OREANDA-NEWS. Fitch Ratings has assigned an 'A+' rating to the following Port St. Lucie, FL (the city) bonds:

--Approximately $207.1 million utility system revenue refunding bonds, series 2016.

The bonds are expected to sell via negotiation the week of Aug. 8. Proceeds, along with debt service reserve fund monies, will be used to current refund all or a portion of the outstanding series 2004A, 2006, and 2006A bonds and advance refund all or a portion of the outstanding series 2009 bonds for interest savings, and pay issuance costs.

In addition, Fitch affirms the 'A+' ratings on the following outstanding bonds:

--$180.7 million (pre-refunding) utility system revenue bonds, series 2001, 2004, 2004A, 2006 and 2014.

The Rating Outlook is Stable.

SECURITY

The bonds are secured by a senior lien pledge of the net revenues from the operation of the city's water and sewer system (the system) and available connection fees.

KEY RATING DRIVERS

BELOW-AVERAGE COVERAGE, ADEQUATE LIQUIDITY: Debt service coverage (DSC) levels increased to 1.4x in fiscal 2015 but remain below category 'A' median levels; liquidity has declined as expected but is adequate for the rating category. DSC and liquidity should remain within historical norms over the next five years according to the city's financial forecast.

HIGH DEBT LEVELS: Substantial capital investment has left the system with strong capacity but a high debt burden. Carrying charges are approximately 45% of gross revenues. Projected debt metrics are estimated to remain above median levels over the next five years but will decline from current levels given the city has no future debt issuance plans.

SOUND OPERATIONS AND LIMITED CAPITAL NEEDS: The system has sufficient capacity, and the capital plan focuses on system upkeep and renewal projects.

SMALL ANNUAL RATE INCREASES: Rates compare favorably to those of neighboring utilities, although the combined residential bill in fiscal 2015 is at Fitch's affordability benchmark of 2% of median household income (MHI). Only modest future increases are projected.

RATING SENSITIVITIES

WEAKENED FINANCIAL PROFILE: The rating anticipates the City of Port St. Lucie, FL's utility system debt service coverage will remain in line with the pro forma provided by the city. A decline in coverage not offset by increased liquidity or a further drain on reserves below historical norms could result in downward rating pressure.

CREDIT PROFILE

Port St. Lucie is a primarily residential community of 179,000 located along Florida's Atlantic coast approximately 100 miles north of Miami, FL in St. Lucie County (the county). The service area is comprised of approximately 134 square miles including the entire city limits and some unincorporated areas of the county. Strong double-digit annual customer growth trends have subsided since the start of the recession in 2007, but growth remains positive. Leading utility customers are diverse and led by Tropicana Products, Inc. accounting for 1.6% of system revenues in fiscal 2015.

WEAK COVERAGE, LIMITED FLEXIBILITY

Financial performance has weakened since 2007 after a significant decline in construction activity coupled with only limited increases in operating revenues led to a decline in both cash flows and annual debt service coverage (DSC) in fiscal 2010. DSC has ranged between 1.0x to 1.3x over the fiscal 2010 to 2014 period, and improved slightly to 1.4x in fiscal 2015. However, results are still below the medians for systems rated in the 'A' category.

Historically, Fitch's concern over low coverage was offset by the availability of sizable accumulated cash balances. Total unrestricted cash for the system was approximately $64 million at the end of fiscal 2012, which was equivalent to more than 800 days of operations. Even after adjusting issuer-reported cash to exclude $14 million in debt service reserves and customer deposits, the remaining approximately $50 million in truly unrestricted reserves was a still strong 670 days of operations. Cash reserves have since declined measurably to 284 and 309 days in fiscals 2014 and 2015, respectively, driven by cash-funded capital spending for the system.

Based on the city's budgeted system revenues and expenditures for fiscal 2016, DSC is estimated at 1.1x for the year; Fitch-calculated DSC using the city's pro forma financial estimates show total DSC levels ranging between 1.3x and 1.4x over the fiscal 2017 to 2021 period. Forecast assumptions appear reasonable with annual rate increases estimated at 1.5%, customer growth at around 1% annually, and annual operating expense growth of about 3%. Fitch will continue to monitor results as any declines in DSC below forecast levels not balanced by increased liquidity, or a further drain on reserves would be viewed negatively by Fitch.

ELEVATED DEBT BURDEN TO SLOWLY DECLINE

The system was expanded and upgraded mainly as a result of the housing boom that preceded the national housing-led recession in 2008. This has led to a high debt burden totaling roughly $416 million as of fiscal 2015. While heavy investment in the system has led to a large amount of debt, it has also provided significant long-term capacity and minimal intermediate capital needs.

At $2,321 per capita in fiscal 2015, debt is over three times the median for the 'A' category. However, with no additional bonding plans over the next five years Fitch expects the debt burden to slowly moderate. The city anticipates spending roughly $31 million on routine repair and replacement projects over the fiscal 2017 to 2020 period. Fitch projects debt will decline to a more reasonable but still elevated $1,753 per capita by fiscal 2021.

USER CHARGES AT FITCH AFFORDABILITY THRESHOLD

Rates have been increased modestly in recent years, which has kept user charges competitive overall with neighboring utilities. However, Fitch is somewhat concerned over the system's minimal free cash flow from operations, as net cash from operating activities has averaged just 5% of annual depreciation over the past five years, which is well below the category 'A' median and below what Fitch considers prudent.

Rates have been increased by approximately 3% annually since at least fiscal 2009; rates were not increased in fiscal 2016. The city expects to recommend to the council another 6% water rate increase for fiscal 2017 but a decrease of 4% for the sewer system per the rate consultant's recommendation. Wastewater rates are projected to decline as it is believed that they have been subsidizing water rates. Beyond fiscal 2017 through 2021, both water and wastewater rates are projected to increase by 1.5% annually.

The average residential customer consumes roughly 5,000 gallons per month due to a fairly strict tiered rate structure that discourages excess consumption. The average residential customer paid approximately $81 for 5,000 gallons in fiscal 2015, which is right at Fitch's affordability threshold of 2% of MHI.

Fitch expects the city will continue to raise rates to meet at least minimum requirements for operations and debt service, but perhaps no more than this as the rate covenant only requires sum-sufficient DSC. The system's legal covenants in general are weak. The financial ratios for the rate covenant and additional bonds test are low, and the rate covenant calculation includes accumulated pledged capital facilities charges (connection fees).

STABLE OPERATING PROFILE AND AMPLE CAPACITY

The city's raw water supply comes from both the Floridan and the Surficial aquifers. Through a long-term consumptive use permit, the city is allowed a maximum withdrawal of 51.5 million gallons per day (mgd). The system's two water treatment facilities provide 42.2 mgd of maximum treatment capacity, which is well in excess of average daily water treated at the plants of 13.2 mgd in fiscal 2015.

The sewer system consists of two treatment facilities and over 1,000 miles of collection and transmission mains. Total treatment capacity was increased to 18 mgd in July 2011. The average daily flows for the sewer system are approximately 8 mgd, leaving more than 50% capacity in the treatment facilities. The larger of the two facilities can be expanded by an additional 12 mgd to meet future customer growth. Treated wastewater effluent is supplied to the city's reclaimed water system or discharged into deep injection wells. There is no surface water discharge and the system is not facing any regulatory issues.