution system and disposed of through deep injection wells. No discharge is emitted into Tampa Bay, limiting environmental concerns for the system. Capacity in the system is strong with treatment capabilities at the four plants nearly two times the average daily flows. The city is in the process of decommissioning its smallest and oldest treatment plant with flows to be re-directed to one of the other facilities.

By decommissioning the plant, the city will gain long-term operating efficiencies and avoid higher up-front capital and other costs associated with meeting increased regulatory compliance for effluent standards. Capacity will remain sufficient for the city's long-term needs.

CAPEX PRIMARILY FOR IMPROVING EXISTING ASSETS

The city plans to debt fund the majority of the system's $204 million 2015-2019 capital improvement plan (CIP). A portion of the series 2014 bonds will be used to fund the city's ongoing upgrade and rehabilitation of existing water distribution, sewer collection and treatment assets. The CIP includes additional upgrade and replacement projects and the construction of a biosolids to energy facility that will generate electricity from the sludge by-product and reduce the city's sludge disposal and electricity costs. A small amount of the CIP will fund storm water projects.

DEBT BURDEN TO RISE, REMAIN MANAGEABLE

With total outstanding debt as of fiscal-end 2013 of $320 million, the debt profile is manageable. Key debt metrics including debt per customer ($1,929) and debt to net fixed assets (55%) are near the medians for systems rated in the 'AA' category by Fitch. Debt carrying costs are currently low at 17% of gross revenues. However, additional borrowings totaling approximately $130 million (including subordinate lien state revolving fund loans) will increase debt ratios to roughly $2,700 per capita (water and sewer only) by fiscal 2019.

Carrying costs will remain a moderate 20%-24% of gross revenues over the forecast, but debt amortization is slow, with payout of existing principal at just 22% over the next 10 years (and just 55% over 20 years), ensuring the debt burden will remain above the medians for the foreseeable future. On the positive side, the service area is fully developed. As such, capital needs beyond the current plan are minimal.

RATES SHOULD KEEP PACE WITH FIXED COST INCREASES

Rate setting is done annually with adjustments put into place at the beginning of the fiscal year. An independent rate study is updated annually, providing consistency and transparency to the rate setting process. The annual study, which was updated in July 2014, includes a 10-year rate forecast based on planned capital spending, incorporating additional debt and long-term operating costs. The study assumes an increase in customers and consumption of 1% in fiscal years 2015 and 2016 (no growth thereafter), which Fitch believes to be feasible given the infill development currently underway.

While retail water sales have been flat over the past several years following a cumulative 19% decline from 2006 to 2010, Fitch believes further declines in consumption are unlikely given the average customer already uses just 4,000 gallons per month. Water and sewer rates have been on the rise with incremental increases adopted in each of the past 12 fiscal years. Rates were increased 3.75% in fiscal 2014 and expectations are for a similar increase in fiscal 2015 pending board review and approval on September 18.

The city retains some rate raising flexibility as rates remain affordable despite the increases, and monthly bills are in line with regional utilities. In fiscal 2014, the average residential customer using 4,000 gallons pays about $64 per month for combined service (water, sewer, and storm), which is an affordable 1.7% of MHI. Fitch notes rate affordability is somewhat a function of the lower average usage in this area. Rates surpass Fitch's affordability threshold (of 2% of MHI) when customer usage approximates the national average of 7,500 gallons per month. The rate study projects annual water and sewer rate increases over the next 10 years of 4.75% in fiscal 2016, 4% in fiscal 2017 and 1.5%-3.25% through fiscal 2024. The increases are considered very manageable given the current level of rates and the history of city-council support for rate increases.

STABLE FINANCIAL PERFORMANCE, STRONG LIQUIDITY EXPECTED

Financial operations have been healthy, supported by sound fiscal oversight and annual incremental rate increases. DSC levels have weakened from previous high levels with the issuance of additional debt over the past several years, although coverage is solid for the rating. In fiscal 2013, DSC on the senior bonds was near 2x, and coverage totaled 1.8x including subordinate lien state revolving fund payments. However, Fitch notes coverage of all fixed charges, including transfer payments to the general fund (which represents payments in lieu of taxes and franchise fees) was slim at just 1.2x in fiscal 2013.

