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Fitch Rates Melbourne, FL Water and Sewer Revs 'AA-'; Outlook Stable

AUSTIN, Texas--(BUSINESS WIRE)-- Fitch Ratings has assigned an 'AA-' rating to the following Melbourne, FL (the city) bonds:

--Approximately $11.6 million water and sewer refunding and improvement revenue bonds, series 2012.

The bonds will be sold via negotiation the week of Oct. 15. Bond proceeds will be used to refund all of the city's water and sewer refunding and improvement revenue bonds, series 2002A, finance system capital improvements, and to pay the cost of issuance.

In addition, Fitch affirms the ratings on the following city bonds:

Approximately $109.9 million in outstanding parity water and sewer revenue bonds (pre-refunding) at 'AA-'.

The Rating Outlook is Stable.

SECURITY

The bonds are secured by a first lien pledge of net revenues of the city's combined water and sewer system (the system) and impact fees.

KEY RATING DRIVERS

IMPROVED FINANCIAL PERFORMANCE: Debt service coverage (DSC) improved to 2.0x in fiscal 2011 and liquidity levels are also up after both fell to low levels in fiscal 2009.

MODERATE DEBT LEVELS: Debt ratios are moderate overall, although debt per capita and debt to net plant is somewhat elevated. Debt ratios are expected to increase slightly given planned borrowing to support capital improvements.

LIMITED RATE FLEXIBILITY: Rates have been raised steadily to enhance financial margins, although user costs have reached Fitch's affordability threshold of 2.0% of median household income (MHI). Costs are also considered moderately high when compared to surrounding communities.

MANAGEABLE CAPITAL COSTS: System capital needs, which are down from prior years and which are in line with utility expenditures nationally, are focused on repair and maintenance of infrastructure. While supply and treatment capacity are sufficient for the foreseeable future, the age of facilities is of some concern.

WEAK LEGAL PROVISIONS: Legal provisions associated with the bonds are considered below average due to the 1.0x coverage rate covenant and additional bonds test.

CREDIT PROFILE

SOUND FINANCIAL METRICS

Financial performance has trended upward for the past two years after reaching low levels in fiscal 2009. Total DSC for fiscal 2011 registered 2.0x, showing substantial improvement from 1.1x DSC in fiscal 2009. Unaudited financial results for fiscal 2012 show continued strong DSC of 2.0x on an all-in basis. Management's financial forecast, which includes reasonable to somewhat conservative assumptions, projects total DSC at 1.6x for fiscal 2013, growing to 1.8x by fiscal 2016. Liquidity has also improved from previously low results, growing to 328 days of cash on hand for unaudited fiscal 2012 from just 137 days in fiscal 2009.

CONSISTENT RATE INCREASES SUPPORT FINANCIAL PERFORMANCE

Historically, the city has adopted multiple-year rate packages to provide for moderate annual rate increases. The city council did amend the rate ordinance to keep rates flat for fiscal 2013 and provide users with some rate relief. However, 5.5% to 7.0% annual increases have been approved for fiscals 2014-2017. Fitch believes the city retains some rate flexibility, although Melbourne's rates are on the higher end of the spectrum when compared to neighboring communities. User charges are also currently at Fitch's 2% of the MHI affordability benchmark.

RISING DEBT PROFILE TO ADDRESS SYSTEM MAINTENANCE

The system's fiscal 2012-2017 capital improvement plan (CIP) totals $93 million. The CIP will be 66% debt funded, including $5 million from the current issue and an additional $14 million in parity debt to be issued in 2014. The system has also applied for $13 million in state revolving fund loans.

Overall, system debt levels are moderately high at $788 on a per capita basis and 76% debt-to-net plant. Given the city's planned debt financing of the CIP, debt ratios are expected to increase further for the near to medium term. Bond covenants are characterized as weaker than average due to the 1.0x rate covenant and additional bonds test.

A substantial portion of the CIP is devoted to rehabilitation of the city's wastewater system and continued improvement to the reclaimed water system. Fitch views the focus of capital needs positively, as there is some concern with the age of facilities. Currently, the average age of the plant is 17 years, notably higher than the 12 years of similarly rated credits, indicating deferred system maintenance.

ADEQUATE SUPPLY AND TREATMENT CAPACITY

The system provides water service to roughly 150,000 people on a retail basis in and around the city as well as wholesale service to the city of West Melbourne. Raw water from Lake Washington and four Floridian aquifer production wells provides ample supply, and the system has sufficient treatment capacity. The sewer system serves about 70,000 people, almost all of which are located within the city limits. The system's two wastewater treatment plants currently provide adequate treatment capacity.

Melbourne is located in southern Brevard County on the Atlantic coast. Employment is centered on high technology, medical and service industries, as well as tourism. Agriculture is also an important part of the economy. Unemployment rates for July 2012 equaled 8.9%, higher than the national average but below the state. Wealth levels have historically been and remain low at 87% and 80% of the state and national levels, respectively.

Additional information is available at 'www.fitchratings.com'. The ratings above were solicited by, or on behalf of, the issuer, and therefore, Fitch has been compensated for the provision of the ratings.

In addition to the sources of information identified in the U.S. Municipal Revenue-Supported Rating Criteria, this action was additionally informed by information from Creditscope and Public Resources Management Group (rate consultant).

Applicable Criteria and Related Research:

--'Revenue-Supported Rating Criteria', June 12, 2012;

--'U.S. Water and Sewer Revenue Bond Rating Guidelines', Aug. 3, 2012;

--'2012 Water and Sewer Medians', Dec. 8, 2011;

--'2012 Outlook: Water and Sewer Sector', Dec. 8, 2011.

Applicable Criteria and Related Research:

2012 Outlook: Water and Sewer Sector

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=657110

2012 Water and Sewer Medians

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=657111

U.S. Water and Sewer Revenue Bond Rating Criteria

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=684901

Revenue-Supported Rating Criteria

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=681015

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Fitch Ratings
Primary Analyst
Teri Wenck, CPA
Associate Director
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Fitch, Inc.
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Austin, TX 78701
or
Secondary Analyst
Andrew DeStefano
Director
+1-212-908-0284
or
Committee Chairperson
Doug Scott
Managing Director
+1-512-215-3725
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elizabeth.fogerty@fitchratings.com

Source: Fitch Ratings