Fitch Affirms Vero Beach, Florida's Electric Revs at 'AA-'; Outlook Stable

NEW YORK--(BUSINESS WIRE)--Fitch Ratings takes the following rating actions on the City of Vero Beach, Florida's electric revenue bonds:

--$50.2 million electric refunding revenue bonds, series 2003A, affirmed at 'AA-'.

The Rating Outlook is Stable.

RATING RATIONALE:
--The electric system's overall healthy financial metrics include consistently strong coverage of debt service in line with rating category medians.
--Liquidity levels fell in fiscal 2009 with additional capital spending and increased fuel costs. However, fiscal 2010 interim financials indicate a return to historically adequate levels of approximately 60 days cash on hand.
--A 24% decrease in rates stemming primarily from a change to a fixed contract rate of delivery from an all-requirements contract with Florida Municipal Power Authority (FMPA) (rated 'A+' by Fitch, with a Stable Outlook) and the addition of Orlando Utilities Commission (OUC) (rated 'AA' by Fitch, with a Stable Outlook) as a supplemental wholesale provider has increased system affordability.
--The load-following contract with OUC, in which OUC dictates the dispatch of Vero Beach's generating facilities, coupled with entitlements from several FMPA projects, mitigates power supply risk.
--A highly politicized operating environment compounds the issues of a weakened service area exhibiting above-average unemployment rates and foreclosures.

KEY RATING DRIVERS:
--Management's ability to maintain sufficient financial flexibility in a challenging operating environment;
--Maintenance of financial metrics at or better than the current satisfactory levels.

SECURITY:
The bonds are senior-lien obligations secured by net revenues derived by the city from the operation of its electric system.

CREDIT SUMMARY:
Vero Beach's retail electric system continues to exhibit sound financial metrics. Fiscal 2009 coverage of debt service registered a healthy 3.5 times (x), and coverage of full obligations equaled 1.4x, both of which equaled 'AA-' medians. Liquidity weakened to a low 23 days cash on hand in fiscal 2009 on account of additional capital spending and increased fuel costs. However, fiscal 2010 interim financials suggest a return to historically adequate levels of approximately 60 days cash, or slightly below the rating category median of 88. While the system's lack of certain financial policies and projections is a credit concern, Fitch expects that a series of annual rate increases approved through Oct. 1, 2013 will help preserve its satisfactory financial position over the medium term.

A change in the system's fuel contracts has enabled management to lower rates by 24% from a year ago, which has improved system affordability in a service area that has been notably affected by the economic recession. The system changed its all-requirements contract with FMPA to a fixed contract rate of delivery on Jan. 1, 2010. On the same date, the system entered into a 20-year supplemental wholesale agreement with OUC. These changes have reportedly enabled the system to realize efficiencies with its own generating units, as well as a more favorable fuel mix in OUC; OUC dispatches the city's generating facilities for more economically advantageous periods and satisfies the full extent of its additional energy and capacity requirements. Current rates are now near the bottom third of Florida versus nearly the highest in the state a year ago. However, rates are still approximately 30% above neighboring Florida Power & Light (FP&L), which has been a source of considerable political tension.

A possible sale of the city's electric system to FP&L has been a recent fixture of local media reports. However, management notes that it is too soon to provide any clarity on the topic and that no timelines for doing so are available. Fitch will monitor the events surrounding the possible sale, as well as the system's ability to preserve its sound financial position during this uncertain period. The 2008 bond resolution outlines bondholder protections in the event of a sale of the system. In addition, the city maintains 62% equity in the utility as of fiscal 2009, which should offset concerns about sale proceeds sufficiently covering outstanding indebtedness.

The City of Vero Beach is located 90 miles north of Palm Beach on the east coast of Florida. The city's retail electric system serves nearly 34,000 customers in a 40 square mile area that extends beyond city limits. Fiscal 2009 electric sales totaled 710,955 MWh, a 4% decline from fiscal 2008 owing largely to the economic recession. Area income levels are average. However, unemployment rates and foreclosures are elevated, which could ultimately cause financial pressure on the system. There is no customer concentration.

Additional information is available at www.fitchratings.com.

In addition to the sources of information identified in the report 'Revenue-Supported Rating Criteria', this action was additionally informed by CreditScope and LoanPerformance, Inc.

Related Research:
'Revenue-Supported Rating Criteria', dated Aug. 16, 2010
'Public Power Rating Guidelines', dated June 11, 2009

For information on Build America Bonds, visit www.fitchratings.com/BABs.

Related Research:
Revenue-Supported Rating Criteria
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=548606
Public Power Rating Guidelines
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=447150

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