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STANDARD AND POOR'S GLOBAL CREDIT PORTAL RATINGS DIRECTSummary: Clearwater, Florida; Water/Sewer Primary Credit Analyst: Scott Sagen, New York (212) 438-5126; scott_sagen@standardandpoors.com Secondary Contact: Le T Quach, New York (1) 212-438-5544; le_quach@standardandpoors.com Table Of Contents Rationale Outlook Related Criteria And Research July 1, 2011 www.standardandpoors.com/ratingsdirect 1 876678 | 300980311?? Summary: Clearwater, Florida; Water/Sewer Credit Profile US$46.94 mil wtr & swr rev rfdg bndsser 2011 due 12/01/2032 Long Term Rating AA-/Stable New Clearwater wtr & swr Long Term Rating AA-/Stable Affirmed Clearwater wtr & swr rev rfdg bnds ser 2010 due 12/01/2032 Long Term Rating NR Withdrawn Rationale Standard & Poor's Ratings Services assigned its 'AA-' rating and stable outlook to Clearwater, Fla.'s series 2011 water and sewer revenue refunding bonds and affirmed its 'AA-' rating, with a stable outlook, on the city's existing water and sewer revenue bonds. At the same time, Standard & Poor's withdrew its rating on the city's series 2010 bonds because the city did not sell the bonds. The rating reflects our view of the system's: · Diverse, primarily residential customer base with, what we consider, strong historical collections; · Strong rate-setting practices with annual rate increases approved through fiscal 2016; · Strong historical debt service coverage (DSC) by net revenue; and · Strong liquidity position. We believe a weakened local economy due, in part, to the slowdown in the region's construction activity somewhat offsets these factors. Net water and sewer system revenue secures the series 2011 bonds. We understand officials plan to use bond proceeds to refund all, or a portion, of the city's series 2002 water and sewer revenue bonds outstanding. Clearwater is in Pinellas County, about 30 miles west of Tampa. The city operates a water, sewer, and reclaimed water system that serves an estimated area population of 106,000. According to management, the population of the mostly built-out city will likely remain level over the next few years. We understand that the city's jobless rate tracked below national averages in 2008 and 2009 but that it grew to 10.8% in 2010. For April 2011, we understand nonseasonally adjusted unemployment remained above the nation's 9.4% rate. According to officials, income levels, measured by median household effective buying income, were, in our opinion, a good 93% of the state's level and 89% of the nation's level in 2010. The system's customer base is primarily residential with commercial accounts accounting for about 18%. In addition, the city's water customer base declined by 1% since 2007 to 39,971 in 2010; we understand management is projecting the customer base to remain steady through fiscal 2019. It is our understanding that collections have Standard & Poor’s | RatingsDirect on the Global Credit Portal | July 1, 2011 2 876678 | 300980311 remained strong and that management has indicated the number of delinquent payments and total disconnected accounts remained steady or decreased from fiscal 2009 all the way up to August 2010. The water system consists of two conventional groundwater treatment plants and one reverse-osmosis plant, as well as interconnections with Pinellas County Utilities water system for the wholesale purchase of water. The agreement with the county allows the city to purchase up to 15 million gallons per day (mgd). The city currently purchases roughly 7 mgd, down from 10 mgd in 2006. According to officials, the city well field has permits to withdraw up to 6.25 mgd from the Floridan Aquifer and the combined water treatment permitted capacity is 25 mgd. Four ground-level storage reservoirs and two elevated tanks provide 22 million gallons of storage capacity. In addition, the sewer system consists of three wastewater treatment plants with a total treatment capacity of 28.5 mgd; this provided, in our view, ample capacity to to meet the city's 14.3 mgd average annual daily flow in 2010. According to officials, water consumption has decreased over the past five years due to increased water conservation efforts in response to a regional drought and increased participation in the city's reclaimed water program. We understand average daily demand declined to 10.7 mgd in 2010 from 14.2 mgd in 2005. According to officials, rates for both systems remain comparable with surrounding utilities despite annual rate increases. Based on a water and sewer revenue sufficiency analysis completed in June 2011, the city approved rate increases of 4.5% annually for fiscals 2012-2016. For a less than one-inch residential connection, combined water and sewer charges totaled $97.74 for 7,500 gallons consumed in 2010. In our opinion, the system's financial performance has been strong recently due to its record of annual rate increases to provide, what we consider, good debt service coverage and fund roughly half of its capital improvement plan (CIP) with debt issuance. Annual DSC since fiscal 2006 has ranged from 1.4x-1.9x. Pledged net revenue in fiscal 2010 totaled $20.6 million and provided, what we regard as, a good 1.4x DSC in fiscal 2010. Including roughly $75 million of additional debt issuance in 2014 and 2016 and annual rate adjustments, the city is projecting DSC to range between, what we view as, a strong 1.6x-2x through fiscal 2016. In our view, unrestricted cash and investment levels have been strong despite some use of cash to fund capital improvements in fiscal 2008. In audited fiscal 2010, unrestricted cash and investments totaled $29 million, or, in our opinion, a strong 284 days' operations. According to officials, the city intends to maintain at least 90 days' cash on hand in operating and maintenance expenditures. Under the bond ordinance, the city has agreed to maintain rates that yield net revenue equal to 115% of annual debt service. Bond provisions include a 1.2x maximum annual debt service (MADS) additional bonds test and a reserve funded at MADS, providing additional liquidity. We consider the city's debt burden moderately high with a debt-to-plant ratio equal to 77% of the plant's net value. It is our understanding the city's CIP totals approximately $121 million for fiscals 2011-2016 with debt issuance funding roughly half of the CIP. We understand the city plans to issue $40 million of additional debt in fiscal 2014 and $35 million of additional debt in fiscal 2016. Outlook The stable outlook reflects Standard & Poor's belief that the system will likely continue to maintain, what Standard & Poor's considers, strong financial operations as it funds its CIP and makes annual rate adjustments. We believe www.standardandpoors.com/ratingsdirect 3 876678 | 300980311 Summary: Clearwater, Florida; Water/Sewer rating improvement is likely limited due to the service area's softening economy, but the softening economy has so far had little effect on the system's finances. We also believe that capital projects will likely remain manageable over the outlook's two-year period and that officials will likely fund these projects mainly with additional debt. Related Criteria And Research USPF Criteria: Standard & Poor’s Revises Criteria For Rating Water, Sewer, And Drainage Utility Revenue Bonds, Sept. 15, 2008 Complete ratings information is available to subscribers of RatingsDirect on the Global Credit Portal at www.globalcreditportal.com. 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