Fitch rates Tampa Bay Water bonds AA-

Fitch Ratings assigns an underlying 'AA-' rating to Tampa Bay Water (TBW, or the authority), Florida's approximately $110 million utility system refunding revenue bonds, series 2004.

NEW YORK, Feb. 5, 2004 -- Fitch Ratings assigns an underlying 'AA-' rating to Tampa Bay Water (TBW, or the authority), Florida's approximately $110 million utility system refunding revenue bonds, series 2004.

The bonds, expected to be insured, are scheduled to price Feb. 4 through negotiation with a syndicate led by Raymond James & Associates, Inc. Fitch also affirms the 'AA-' underlying rating on the authority's $1.1 billion in outstanding parity revenue bonds. The Rating Outlook is Stable.

The 'AA-' underlying rating on Tampa Bay Water's utility system revenue bonds reflects the authority's success to date in meeting regional water supply demands, aided by its sound operating structure and high-quality management. While the authority's seawater desalination facility has not been operating at expected treatment levels to date, drought conditions have subsided in recent years, lessening the risks associated with a lack of adequate water supply for the near term.
Finances are sound, and the service area, with a population of over two million, continues to grow and diversify.

Multiple projects to reduce groundwater pumping and develop alternative water supplies have been advancing, and several other projects are planned over the 5-year horizon. Administering a large, ongoing capital program that will provide sufficient new water sources, satisfy environmental concerns, and react to periodic drought conditions is a continual challenge. Concerns about disputes among member governments have declined because cooperation since TBW's inception has been positive.

Under the strong security structure, six-member governments (Hillsborough, Pasco, and Pinellas counties and the cities of New Port Richey, St. Petersburg, and Tampa) make several, not joint, operating expense payments to TBW for highly essential water supplies. Tampa is the only member government with its own separate water supply and the only member not charged the uniform rate.

Their payments to TBW are made before disbursements to holders of their respective city and county utility bonds, making the payments from member governments exceptionally well secured. TBW's net revenue and fund balance provide a modest cushion above the rate covenant requirement, which requires sum sufficient debt service coverage from annual revenues and 1.25 times (x) coverage when fund balance is added to net revenues. Fiscal 2003 coverage of debt service by net revenues alone was 1.04x, equal to projections for fiscal 2003 coverage from two years ago.

TBW's seawater desalination facility opened in March 2003 but remains in intermittent operation and has not reached its expected operational capacity of 25 mgd (about 10% of total system capacity). On Oct. 1, 2003, TBW declared the project's contractor, Covanta, in default of their contract. If Covanta continues to be unable to meet the requirements of the contract, TBW will pursue enforcement of the performance guaranty obtained from the primary subcontractor and a $24 million performance bond.

In addition, TBW has recently issued a notice of event of default to the facility's operator, Covanta Tampa Bay, Inc., for the failure to maintain a required $8.5 million letter of credit. According to authority officials, TBW has identified possible replacement contractors and operators. Fitch believes there is operational risk involved with this type of change of management. The new surface water treatment plant and ground water treatment plant, with combined capacity of 75 mgd, have been completed and are up and running.

With the subsidence of drought conditions and Tampa's decreased reliance on TBW's supply, water demand has declined from 181 mgd in fiscal 2000 to 153 mgd in fiscal 2003. Projected annual average demand rises to 160 mgd in fiscal 2004, and 186 mgd in fiscal 2007. Under the contracts that created Tampa Bay Water, TBW committed to reducing withdrawal from 11 existing wellfields and developing at least 85 mgd of new water supply by Jan. 1, 2008.

Once the regional reservoir is completed (expected in August 2004) and the desalination plant is running at full treatment capacity, TBW will have 236 mgd of permitted water withdrawal and treatment capacity, and expects to meet the 2008 deadline. Permitted water withdrawal and treatment capacity will decline to 205 mgd at the end of 2007 when allowable wellfield withdrawal is reduced, still adequate to meet projected demand. Several additional projects to increase supply are planned, and TBW plans to issue about $200 million in new money sometime between fiscal 2005-2007.


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