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HomeMy WebLinkAbout2013 10 14 Informational 201 Municipal Bond Rating Upgrade COMMISSION AGENDA Informational X Consent ITEM 201 11iearings Regular October 14, 2013 KS SB Regular Meeting City Manager Department REQUEST: The Finance and Administrative Services Department would like to advise the Commission of a recent upgrade to the City's Water and Sewer Bond credit rating. SYNOPSIS: Standard & Poor's Ratings Services raised its rating on Winter Springs Water and Sewer Funding Revenue Debt one notch, to 'AA-' from 'A+' and with a long term outlook of stable. The upgrade reflects the system's improved financial metrics, including debt service coverage and liquidity position. This upgrade is an outside independent verification that the City is running and maintaining an efficient and effective system. CONSIDERATIONS: The downgrade of the U.S. by Standard & Poor's to AA-plus from AAA will reverberate through the municipal bond market. 2013 saw many municipal bonds downgraded due primarily, to the weak economy and lower tax revenues. Government found itself in an unfamiliar situation of sustained economic contraction. The City of Winter Springs reacted to this persistent down-turn in the economy by aggressively trimming non-essential costs and tweaking revenue streams to assure future stability in the Water System. This strategy coupled with the support of our citizens produced a very stable environment for investors of our Water System. In a credit interview with Standard & Poor's in September of 2013, the strategy of Winter Springs was well received by a S&P Credit Review Committee. Recognizing the strong financial position of the Water and Sewer System, Standard and Poor's raised the credit Informational 201 PAGE 1 OF 2-October 14,2013 rating to AA- sighting the following reasons: • The upgrade reflects the system's improved financial metrics, including debt service coverage (DSC) and liquidity position. Net revenues produced coverage of 2.82x in fiscal 2012, which we consider strong, and we expect them to remain strong as debt service requirements level off. The system's liquidity improved from already-strong levels to provide more than 432 days' cash on hand for fiscal 2012. • Strong economic fundamentals, including strong incomes for the area and relatively low unemployment rates, with participation in the Orlando, Fla. metropolitan statistical area (MSA); • Willingness to adjust rates to meet capital needs; rates are low relative to incomes in the area, providing the system with ample rate-setting flexibility; and • Stable and diverse customer base. FISCAL IMPACT: This rating increase will lower the cost of borrowing in the future if such a need should arise. COMMUNICATION EFFORTS: This Agenda Item has been electronically forwarded to the Mayor and City Commission, City Manager, City Attorney/Staff, and is available on the City's Website, LaserFiche, and the City's Server. Additionally, portions of this Agenda Item are typed verbatim on the respective Meeting Agenda which has also been electronically forwarded to the individuals noted above, and which is also available on the City's Website, LaserFiche, and the City's Server; has been sent to applicable City Staff, Media/Press Representatives who have requested Agendas/Agenda Item information, Homeowner's Associations/Representatives on file with the City, and all individuals who have requested such information. This information has also been posted outside City Hall, posted inside City Hall with additional copies available for the General Public, and posted at five (5) different locations around the City. Furthermore, this information is also available to any individual requestors. City Staff is always willing to discuss this Agenda Item or any Agenda Item with any interested individuals. RECOMMENDATION: Staff requests the City Commission receive and review the information provided in this Agenda Item. ATTACHMENTS: Standard and Poor's Rating Report Informational 201 PAGE 2 OF 2-October 14,2013 STANDARD & POOR'S RATINGS SERVICES Ratin g sDirect® Summary: Winter Springs, Florida; Water/Sewer Primary Credit Analyst: Alexander Vargas,Dallas(1)214-765-5872;aexander.vargas@standardandpoors.com Secondary Contact: Scott W Sagen,Dallas(1)212-438-0272;scott.sagen @standardandpoors.com Table Of Contents Rationale Outlook Related Criteria And Research WWW.STANDARDANDPOORS.COM/RATINGSDIRECT SEPTEMBER 24,2013 1 1195757 I 301906118 Summary: Winter Springs, Florida; Water/Sewer credit profile Winter Springs wtr/swr Unenhanced Rating AA-(SPUR)/Stable Upgraded Many issues are enhanced by bond insurance. Rationale Standard&Poor's Ratings Services has raised its underlying rating(SPUR)on Winter Springs, Fla.'s water and sewer refunding revenue debt one notch,to'AA-'from'A+'. The outlook is stable. The upgrade reflects the system's improved financial metrics,including debt service coverage(DSC) and liquidity position. Net revenues produced coverage of 2.82x in fiscal 2012,which we consider strong, and we expect them to remain strong as debt service requirements level off. The system's liquidity improved from already-strong levels to provide more than 432 days' cash on hand for fiscal 2012. The rating also reflects our opinion of the system's: • Strong economic fundamentals,including strong incomes for the area and relatively low unemployment rates,with participation in the Orlando,Fla.metropolitan statistical area(MSA); • Willingness to adjust rates to meet