(The following statement was released by the rating agency)NEW YORK, November 11 (Fitch) Fitch Ratings affirms the 'AA-' rating for the following Hollywood, FL (the city) revenue bonds: --Approximately $124.6 million in outstanding utility system revenue bonds, series 2003, 2010A, and 2010B. The Rating Outlook is Stable.SECURITYThe 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). KEY RATING DRIVERSIMPROVING FINANCIAL PERFORMANCE: Senior and all-in debt service coverage (DSC) have grown steadily over the past five years, both exceeding 2.0x coverage in fiscal 2012. Liquidity has also grown, with the combination of unrestricted cash, a rate stabilization fund, and a renewal, replacement, and improvement fund equating to over 630 days of operations in fiscal 2012. MODERATING DEBT BURDEN: Debt ratios are steadily improving and very manageable given the system's ample liquidity and coverage. System leverage indicators are not expected to weaken despite the acquisition of additional subordinate state revolving fund (SRF) loans over the five-year capital plan period. However, this could change from regulatory projects expected beyond the capital improvement program (CIP) period. PROACTIVE CAPITAL PLANNING: The utility's five-year CIP will fund long-term regulatory compliance and water supply projects. The CIP will largely be financed with built-up internal capital reserves and low-interest, short-term subordinate debt. ABOVE-AVERAGE RATES: Large rate increases imposed over the past five years have improved financial performance to its current strength. However, they also have pushed rates to above average levels relative to peer systems. Though rates currently represent 2.1% of median household income, this may be mitigated by a planned multi-year rate freeze that could support greater rate flexibility in the future. RECENT ECONOMIC STABILIZATION: Considerable economic investment is currently underway, bolstering the city's tourism industry and supporting a continued drop in unemployment. The city's inclusion in the Miami-Ft. Lauderdale Metropolitan Statistical Area (MSA) lends it significant economic opportunity and support.RATING SENSITIVITIESSUSTAINED FINANCIAL STRENGTH: The utility's ability to pay-go the bulk of its capital program while maintaining very manageable debt levels, a solid financial position, and stable rates is positive and may lead to upward rating movement. Better direction of out-year capital costs and how these costs will be mitigated to maintain recent financial results is also key.CREDIT PROFILE Hollywood, Florida (general obligation bonds rated 'A' by Fitch) is located in Broward County (GOs rated 'AAA') on the southeast coast of Florida and is a part of the Miami-Ft. Lauderdale MSA. In 2012 the population was 142,374 residents. According to the Bureau of Labor Statistics, the city's unemployment was down to 6% in August 2013 compared to the prior year's rate of 8.1%. The system provides water and sewer service to a mostly residential and retail customer base within the city. The system also provides wholesale sewer service to the adjacent municipalities of Pembroke Pines, Hallandale Beach, Dania Beach, Broward County, and Miramar. The wholesale customers represented roughly 22% of the system's total fiscal 2012 revenues, a proportion that represents potential customer concentration risk.This risk is largely mitigated by stiff provisions contained in bulk customer contracts, including a mandatory one-year termination notice, the pre-payment of debt prior to termination, and a present value payment of any other charges that would have been paid by the large user over the ensuing five years.IMPROVED FINANCIAL STRENGTH The system has improved its financial position significantly over the past five years. In fiscal 2012, despite a spike in senior lien annual debt service (ADS), senior DSC was very strong at 3.4x and all-in coverage improved to 2.4x. Several years of substantial rate increases contributed to a 28% growth in system revenues from fiscal years 2008-2012. When coupled with a relatively flat 2% overall growth in expenses, it resulted in a currently very strong operating margin of 51%. In fiscal 2012, operating cash flows represented nearly 2.0x current liabilities, and unrestricted cash and investments, including the cash the utility restricts for its renewal, replacement and improvement (RR&I) fund and rent stabilization fund, equated to over 630 days of operations. SOUND, FORWARD-LOOKING CAPITAL PROGRAMThe system's five-year CIP (fiscal years 2014-2018, including unspent budgeted funds rolled over from fiscal 2013) totals roughly $250 million and is very comprehensive. It includes the replacement and lining of water and sewer mains, an extensive inflow and infiltration program, lift station upgrades, re-use system expansion, treatment plant upgrades, and water supply well construction among various other projects. Fitch notes the capital plan is fluid and projects can be deferred as needed. A major priority of the utility is the continued development and expansion of its reverse osmosis water treatment capabilities. This ongoing effort will ensure compliance with Florida Department of Environmental Protection (FDEP) and the South Florida Water Management District (SFWMD) requirements to reduce draws on the Biscayne Aquifer (which is the water produced by the Everglades, an ecologically fragile ecosystem).The city already has a long-term water use permit for its current supply. That said, it is actively seeking alternative water supplies such as treating the more abundant brackish water from the Lower Floridan Aquifer. This involves the removal of salinity and implies substantial capital outlays and treatment upgrades. Hollywood has proactively addressed these anticipated needs via the construction of additional wells, membranes, and storage facilities, guaranteeing long-term supply needs. DECLINING DEBT BURDENLeverage ratios are very manageable. In fiscal 2012 debt per customer totaled under $1,300, an improvement over the prior year and favorable compared the Fitch 'AA' median average of $1,828. The very strong annual cash flow produced by the system will allow for nearly 70% of the five-year CIP to be funded on a pay-go basis. The remaining costs will be addressed through