DSC for fiscal 2014 is projected to remain close to prior year levels before improving slightly in fiscal 2015 and through the remainder of the financial forecast (2018). Projected DSC levels are low but adequate for the rating, and somewhat offset by the strong liquidity position and rate raising flexibility. However, Fitch believes the modest free cash flow (after payment of O&M, debt service and transfers) will result in reliance on debt funding for most future capital needs. Fitch expects stability and predictability in the transfers to the general fund as they are based on a formula that provides payments to the city in lieu of taxes and franchise fees. The city includes the transfers, which are paid subordinate to debt service, in its rate setting process.

The system maintains a strong balance sheet with $121 million in unrestricted cash and investments or 512 days cash on hand at the close of fiscal 2013. A significant portion of the system's reserves were funded from the sale of water supply facilities to TBW in 1999. These reserves are designated solely for water purchases and the development of water production and transmission facilities, but can be used for any system-related purpose. Management intends to keep reserves at similar levels going forward.

Additional information is available at 'www.fitchratings.com'.

In addition to the sources of information identified in Fitch's Revenue-Supported Rating Criteria, this action was additionally informed by information from CreditScope.

Applicable Criteria and Related Research:

--'Revenue-Supported Rating Criteria' (June 2014);

--'U.S. Water and Sewer Revenue Bond Rating Criteria' (July 2013);

--'2014 Water and Sewer Medians' (December 2013);

--'2014 Outlook: Water and Sewer Sector' (December 2013).

Applicable Criteria and Related Research:

Revenue-Supported Rating Criteria

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=750012

U.S. Water and Sewer Revenue Bond Rating Criteria

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=715275

2014 Water and Sewer Medians

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=724358

2014 Outlook: Water and Sewer Sector

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=724357

Additional Disclosure

Solicitation Status

http://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=875974

ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: HTTP://FITCHRATINGS.COM/UNDERSTANDINGCREDITRATINGS. IN ADDITION, RATING DEFINITIONS AND THE TERMS OF USE OF SUCH RATINGS ARE AVAILABLE ON THE AGENCY'S PUBLIC WEBSITE 'WWW.FITCHRATINGS.COM'. PUBLISHED RATINGS, CRITERIA AND METHODOLOGIES ARE AVAILABLE FROM THIS SITE AT ALL TIMES. FITCH'S CODE OF CONDUCT, CONFIDENTIALITY, CONFLICTS OF INTEREST, AFFILIATE FIREWALL, COMPLIANCE AND OTHER RELEVANT POLICIES AND PROCEDURES ARE ALSO AVAILABLE FROM THE 'CODE OF CONDUCT' SECTION OF THIS SITE. FITCH MAY HAVE PROVIDED ANOTHER PERMISSIBLE SERVICE TO THE RATED ENTITY OR ITS RELATED THIRD PARTIES. DETAILS OF THIS SERVICE FOR RATINGS FOR WHICH THE LEAD ANALYST IS BASED IN AN EU-REGISTERED ENTITY CAN BE FOUND ON THE ENTITY SUMMARY PAGE FOR THIS ISSUER ON THE FITCH WEBSITE.

Contacts:

Fitch Ratings
Primary Analyst
Andrew DeStefano
Director
+1-212-908-0284
Fitch Ratings, Inc.
33 Whitehall Street
New York, NY 10004
or
Secondary Analyst
Kathryn Masterson
Senior Director
+1-512-215-3730
or
Committee Chairperson
Adrienne Booker
Senior Director
+1-312-368-5471
or
Media Relations
Elizabeth Fogerty, New York, +1-212-908-0526
elizabeth.fogerty@fitchratings.com

Data & News supplied by www.cloudquote.io
Stock quotes supplied by Barchart
Quotes delayed at least 20 minutes.
By accessing this page, you agree to the following
Privacy Policy and Terms and Conditions.