capital needs;rates are low relative to incomes in the area,providing the system with ample rate-setting flexibility; and • Stable and diverse customer base. These strengths are partially offset by our assessment of: • The system's moderately high debt-to-plant ratio,which may increase due to potential future debt issuance needs; and • Debt structure,which back-loads debt service requirements. A pledge of first available revenues derived from water and sewer operations secures the bonds. Winter Springs,with a population estimate of 32,400,is in Seminole County, about 15 miles north of Orlando. Residents benefit from employment opportunities in the Orlando MSA,which is centered on the leisure and hospitality sector. Incomes for the city are strong,in our opinion,with median household effective buying income (MHEBI) at 121%of the national average. The unemployment rate for the area for 2012 was 7.4%and was lower than both state (8.6%)and national(8.1%)averages. The system serves about 12,850 water and sewer customers, a figure that has remained flat since 2008. Management is expecting significant growth in the next 12 months due to new residential development that could drive demand significantly higher. The system's customer base is diverse,with the top 10 customers accounting for only 5.9%of total WWW.STANDARDANDPOORS.COM/RATINGSDIRECT SEPTEMBER 24,2013 2 1195757 I 301906118 Summary: Winter Springs, Florida; Water/Sewer revenues.Water is sourced from eight wells with a total daily capacity of 12 million gallons per day(MGD),which is more than double the system's peak demand for 2012 of 6.22 MGD. The sewer system consists of two wastewater treatment plants with a combined treatment capacity of 4.1 MGD and peak capacity of 12 MGD,which met both average daily and peak flows for 2012, 2.04 MGD and 6.22 MGD,respectively. The system's financial profile remains strong as evidenced by its strong DSC and liquidity position. Net revenues of$4 million provided what we consider strong DSC of 2.82x,net of transfers,for fiscal 2012. Coverage improved from fiscal 201 l's 1.73x due to a decrease in debt service requirements and an increase in net revenues. Debt service requirements will level off at about$1.9 million,which will bring down coverage to about 2.lx DSC,using fiscal 2012 net revenues after transfers to the general fund. Fiscal 2012 net revenues provided strong,in our opinion,maximum annual debt service (MADS)coverage of 1.63x as debt service requirements are expected to increase to $2.4 million in fiscal 2022. Management estimates that due to wet weather conditions,net revenues will be down from 2012 levels by 5%for fiscal 2013 ,which still provides what we consider strong coverage. In our opinion,the system's liquidity position remained strong for fiscal 2012 with$6.33 million providing 432 days' cash on hand. Management has no plans for significant drawdowns on liquidity and maintains a policy to keep at least 25%of operating expenses in reserves. Winter Springs,which has autonomous rate-setting ability,reviews its rates yearly and adjusts them as needed.Annual rate adjustments since 2010 have raised rates 22%,with approved annual rate increases based on the consumer price index to continue indefinitely.A combined water and sewer bill for 8,000 gallons of usage stands at$60.92--low relative to incomes in the area--accounting for only 1.47%of the city's MHEBI. The system currently supports$19.42 million in revenue bonds,notes,and state revolving fund loans, accounting for 63%of the system's total net value,which we consider moderately high. Management has no debt plans for fiscal 2014 but may need to issue about$3 million in debt for fiscal 2015 due to Environmental Protection Agency water quality mandates. We consider bond provisions adequate;they feature a l.1x average annual debt service(AADS) and a l.1x MADS additional bonds test.A debt service reserve equal to the lesser of MADS, 1.25x of AADS, or 10%of bond proceeds provides additional liquidity. Outlook The stable outlook reflects Standard& Poor's expectation that the system will maintain its strong financial profile. Management has shown a willingness to adjust rates as needed to fund capital improvements with working capital and to maintain its strong coverage levels and liquidity position.We expect the system to adjust rates as needed to accommodate future capital needs and potential debt issuance plans. The system's moderately high leverage position precludes a higher rating. Downward pressure could be placed on the rating should the system's financial metrics decrease significantly. WWW.STANDARDANDPOORS.COM/RATINGSDIRECT SEPTEMBER 24,2013 3 1195757 I 301906118 Summary: Winter Springs, Florida; Water/Sewer Related Criteria And Research • USPF Criteria: Key Water And Sewer Utility Credit Ratio Ranges, Sept. 15, 2008 • USPF Criteria: Standard&Poor's Revises Criteria For Rating Water, Sewer,And Drainage Utility Revenue Bonds, Sept. 15, 2008 • U.S. State And Local Government Credit Conditions Forecast,July 8, 2013 Complete ratings information is available to subscribers of RatingsDirect at www.globalcreditportal.com.All ratings affected by this rating action can be found on Standard& Poor's public Web site at www.standardandpoors.com. Use the Ratings search box located in the left column. WWW.STANDARDANDPOORS.COM/RATING SDIRECT SEPTEMBER 24,2013 4 1195757 I 301906118 Copyright©2013 by Standard&Poor's Financial Services LLC.All rights reserved. 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