Fitch Affirms Boca Raton, FL Water & Sewer System Revenue Bonds at 'AAA'; Outlook Stable

Fitch Ratings affirms the 'AAA' rating on the following Boca Raton, FL revenue bonds:

--$36.8 million water & sewer system revenue bonds, series 2008 and series 2009.

The Rating Outlook is Stable.

SECURITY

The bonds are supported by a pledge of the net revenues of the water and sewer system, including legally available impact fees.

KEY RATING DRIVERS

SUSTAINED STRONG FINANCIAL PERFORMANCE: The city's water and sewer system continues to maintain excellent financial margins with very strong debt service coverage (DSC) and abundant cash on hand.

LOW DEBT BURDEN: Debt metrics have remained very low and continue to decline, ranking well compared to the median for 'AAA' systems. Outstanding debt is scheduled to be fully retired in 15 years.

AFFORDABLE USER CHARGES: The typical residential bill equates to a low 1% of median household income (MHI) and compares favorably to neighboring systems.

SOUND OPERATIONS: The city minimizes the discharge of treated wastewater into the ocean by reusing 75% of effluent for sale to local irrigation users. The Biscayne Aquifer provides abundant potable water supply to the city through at least 2035.

STRONG SERVICE AREA DEMOGRAPHICS: The service area's customer base is characterized by low unemployment and high wealth.

RATING SENSITIVITIES

MAINTENANCE OF STRONG CREDIT FUNDAMENTALS: Fitch expects that the system's exceptionally strong financial, operational, debt and managerial profiles will maintain rating stability.

CREDIT PROFILE

WEALTHY, RESIDENTIAL CUSTOMER BASE

The city of Boca Raton (implied GO rating 'AAA' by Fitch) is located on Florida's east coast in Palm Beach County (GOs rated 'AAA', Stable Outlook). The city owns and operates a combined water and sewer utility system, serving over 36,000 water and 33,000 sewer customers over its 35 square mile service area. The customer base is mostly residential and fairly affluent though the area's commercial presence continues to develop. Customer concentration is low with the 10 largest customers, the topmost of which include Florida Atlantic University (FAU) and the Office Depot headquarters, representing less than 10% of usage.

The service area, which includes the city and surrounding areas, is primarily built-out, allowing capital plans to address system upgrade and renewal. The unemployment rate continues to fall, landing at 4.7% in September 2014 compared to 5.4% the year prior. The city's unemployment rate is lower than that of neighboring Palm Beach County (6%) and the state average of 6.1%.

STRONG SUSTAINED FINANCIAL RESULTS

The system's financial profile has continued a trend of strong DSC margins and ample liquidity. Fiscal 2013 net revenues yielded 4.6x all-in DSC and the system's $38.5 million in unrestricted cash and cash equivalents equated to 420 days of operations. Including $23.3 million in renewal and replacement (R&R) funds available for capital spending, liquidity approximated 675 days of operations. Unaudited fiscal 2014 net revenues continued these strong results, ending the year with 4.5x senior lien DSC and $36.4 million in unrestricted cash and investments, yielding 403 days of operations. When including an additional $22.5 million in R&R funds, liquidity rose to 652 days of operations. The system's operating margin has maintained a low average of 34% over the past five years compared to the 'AAA' median of 38%, and free cash to depreciation has surpassed a very high 150% during the same period.

AFFORDABLE CUSTOMER CHARGES

The average Boca Raton resident pays a customer charge of $57 for consuming a very high 15,000 gallons of water per month. The associated charge for this volume is low compared to other systems in the region, and given the area's above-average income levels, equates to only 1% of MHI, one-half the 2% Fitch affordability threshold for combined service. A city ordinance requiring automatic annual rate increases equal to the growth in the consumer price index (CPI) helps revenues keep pace with escalating costs.

FAVORABLE DEBT AND CAPITAL PROFILES

The system's low debt burden is evidenced by a per-customer debt ratio of $545 and debt-to-net plant of only 16% in (unaudited) fiscal 2014, both of which are well below the 'AAA' median levels. Debt amortization is rapid with 100% of principal retiring in 15 years, and in 2014 the annual debt carrying costs were just 8% of gross revenues, which Fitch views favorably.

The current six-year capital improvement plan (CIP) at $126 million is manageable given the city's very strong cash position, strong expected cash flows, and low debt burden. Funding sources for the CIP include internal cash and operating surpluses. No additional debt is expected at this time.

AMPLE GROUNDWATER TO MEET LONG-TERM DEMAND

Groundwater is provided from five well fields that draw water from the Biscayne aquifer, which is considered to have a sufficient long-term supply. The system's 70 million gallon per day (mgd) in total water treatment capacity is well in excess of the current average daily demand of 35 mgd. The water use permit from the South Florida Water Management District is valid through fiscal 2028. Wastewater treatment is provided by the Glades Road wastewater treatment plant and a water reclamation facility that are co-located at the site of the Glades Road facility. Both facilities are permitted to provide 17.5 mgd of treatment capacity, and Glades Road has the design capacity to treat up to 22.5 mgd. With just 11.1 mgd of average flows in 2013, the city has ample treatment capacity.

SYSTEM MEETING STATE AND FEDERAL GUIDELINES

The system remains in regulatory compliance, with 75% of the effluent produced treated to advanced levels and redistributed to golf courses and other irrigation users. This helps limit the system's potential exposure to increased financial and capital requirements associated with state and federal mandates, including numeric nutrient criteria. The remaining effluent is discharged via ocean outfall, a practice that is expected to be eliminated by 2018 as management continues to increase the level of re-use to 100%.

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 2013);

--'U.S. Water and Sewer Revenue Bond Rating Criteria' (July 2012);

--'2014 Water and Sewer Medians' (December 2013);

--'2014 Outlook: Water and Sewer Sector' (December 2013).

Applicable Criteria and Related Research:

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

2014 Water and Sewer Medians

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=724358

2014 Outlook: Water and Sewer Sector

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=724357

Additional Disclosure

Solicitation Status

http://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=956855

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