Fitch Rates Venice, FL's Water & Sewer Revs 'AA'; Outlook Stable

Fitch Ratings has assigned an 'AA' rating to the following revenue bonds issued by Venice, Florida (the city):

--$15,335,000 utility system revenue bonds, series 2015.

In addition, Fitch affirms the following ratings:

--$20,395,000 utility system revenue bonds, series 2012, at 'AA'.

The bonds are expected to sell via negotiation the week of Feb. 19. Bond proceeds will be used to finance various capital improvements, a debt service reserve account, and pay for issuance costs.

The Rating Outlook is Stable.

SECURITY

The bonds are secured by the net revenues of the city's water and sewer system (the system).

KEY RATING DRIVERS

STRONG FINANCIAL PROFILE: Financial performance has continuously improved over the past several years resulting in sustained high debt service coverage (DSC) and robust liquidity. Projections indicate continued strong performance through the fiscal 2019 forecast period.

MANAGEABLE DEBT BURDEN AND CAPITAL PROGRAM: Existing debt metrics are favorable relative to comparably-rated credits and will stay moderate subsequent to this issuance. Metrics resulting from near-term planned borrowings associated with the system's capital improvement program (CIP) are likely to remain within the 'AA' median range.

SOMEWHAT ELEVATED CUSTOMER CHARGES: The average monthly residential bill for combined service is high at $97 in fiscal 2014 for 5,000 gallons, equating to 2.5% of median household income (MHI).

STABLE CUSTOMER BASE, LIMITED SERVICE AREA: The economy is largely retiree-based and relies primarily on housing and tourism. Positively, unemployment is low and MHI approximates that of the state.

RATING SENSITIVITIES

MAINTENANCE OF STRONG CREDIT CHARACTERISTICS: Realization of continued strong financial performance and manageable debt levels may result in positive rating action over time.

CREDIT PROFILE

CONTINUED STRONG FINANCIAL RESULTS

The system has generated strong financial performance in recent years due to regular rate adjustments that have yielded sound revenue growth. Total DSC has trended positively, amounting to 3.1x in fiscal 2013. Liquidity has also markedly improved over time from virtually no days cash and a negative working capital position in fiscal 2009 to the fiscal 2013 unrestricted cash balance of nearly $14 million, equating to a very strong 565 days cash on hand. Free cash to depreciation, a measure of the system's annual cash flow available for reinvestment in the capital base, has also been a positive, measuring over 130% in fiscal 2013 and averaging nearly or over 100% since fiscal 2010.

Debt carrying costs are slightly below comparably-rated credits at 19% of fiscal 2013 gross revenues. Carrying costs will remain at or around 20% annually through 2016 as the utility pays down the final payments of the expiring 2012 utility refunding bank note. Beginning in fiscal 2017, total annual debt service, including the additional roughly $1 million in debt service associated with the series 2015 bonds, will decline significantly and equate to an estimated 12% of gross revenues annually through the fiscal 2019 forecast. Consequently, total DSC is expected to jump to around 4.5x by fiscal 2017, providing the system enhanced financial flexibility.

DEFINED CAPITAL NEEDS, MODERATE DEBT BURDEN

The system's five-year CIP for fiscals 2015-2019 totals $72.6 million and will be 69% debt-funded by a mix of the current and existing bonds and state revolving fund (SRF) loans, 21% by recurring revenues, 7% by a 1% infrastructure surtax, and the remaining 3% by capacity charges. The surtax proceeds will equate to $1.1 million annually over six years beginning in 2015 and are entirely dedicated to utility capital needs. Management has accelerated several capital projects into the current five-year CIP contingent upon obtaining low-interest SRF loan funding, and may defer these projects should the loans not be available.

The current issuance will fund system enhancements, including treatment capacity expansion to the system's Eastside Wastewater Reclamation Facility (EWRF), improvements to the odor control facility at the water treatment plant, and utility relocation projects along the Venetian Parkway. Additional CIP projects will address inflow and infiltration, expanded reclaimed water storage capabilities, and various treatment plant upgrades.

