NEW YORK--()--Fitch Ratings affirms the rating on the following Boca Raton, FL revenue bonds:
--Approximately $40 million water & sewer system revenue bonds, series 2008 and series 2009, at 'AAA'.
The Rating Outlook is Stable.
The Bonds are secured by a pledge of the net revenues of the water and sewer system, including legally available impact fees.
KEY RATING DRIVERS:
EXCELLENT FINANCIAL PERFORMANCE: The city's water and sewer system (the system) exhibits strong financial margins; debt service coverage stands at more than 3.5x in fiscal 2011, and free cash flow has been strong, averaging 139% of depreciation over the past five years. Leveraging is low and should remain so given the system's modest capital needs with no additional borrowing plans expected over the near term.
ABUNDANT CASH ON HAND: Management has consistently maintained high cash balances with more than 580 days cash on hand in fiscal 2011 from all available sources.
LOW DEBT BURDEN: Debt-to-Net-Plant, at 20% in fiscal 2011, continues to decline, and debt-per-customer is well below the median for 'AAA' systems. Debt payments are scheduled to rapidly amortize and fully retire all outstanding debt in 15 years.
WATER SUPPLY REMAINS AMPLE: The Biscayne Aquifer provides abundant supply to the city through at least 2035.
SYSTEM REUSES 75% OF EFFLUENT: In order to meet Florida Department of Environmental Protection law, the city is minimizing its discharge of treated wastewater into the ocean, and instead reclaiming this water source for sale to local irrigation users.
STRONG SERVICE AREA DEMOGRAPHICS: Continued low water and wastewater rates relative to competitors, along with the service area's wealthy customer base, provide considerable flexibility.
WEALTHY, RESIDENTIAL CUSTOMER BASE
The city of Boca Raton (implied GO rating 'AAA' by Fitch) is located on Florida's east coast in Palm Beach County (GOs rated 'AAA', Stable Outlook). The city owns and operates a combined water and sewer utility system, serving 36,000 water, and nearly 33,000 sewer customers over its 35 square mile service area. The customer base is mostly residential, and fairly affluent, though the area's commercial presence continues to develop. Customer concentration is low with the 10 largest customers, the topmost of which include Florida Atlantic University (FAU) and the Office Depot headquarters, representing less than 10% of usage. The service area, which includes the city and surrounding areas, is primarily built-out, allowing capital plans to address system upgrade and renewal.
Boca Raton is still 7% below its 2008 population level, and population growth increased in 2012 by a mere 0.43%. However, customer connections have remained stable with potential future growth from in-fill development. The overall unemployment rate for Boca continues to fall, reaching 6.8% for November 2012 (compared to 8.3% unemployed in November 2011) due to a 2% growth in jobs over the past year. Boca's unemployment rate is lower than that of neighboring Palm Beach and Miami-Dade counties, and the state average, which is 8.1%.
AMPLE GROUNDWATER TO MEET LONG-TERM DEMAND
Groundwater is provided from five well fields that draw water from the Biscayne aquifer, which is considered to have a sufficient long-term supply. The system's 70 million gallon per day (mgd) in total water treatment capacity is well in excess of the current average daily demand of 35 mgd. The water use permit from the South Florida Water Management District (SFWMD) is valid through fiscal 2028.
Wastewater treatment is provided by the Glades Road wastewater treatment plant and a water reclamation facility, which are co-located at the site of the Glades Road facility. Both facilities are permitted to provide 17.5 mgd of treatment capacity, and Glades Road has the design capacity to treat up to 22.5 mgd. With 13.5 mgd of average flows in 2012, the city has ample treatment capacity.
STRONG SYSTEM FINANCIAL MANAGEMENT
Financial operations remain sound and a trend of strong debt service coverage margins continues. Back-to-back rate increases helped the system generate over $18 million in net operating revenues in fiscal 2011 (including impact fees), covering annual debt service by 3.6x. Debt service coverage net of impact fees was still very strong at 3.4x in fiscal 2011. Preliminary financials for fiscal 2012 (unaudited) show an increase in net revenues to $23 million due to a jump in connection fee revenues. Annual debt service coverage improved to 4.7x including connection fees, and to 3.6x without such fees.
System liquidity is significant with nearly $33 million in unrestricted cash as of the end of fiscal 2011, which was equivalent to roughly 380 days of operations. When including renewal and replacement (R&R) funds totaling $17 million, total liquidity is about 580 days cash on hand. Preliminary results for fiscal 2012 show nearly $44 million in unrestricted cash, an increase due to the strategic accumulation of funds for pay-go capital financing and potential legally mandated projects. When including the roughly $18 million in R&R funds in fiscal 2012, the system had over 700 days of operating expenses on hand.
The average monthly residential bill of $56 for combined service (based on 15,000 gallons) is low compared to other systems in the region, particularly given the area's above-average income levels. A city ordinance requiring automatic annual rate increases equal to the growth in the consumer price index (CPI) helps revenues keep pace with escalating costs.
FAVORABLE DEBT PROFILE
The system's low debt burden is evidenced by a per-customer debt ratio of $649 in fiscal 2012, which is well below the median level for the rating. Other debt ratios, including debt-to-net plant and debt-to-equity are also low, at 20% and 90%, respectively. Debt amortization is rapid with 100% of principal retiring in 15 years, and debt carrying costs are just 10% of gross revenues, which Fitch views favorably. The current six-year capital improvement plan (CIP) totals $117 million, which is manageable given the city's very strong cash position, strong expected cash flows, and low debt burden. Funding sources for the CIP include internal cash and operating surpluses. No additional debt is expected at this time.
SYSTEM MEETING STATE AND FEDERAL GUIDELINES
The system remains in regulatory compliance with 75% of the effluent produced treated to advanced levels and redistributed to golf courses and other irrigation users. This helps limit the system's potential exposure to increased financial and capital requirements associated with state and federal mandates, including Numeric Nutrient Criteria. The remaining effluent is discharged via ocean outfall, a practice that is expected to be eliminated by 2018. Management plans to increase the level of re-use to 100% over the next several years, but has budgeted $16 million in the current capital plan to fund potential system upgrades related to lowering nutrient levels in waste water, if needed.
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 Sector Outlook: Water and Sewer' (Dec. 8, 2011).
Applicable Criteria and Related Research:
2013 Water and Sewer Medians
U.S. Water and Sewer Revenue Bond Rating Criteria
Revenue-Supported Rating Criteria