annual state revolving fund loan acquisitions.According to the utility's five year financial projections, despite the acquisition of SRF loans, overall debt per customer is expected to decline even further to close to $1,000 over the five year horizon due to rapid amortization of 64% of existing debt in 10 years and 88% in 20 years. ABSORPTION OF MANDATED OCEAN OUTFALL ELIMINATION PROJECTIn fiscal year 2019 the city plans to issue $147.6 million in senior lien debt to primarily fund the construction of projects related to the city's largest and most impactful capital project in the ten-year outlook, the elimination of its Atlantic Ocean wastewater outfall. This project is mandated by the FDEP and United States Environmental Protection Agency (USEPA) and must be completed by 2025.The city has initiated the planning and design stages for alternative wastewater discharge options, and at current is implementing a pilot program to test these methods. These options include but are not limited to indirect potable re-use for irrigation and Floridan aquifer recharge via deep injection wells. The bulk of the projects will commence towards the end of the current five year CIP (fiscal 2018) and into the ten year plan. The utility estimates that the projects will cost between $180 million and $240 million, depending on which course of action the city takes, and will be funded from a mix of debt and pay-go cash. Based on the pro forma financial projections produced by a rate study analysis, Fitch projects that DSC of the additional debt annual burden will stay close to 2.0x for the senior lien and just over 1.3x for all-in coverage. These estimated coverage levels do not include rate increases that the city will likely implement. Therefore actual coverage levels may prove to be more favorable. Future debt per customer, assuming full absorption of the fiscal year 2019 debt issuance, is also projected to stay relatively favorable, around $2,000, given the flexibility afforded by currently low debt levels. Greater clarity with regards to capital costs and the impact of the proposed debt on the system's cash flows would be viewed favorably. MODERATELY HIGH RATES; FUTURE FLEXIBILITY EXPECTEDThe syst
em has implemented fairly rigorous rate increases over the past five years, yielding significant cash reserves in order to fund the majority of its capital program. The final rate increase of an approved multi-year rate plan was for 7.5% and was implemented at the start of fiscal year 2014. The utility has recommended and received commission approval to not raise rates again until at least 2020. At that point increases are likely to resume in order to support repayment of the future fiscal year 2019 debt issuance. The average residential customer consumes roughly 5,000 gallons per month (gpm) due to a fairly strict tiered rate structure that discourages excess consumption. Assuming 5,000 gallons, the average consumer will pay roughly $81 per month for combined service in fiscal 2014, which represents close to 2.1% of median household income. Fitch's benchmark for affordability is 2% of MHI for combined charges. The city's utility charges relative to regional peer utilities are on the high end. However, the utility expects that the five-year rate freeze will bring its relative costs closer to the average of the group. Management expressed that out-year rate increases should be more moderate than those previously levied. However, they are still expected to be high enough to support the system's long-term capital needs and financial goals. STABLE ECONOMYOver the past five years, the utility's customer base has been stable despite a waning soft regional housing market and slowed economy. The city is almost completely developed, with future customer growth expected to be minimal. However, several planned re-developments of existing spaces are underway, including a major future tourist destination called 'Margaritaville,' (expected to open in late 2015) as well as the installation of a new Wal-Mart at the long vacant Millennium Mall. Management is optimistic that both projects will help to bolster the local economy and revive tourist interest in the area.Contact:Primary AnalystEva D. Rippeteau Associate Director+1-212-908-9105Fitch Ratings, Inc., One State Street Plaza, New York, NY 10004Secondary AnalystAndrew DeStefanoDirector+1-212-908-0284Committee ChairpersonDouglas ScottManaging Director+1-512-215-3725Media Relations: Elizabeth Fogerty, New York, Tel: +1 (212) 908 0526, Email: elizabeth.fogerty@fitchratings.com.Additional information is available at 'www.fitchratings.com'. In addition to the sources of information identified in Fitch's 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 3, 2013);--'U.S. Water and Sewer Revenue Bond Rating Criteria' (July 31, 2013);--'2013 Water and Sewer Medians' (Dec. 5, 2012);--'2013 Outlook: Water and Sewer Sector' (Dec. 5, 2012).Applicable Criteria and Related Research: Revenue-Supported Rating Criteriahttp://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=709499 U.S. Water and Sewer Revenue Bond Rating Criteriahttp://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=715275 2013 Water and Sewer Medianshttp://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=695756 2013 Outlook: Water and Sewer Sectorhttp://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=695755 Additional Disclosure Solicitation Statushttp://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=807640 ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: HTTP://FITCHRATINGS.COM/UNDERSTANDINGCREDITRATINGS. IN ADDITION, RATING DEFINITIONS AND THE TERMS OF USE OF SUCH RATINGS ARE AVAILABLE ON THE AGENCY'S PUBLIC WEBSITE 'WWW.FITCHRATINGS.COM'. PUBLISHED RATINGS, CRITERIA AND METHODOLOGIES ARE AVAILABLE FROM THIS SITE AT ALL TIMES. FITCH'S CODE OF CONDUCT, CONFIDENTIALITY, CONFLICTS OF INTEREST, AFFILIATE FIREWALL, COMPLIANCE AND OTHER RELEVANT POLICIES AND PROCEDURES ARE ALSO AVAILABLE FROM THE 'CODE OF CONDUCT' SECTION OF THIS SITE. FITCH MAY HAVE PROVIDED ANOTHER PERMISSIBLE SERVICE TO THE RATED ENTITY OR ITS RELATED THIRD PARTIES. DETAILS OF THIS SERVICE FOR RATINGS FOR WHICH THE LEAD ANALYST IS BASED IN AN EU-REGISTERED ENTITY CAN BE FOUND ON THE ENTITY SUMMARY PAGE FOR THIS ISSUER ON THE FITCH WEBSITE.
