Fitch Rates Clearwater, FL's Stormwater Rev Rfdg Bonds 'AA-'; Outlook Stable

Fitch Ratings has assigned an 'AA-' rating to the following Clearwater, Florida revenue bonds:

--Approximately $19.1 million stormwater system revenue refunding bonds, series 2012.

The series 2012 refunding bonds are expected to be sold the week of Jan. 16 through negotiated sale. Proceeds will be used to refund outstanding parity bonds for cost savings with no extension of maturity. The series 2012 bonds will be issued with a cash funded debt service reserve fund.

In addition, Fitch affirms the following rating:

--$40 million in outstanding stormwater system revenue bonds at 'AA-'.

The Rating Outlook is Stable.

SECURITY

The current offering and outstanding parity bonds are secured by a first lien on net revenues of the stormwater system.

KEY RATING DRIVERS

WELL MANAGED SYSTEM: The system's financial operations and capital program are well managed, resulting in modest capital needs and affordable rates.

STRONG FINANCIAL PROFILE: Consistently strong operating margins continue to yield high debt service coverage and ample liquidity.

MODERATE DEBT LEVELS: The service area is largely built-out, and the system's debt burden is quite manageable, although the potential imposition of environmental regulations would likely result in a sizeable increase in system leveraging.

SOUND LEGAL PROTECTIONS: Legal provisions are satisfactory.

CREDIT SUMMARY:

Clearwater, the county seat of Pinellas County, is located in the middle of the west coast of Florida along the Gulf of Mexico, approximately 20 miles west of Tampa and 15 miles north of St. Petersburg. The system's service area includes the city, with an estimated population of about 107,000, and a small portion of surrounding unincorporated sections of the county. The number of stormwater system customers has shown little growth over the last several years, reflecting a mature, built-out service area.

The system served about 99,000 equivalent residential units (ERU) in fiscal 2010 and is expected stay at or close to that amount for the foreseeable future. The city's unemployment rate, measured at 9.2% in November 2011, has shown modest year over year improvement and ranks below the state average, yet still higher than the national figure. Nevertheless, collections rates are strong, typically at about 100%. The city's wealth indicators are below average.

The city's stormwater system consists of approximately 148 miles of storm sewers, nine square miles of open water, and more than 14,400 structures such as culverts, flumes, weirs, and catch basins. Operation and maintenance costs are funded through a stormwater utility fee levied against all developed property within the service area. Stormwater fees are collected on a per-ERU basis as a separate line item on the utility bill.

The system's strong operating margins continue to generate high debt service coverage levels and sizeable cash balances. Annual debt service (ADS) coverage in fiscal 2010 remained in excess of 2.0 times (x) and liquidity increased to more than 800 days of cash on hand. Based on unaudited results for fiscal 2011, ADS coverage approximated nearly 2.5x and liquidity showed a modest improvement over the prior year. Stormwater charges have increased by an average of about 9% annually over the last 12 years, although the current monthly charge of close to $14 remains affordable to rate payers. A more moderate 4.25% fee increase was adopted for the current fiscal year.

System leveraging is manageable, and no additional debt plans currently exist. However, Fitch notes that the State of Florida may require utility systems to comply with new standards designed to reduce the amount of nutrients in stormwater runoff. The new limitations could compel the system to fund upwards of $85 million over a five-year period. To date, the state has not made a final determination leaving the cost and funding timeline uncertain at this point.

While the potential cost to the city would be steep, Fitch believes the system's low debt levels, affordable rates, and strong operating margins would provide adequate financial flexibility to sufficiently absorb the cost. As it stands, projected capital needs through fiscal 2016 total about $30 million and will be funded on a pay-go basis from existing cash balances and excess operating revenues.

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 Fitch's Revenue-Supported Rating Criteria, this action was additionally informed by Creditscope and HIS Global Insight.

Applicable Criteria and Related Research:

--'Revenue-Supported Rating Criteria', dated June 20, 2011;

--'Water and Sewer Revenue Bond Rating Guidelines', dated Aug. 10, 2011;

--'2012 Water and Sewer Medians', dated Dec. 8, 2011;

--'2012 Outlook; Water and Wastewater Sector', dated Dec. 8, 2011.

Applicable Criteria and Related Research:

Revenue-Supported Rating Criteria

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=637130

U.S. Water and Sewer Revenue Bond Rating Criteria

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=647331

2012 Water and Sewer Medians

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=657111

2012 Outlook: Water and Sewer Sector

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=657110

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