Debt to net plant was 47% and debt per customer was $1,335 in fiscal 2013, consistent with and slightly lower than the 'AA' medians, respectively. If the city obtains low-interest SRF funding related to projects accelerated into the CIP (upwards of $26.7 million), Fitch projects that these additional loans in their entirety would likely increase the currently favorable debt metrics to beyond the 'AA' median averages. Without the SRF loans, debt metrics subsequent this transaction will remain in line with 'AA' category medians. The actual amount of loans to be obtained is still undetermined.

HIGH CUSTOMER CHARGES

The average Venice resident paid nearly $97 for combined water and sewer service (assuming 5,000 gallons of use) in fiscal 2014. These rates are high both in comparison to peer systems as well as median income, equating to roughly 2.3% of MHI in 2014.

In 2013, management commissioned a rate study in order to evaluate billing equivalency between customer classes of different home sizes, partly in response to customer dissatisfaction. The study led to a reclassification of what type of dwelling constitutes a single family residential (SFR) customer and created a more equitable rate for smaller dwelling sizes such as condominiums and mobile homes. This change will result in greater rate affordability for the class of customers not considered full SFRs.

However, affordability remains a concern for customers paying over 2% of MHI and a recent multi-year rate increase adopted to raise rates annually by 3% through fiscal 2018 may continue to pressure affordability levels. Fitch notes that the adopted rate resolution was at the recommendation of an outside engineering consultant and demonstrates a willingness to preserve strong financial margins. Collections are very strong in Venice and management notes that bad debt write-offs have been de minimus.

SUFFICIENT WATER SUPPLY AND TREATMENT CAPACITY

The city's potable water system consists of groundwater withdrawals from two municipal wellfields and a centralized water treatment plant. Raw water is supplied by the Intermediate Aquifer, which is regulated by a 20-year water use permit from the Southwest Florida Water Management District. The system is currently permitted for an average daily withdrawal of 6.9 million gallons per day (mgd) and has a treatment capacity of 4.5 mgd with the ability to expand to over 6 mgd as needed. Water supply is well in excess of current demand of about 3 mgd. The 20-year permit was renewed in 2008.

All wastewater is collected and directed to the city's EWRF through a system of gravity sanitary sewer mains, lift stations and force mains. The plant is an advanced treatment facility with a permitted capacity of 6 mgd based on a three-month rolling average daily flow. The plant will be expanded to 8 mgd, which is well in excess of current flows.

COASTAL LOCATION ATTRACTS RETIREES AND TOURISTS

Venice is located on the Gulf of Mexico in Sarasota County (the county, implied general obligation rating of 'AAA' by Fitch), approximately 70 miles south of Tampa. The city has a significant retiree population and, with its extensive beachfront, attracts a noteworthy amount of tourism. The government, housing and health-care sectors are also well represented. The year-round resident population of the city is approximately 22,000. However, the system serves a larger population during the winter months and service is extended into unincorporated parts of the county for an estimated total population of 32,000. Several significant housing developments are currently underway in the city and management estimates that roughly 1,000 new connections, a mix of both seasonal and permanent homes, will be added to the system annually over the next five years.

The system's customer base is diverse, stable, and mostly residential. The water and sewer systems served roughly 11,000 and 13,700 retail connections respectively in fiscal 2014. The system also provides reclaimed water services to an additional 3,000 accounts. In addition to retail service, the system also provides bulk sewer service to the county via an interlocal agreement whereby the county has reserved 3 mgd in the city's sewer plant and sends flows on an as-needed basis. The city charges the county a wholesale rate and county flows represent roughly 34% of total flows to the plant.

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

In addition to the sources of information identified in Fitch's Revenue-Supported Rating Criteria, this action was additionally informed by information from Creditscope.

Applicable Criteria and Related Research:

--'Revenue-Supported Rating Criteria' (June 2014);

--'U.S. Water and Sewer Revenue Bond Rating Criteria' (July 2013);

--'2015 Water and Sewer Medians' (December 2014);

--'2015 Outlook: Water and Sewer Sector' (December 2014).

Applicable Criteria and Related Research:

2015 Outlook: Water and Sewer Sector

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=818410

Revenue-Supported Rating Criteria

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

U.S. Water and Sewer Revenue Bond Rating Criteria

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

2015 Water and Sewer Medians

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=818409

Additional Disclosure

Solicitation Status

http://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=978900

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