Overview

Florida municipal utilities have experienced stable and generally strengthening credit quality in recent years, supported by continued economic growth and diversification, and substantiated financial metrics. We expect credit quality to remain stable in the state, given our expectation for continued economic growth, existing federal stimulus, and utilities' general propensity for emergency preparedness and financial flexibility, which lead to greater resiliency. However, although our expectation for a national recession over the next 12 months has abated, we expect supply chain disruptions, a protracted inflationary environment, and labor pressures to continue to have an impact on utilities, in addition to ongoing hurricane risk. Moreover, rising insurance premiums for homeowners in Florida could deaccelerate economic growth in some service areas and reduce disposable income for ratepayers over the longer term, if not offset by rising incomes.

S&P Global Ratings maintains 79 ratings on municipal utilities in Florida. Notably, upgrades in Florida significantly outpaced the nation from 2021 to July 2023, with no downgrades during this time frame. We view the state's overall positive rating movement as supported by the state's continued economic and population gains, which drove growth-supported revenues, bolstered financial metrics, and benefited economies of scale. However, while growth has yielded benefits for utilities in the state, it also poses challenges. We view the economic and financial benefits of growth as tempered by management teams' ability to manage growth-driven capital pressures, which can often present credit limitations.

Roughly half of the credits that have experienced positive rating actions since 2021 face the need to manage growth-related pressures, primarily with respect to capital. For instance, the City of Palm Coast's upgraded rating primarily reflects economic growth and diversification, which substantially increased nominal incomes and positively affected the city's market position assessment, whereas the City of Port St. Lucie's upgrade reflects management's ability to maintain very strong financial metrics and affordable rates despite growth-related demand pressures. Both cities, however, will need to manage large capital programs relative to their size. Palm Coast's five-year capital program cost increased by approximately 75% from 2016 to 2021, from about $70 million to $120 million, driven primarily by growth and demand, while Port St. Lucie's anticipated capital costs more than doubled from 2017 to 2022, driven by capital repairs and improvements.

What We Are Watching

Florida has a strong institutional framework in place to augment the private insurance sector, including via the Florida Hurricane Catastrophe Fund. Nevertheless, in the past two years some property and casualty insurers have discontinued policy coverage in Florida, in part as a result of rising insured losses due to natural catastrophes (source: Insurance Services Office; S&P Global Ratings). For example, Farmers Insurance recently announced that it will no longer offer coverage in Florida, while AAA and American International Group, Inc. (AIG) will not renew some higher exposed home and auto insurance policies.

Although recent state legislation could help stabilize the private insurance market, we believe that rising premiums and difficulty obtaining insurance could have a negative impact on economic growth over the long term if rising costs for home ownership reduce disposable incomes for existing Florida ratepayers, adding to affordability pressures over the longer term. We believe that long-term planning and supportive rate structures, such as those that promote cost recovery and revenue stability, will continue to be fundamental for utilities facing affordability pressures and large capital programs.

Spotlight On Environmental, Social, Governance Factors

Florida utilities contend with various acute and chronic physical climate risks, including severe weather such as hurricanes, sea-level rise, and flooding are common considerations within the state's portfolio. We assess each credit's financial flexibility and planning initiatives in place to prepare for, respond to, and recover from the risks to which they are exposed. Following Hurricane Ian (category 4), utilities are generally well-prepared to respond to severe weather events, with no downgrades for any utility we rate, following the catastrophe. We note that Florida utilities are generally well-prepared with comprehensive disaster plans, as well as with management teams that are typically well-versed in working with emergency management agencies, such the U.S. Federal Emergency Management Agency (FEMA). Salt-water intrusion due to sea-level rise is also a growing concern, given saltwater can move inland along coastal rivers or penetrate underground aquifers, driving up water treatment charges. Notably, helping to offset this risk is the rising number of water reclamation projects in the state, which can reduce overpumping and replenish aquifers to offset salt-water intrusion. According to the American Society of Civil Engineers, Florida is a national leader in the reuse of reclaimed water, making up 35% of all water supply projects (American Society of Civil Engineers; 2021).

Despite the implementation of the EPA's federal cyber security plan for water utilities pausing on July 1, 2022, Florida state agencies and local governments became subject to amendments made to Florida's State Cybersecurity Act. The act imposes certain ransomware reporting obligations and prohibits entities from paying or complying with cyber randoms. It also requires cyber security training for all new governmental hires, among other operational requirements. Although the state's bill impact analysis indicates these initiatives will likely have a negative fiscal impact on utilities, it also outlines grant opportunities through the state for technical assistance, along with dedicated funding sources allocated toward developing cyber security training government employees are required to take. We view this expansion of the cyber security act as having favorable credit attributes for the portfolio, as it has a structured and supportive framework for utilities to mitigate cyber risk.

Florida Municipal Utilities Data

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