Fitch Rates Palm Coast, Florida's $50.7MM Utility System Revs 'A-'; Rating Watch Positive.
The 'A-' rating is based on the city's conservative financial management, low rate structure relative to area providers, solid debt service coverage from pledged revenue, and adequate legal provisions. The rating also considers a demonstrated trend of sound financial operations leading to ample liquidity, and proactive capital planning efforts that will ensure water and wastewater capacity to a rapidly expanding service area. The Rating Watch Positive reflects Fitch's expectation that the utility system will maintain solid coverage and liquidity levels as it embarks on a large growth-driven capital plan, requiring a nearly 13% rate increase in fiscal 2009. As the first proposed rate increase as a municipally-owned system, successful adoption of the rate increase is considered key to the system's ability to keep pace with its sizeable infrastructure needs on sound financial footing. Board consideration of the rate increase is scheduled for Dec. 19, 2006. Implementation of the rate increase will likely have a positive impact on the utility system's current rating.
Palm Coast was incorporated in 1999 and is located in Flagler County, equidistant to St. Augustine and Daytona Beach. Originally platted as a residential community, the city's population increased to an estimated 61,000 in 2005, nearly twice the number of residents as recorded in the 2000 census. The city's population represents approximately 75% of the county's total population. Following incorporation in 1999, the city purchased water and wastewater assets from Florida Water Services Corporation (FWS) in 2003. The transaction was financed with a series 2003 utility system revenue bond issue, which also funded capacity expansion and system upgrades. The system serves the city of Palm Coast as well as neighboring unincorporated areas of the county. Income levels in the city measure below the state and nation, and historical unemployment rates have compared favorably to state and national averages. Since the acquisition, Fitch believes the city has demonstrated a sound ability to operate and manage the utility system.
Despite very strong growth in customer connections that averaged 11% for water users and 13% for wastewater payers over the last five years, sufficient treatment capacity remains. The city's water system serves approximately 38,796 customers. The city operates two water treatment plants with a combined treatment capacity of 12.38 millions of gallons per day (mgd) versus an average daily demand of 8.2 mgd and a peak demand of 10.2 mgd in fiscal 2006. A planned 1.8 mgd expansion of an existing facility in fiscal 2007 coupled with the construction of an additional WTP with an initial treatment capacity of 3.0 mgd is expected to provide sufficient capacity through 2011. The wastewater system provides service to about 30,500 customers and maintains treatment capacity of 6.8 mgd versus an average daily flow of 4.8 mgd in fiscal 2006. An additional wastewater treatment facility with an initial treatment capacity of 2.0 mgd is expected to come online by fiscal 2009.
Financial operations since the acquisition are sound, generating solid debt service coverage and good liquidity. The system finished fiscal 2005 with 239 days cash on hand, and unaudited fiscal 2006 revenues together with legally available impact fees covered annual debt service on parity debt by a solid 2.9 times (x). Excluding capital facilities fees, debt service coverage is projected to decline to a range of 1.4x to 1.7x through fiscal 2011. The system's rate structure is low relative to area competitors due to a 2003 acquisition agreement that held rates constant for a five-year period. Financial projections include a 12.5% rate increase in fiscal 2009 and annual price index rate increases for fiscal 2010 and 2011.
Given its recent purchase from a private corporation, the system is highly leveraged with a debt to net plant ratio at 115% in fiscal 2005. Additional capital needs, totaling $151 million over the next five years, are needed to address its fast growing service demands. The capital improvement plan (CIP) includes funding for the expansion of one of the WTPs and the construction of a third WTP and a second wastewater treatment facility. Dedicated CIP funding sources include the current bond offering, along with additional subordinate borrowings of $17 million and $22.5 million from the state revolving fund planned for fiscal years 2007 and 2009, respectively. Remaining funding sources will be derived from impact fees and renewal and replacement funds.