Fitch Upgrades Clay County Utility Auth, FL's Utility Sys Revs to 'AA+'; Outlook Revised to Stable

Fitch Ratings upgrades the rating on the following Clay County Utility Authority, FL (the authority) revenue bonds:

-- $42.1 million water and sewer system (the system) improvement and refunding revenue bonds, series 2007A.

The Rating Outlook has been revised to Stable from Positive.

SECURITY

The bonds are secured by a senior lien pledge of the net revenues of the system including connection fees.

KEY RATING DRIVERS

UPGRADE REFLECTS CONSISTENT CREDIT STRENGTHS: The authority has shown persistent strength in each of Fitch's key credit areas, including strong debt service coverage (DSC) and liquidity, a low and declining debt burden, a manageable and cash-funded capital program, and a stable customer base with affordable rates.

STRONG FINANCIAL PERFORMANCE AND LIQUIDITY: The authority continues to yield strong operating margins, producing continuously growing cash flows and DSC of 2.7x of all debt in fiscal 2013. Fitch expects operating margins will stay stable.

DECLINING DEBT BURDEN: Key debt metrics fall below the medians for similarly rated systems. Currently moderate capital needs should keep debt ratios manageable.

SOUND INFRASTRUCTURE MANAGEMENT: System capacity is ample and sufficient to accommodate future development without exerting large-scale capital pressures.

AFFORDABLE AND FLEXIBLE RATES: Residential rates for combined service are affordable and represent 1.4% of median household income (MHI) and rank competitively among peer systems.

STABLE CUSTOMER BASE: The mostly residential customer base has been stable, aided by slightly above-average income levels, below-average unemployment and access to the Jacksonville metropolitan employment base.

RATING SENSITIVITIES

CONTINUED STRONG PERFORMANCE: The rating is sensitive to shifts in fundamental credit characteristics including the authority's strong financial operations and management practices, low and declining debt burden and affordable rate structure.

CREDIT PROFILE

The authority serves the unincorporated areas of Clay County (the county, with a Fitch implied general obligation [GO] rating of 'AA+', with a Stable Outlook), which is located just outside of the city of Jacksonville, Florida (implied unlimited tax GOs rated 'AA+' with a Negative Outlook). The authority is an independent governmental agency governed by a board of supervisors comprised of seven members - six appointed by the Clay County Commission and one appointed by the governor - and managed by the executive director.

SOLID FINANCIAL PERFORMANCE BACKS UPGRADE

The authority continues to demonstrate solid financial results. Despite slight decreases in operating revenues due to increased water conservation measures, DSC continues to trend positively; net revenues yielded 3.3x coverage of senior lien debt and 2.7x coverage of total debt in fiscal 2013.

In fiscal 2014 unaudited senior lien and all-in DSC yielded 3.0x and 2.4x, respectively. The authority's financial projections show that coverage will likely remain high over the next five years. The conservative application of fiscal 2013 net revenues to maximum annual debt service (ADS), which is not expected to occur until fiscal 2020 and therefore outside the pro forma forecast, is projected to provide coverage of 2.8x of all-in ADS.

AMPLE LIQUIDITY

In fiscal 2013, liquid resources totaled 660 days of operations based on current unrestricted cash and investments as well as some portion of easily accessed non-current assets. Liquidity is expected to remain relatively constant over at least the next few years even with a predominantly pay-go funded capital program. Free cash flow-to-depreciation has been positive at near or over 100% in recent years, demonstrating the system's ability to generate enough annual cash flow to replace depreciating assets.

AFFORDABLE RATES PROVIDE FLEXIBILITY

Rates are set by the county's board of supervisors on an annual basis. The payment structure was revised in fiscal 2011 to include both fixed service charges and an inclining volumetric block rate designed to promote conservation. This effort has been successful, as management notes the majority of customers did not exceed the second tier of consumption during fiscals 2012 and 2013. Consequently, operating revenues slightly but steadily declined in both of these years.

Typical residential charges amount to 1.4% of MHI, which is competitive when compared to the rates of neighboring utilities. The authority raised rates between fiscals 2008-2011 but has opted to suspend raises since then. Utility bills are expected to remain affordable. Given the ample flexibility under the current structure, any rate increases are not likely to raise customer charges beyond the affordability threshold in the near term.

