Fitch Ratings takes the following rating action on Port St. Lucie, Florida's water and sewer revenue bonds as part of its continuous surveillance effort:
--approximately $458.8 million water and sewer revenue bonds affirmed at 'A'.
The Rating Outlook is Stable.
RATING RATIONALE:
--The system has exhibited stable financial operations, strong liquidity and stable customer base with minimal capital needs.
--Legal provisions and liberal.
--The service area's growth has been impaired by a weakened housing market.
KEY RATING DRIVERS:
--The system's ability to maintain coverage from net revenues could be reduced as customer growth continues to decline and annual debt service obligations increase.
--This system could be affected positively by increased debt service coverage by net revenues combined with strong liquidity and capacity facility charges (CFCs).
--Continued stress in the housing market, could reduce future CFCs, subordinate assessment levies and operating revenues.
--Debt service obligations will increase over the next few years which will require rate increases to provide adequate coverage from net revenues.
SECURITY:
The bonds are secured by net revenues of the system, allowable capital facility charges, and transfers from the rate stabilization account.
CREDIT SUMMARY:
The system's service area includes the entire city limits and some unincorporated areas of the county. The city began operating the system in 1994 and has committed to expanding within the service area. Over the last 10 years the customer base has grown dramatically, however, annual growth has declined due to a combination of the housing market and the city becoming built out. Debt service coverage has historically been weak solely from net operating revenues (between 1.2 times [x]-1.4x), however, it is much stronger (approximately 2x) when CFC revenues are included. The city has strong liquidity, with contingency reserve funds equaling over three years of operating cash on hand. Projected coverage is anticipated to be approximately 1.2x from net revenues over the next five years and approximately 2x from the CFC account.
The system's customer base growth has slowed significantly. Annual growth declined from double digits between FY2000 through FY2006 to approximately 2% in fiscal 2009. In FY2008 there were approximately 75,000 water customers and 51,000 sewer customers. Projected customer growth for FY2010 through FY2013 is 1%-2%. The top 10 customers represent only 7.3% of total FY2008 revenues. The system's residential customers accounted for approximately 95% of the total customer base.
The city had annual rate increases of 1.5% from FY2005 through FY2008, and 3% in FY2009. Rates will not be increased in FY2010 due to receipt of one-time revenues from swap termination and suspension payments. A rate study conducted in May of 2009 recommended annual rate increases of 3% for FY2011 through 2012 and a 3.5% increase for fiscal 2013. The system's combined water and sewer bill remains just above the average rate in comparison to other neighboring utilities.
Financial operations remain stable. Coverage is adequate but declined to close to 1x from net revenues alone in FY2008. Operating revenues for FY2008 were flat in comparison to FY2007 mainly due to water use restrictions and increased in 3% in FY2009. Coverage increased to closer to historical levels in FY2009 at 1.13x from net revenues and 2x with CFC revenues. The additional CFC revenues are projected to provide debt service coverage equal to 2x over the next five years.
Both water and sewer systems are in good condition with ample capacity. The city's five-year CIP is modest totaling approximately $17 million. Sources of funding consist of existing cash from the system operating fund and interest revenues.
The city is located in St. Lucie County on the Atlantic coast approximately 100 miles north of Miami. The city is primarily residential and has had significant growth due to the large amount of low cost developable land. The population of approximately 155,000 has grown 72% since 2000. The city's tax base also experienced tremendous annual growth of over 30% between 2003-2007. However, both population and tax base have slowed substantially, with key economic indicators reflecting ongoing stress. City unemployment rates, which historically have been above the state and below national averages, increased to 7.5% in 2008 from 4.6% in 2007, above both state and national averages, and have weakened substantially year-to-date for 2009, reaching a high 12.8% in September 2009. The city's tax base increased only 8% in FY2008-09 and declined by 19% in fiscal 2009. Officials expect a further decline of 26% for fiscal 2011. In addition, data obtained by Fitch indicates that foreclosure activity in the city is roughly three times the national average for the third quarter of 2009 and has worsened over the last several years. Despite the severely stressed housing market, city officials report that property tax collections are consistent with the budget and previous years' experience.
Applicable criteria is available on Fitch's web site at 'www.fitchratings.com':
'Water and Sewer Revenue Bond Rating Guidelines', dated Aug. 6, 2008.
Additional information is available at 'www.fitchratings.com'.
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Bud Littman,
212-908-0500, New York
or
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212-908-0526, New York
Email: cindy.stoller@fitchratings.com