LOW DEBT AND MANAGEABLE CAPITAL PLAN

The authority's total debt burden remains low, making up a manageable 34% of net capital assets and a below-average $902 per customer. These ratios compare favorably to the 'AA' medians of 47% and $1,818, respectively. In addition, debt-to-equity was low in fiscal 2013 at only 2.7% compared to the 'AA' median of 3.4%. As of fiscal 2015, the authority has $73.6 million in outstanding debt. Amortization of this remaining debt is rapid, with 81% paid off in 20 years. As management does not have near-term debt issuance plans, the authority's overall debt profile and metrics are expected to continually improve.

The five-year fiscal 2014 - 2018 capital improvement plan (CIP) totals $57 million and primarily funds wastewater and reclaimed water improvement and expansion projects. These include treatment plant upgrades, the consolidation of smaller, phased-out treatment plants, the construction of a reclaimed water reservoir, and the upgrade of biosolid treatment facilities. In addition, the CIP will fund water projects such as water supply well and treatment plant improvements as well as trunk-main extensions. Capital spending per customer is low at only $180 compared to the 'AA' median average of $243; however, capital spending relative to depreciation has averaged over 100% since 2009.

Most of the authority's effluent is re-used or discharged to percolation ponds. However, a portion is discharged into surface water and is therefore subject to enhanced nutrient removal guidelines from the U.S. Environmental Protection Agency. The capital plan includes additional reclaimed water capabilities intended to divert the effluent to other non-impaired surface waters. Costs for these projects appear manageable. Fitch will continue to monitor the authority's progress in meeting the enhanced nutrient removal guidelines. Wastewater and reclaimed water treatment capacity comfortably exceeds the current average demands and flows.

RURAL, MODESTLY GROWING CUSTOMER BASE

The authority provided service to an estimated population of 150,000 residents through 48,000 water and 43,000 wastewater customers, as well as nearly 10,000 residential reclaimed water system customers in fiscal 2013. The authority's mostly residential customer base has been stable over time, and there is very little customer concentration; the top 10 water and wastewater customers, including commercial entities, represent only 4.8% of total water and wastewater usage.

After several years of recession-related stagnation, customer growth and development have regained tempered momentum. As the county is only about 50% developed, management is expecting increased development - some already underway - along major commuter corridors such as the outer beltway that bisects the authority's service area. Some water, wastewater, and reclaimed water customer growth will prompt additional infrastructural support over the next decade.

SOLID OPERATIONS AND CAPACITY; STRATEGIC LONG-TERM PLANNING

The authority draws raw water from the Floridan Aquifer through a long-term consumptive use permit (CUP) issued by the St. John's River Water Management District (SJRWMD). The CUP allows for withdrawal of up to 34 million gallons per day (mgd) and expires in 2025. Current average water demand is just over 12 mgd therefore the authority has surplus allocation for the intermediate term. Water resources are expected to meet demand for at least the next 15-20 years and treatment capacity is currently more than double the demand.

Along with increased customer and economic growth is a statewide push for greater water conservation efforts and stricter withdrawal permitting. The authority, along with its regional partners, is in the planning stages of strategies to address a potential curtailing of permitted water withdrawal limits by the SJRWMD upon CUP renewal. Future strategies may result in costly capital projects to provide increased aquifer recharge or alternate water supply options. The authority's current efforts to increase reclaimed water capacity to supplant potable water use for irrigation purposes is notable and may temper potential future capital needs.

Additional information is available at 'www.fitchratings.com'.

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' (July 2013);

--'2013 Water and Sewer Medians'(Dec. 5, 2012);

--'2013 Outlook: Water and Sewer Sector'(Dec. 5, 2012).

Applicable Criteria and Related Research:

2013 Outlook: Water and Sewer Sector

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=695755

2013 Water and Sewer Medians

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=695756

U.S. Water and Sewer Revenue Bond Rating Criteria

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=715275

Revenue-Supported Rating Criteria

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=750012

Additional Disclosure

Solicitation Status

http://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=907035

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