Fitch Rates Brevard County, FL Revenue Bonds 'AA-'; Outlook Stable

AUSTIN, Texas--()--Fitch Ratings has assigned an 'AA-' rating to the following Brevard County, FL (the county) revenue bonds:

--$25.5 million water and wastewater utility revenue bonds series 2014.

The bonds will be sold via competitive bid on or around September 23. Proceeds of the bonds will be used to fund various capital improvement projects throughout the system.

The Rating Outlook is Stable.

SECURITY

The bonds are secured and payable from a first lien on the net revenues of the water and wastewater system (the system or utility).

KEY RATING DRIVERS

SOUND FINANCIAL PERFORMANCE: The utility has no debt outstanding; however, projections which include adopted rate hikes and planned debt issuances show solid debt service coverage (DSC). Liquidity for fiscal 2013 is strong at 268 days of cash on hand, but this is projected to decline upon implementation of the new capital improvement plan (CIP).

DEFERRED SYSTEM MAINTENANCE: The age of plant is high at 35 years despite an absence of regulatory issues. As a result, the CIP is focused on major rehabilitation as well as expansion of a wastewater treatment plant that is near capacity.

MODEST DEBT LEVELS: Debt ratios are expected to remain modest even with the planned debt issuance in the near term. The county plans to fund the modest capital needs beyond the current five-year CIP with rate revenue and reserves.

POTENTIAL RATE PRESSURE: The system serves non-contiguous areas resulting in higher operating costs than regional municipalities. Adopted rate hikes may result in combined utility costs at Fitch's affordability threshold of 2.0% of MHI by fiscal 2018, somewhat limiting future rate flexibility.

RATING SENSITIVITIES

CONTINUED HEALTHY FINANCIAL METRICS: Maintenance of strong all-in DSC and solid liquidity are key credit considerations. Low leverage could result in upward rating pressure over time.

CREDIT PROFILE

Brevard County (Fitch implied 'AA' general obligation rating) occupies approximately 1,557 square miles and is located on the central east coast of Florida. County population was estimated at 548,424 in 2013 and is projected to grow at roughly 1% annually. The utility is charged with serving all the unincorporated areas of the county; however, 98% of the system's sewer connections are in the municipalities of Cocoa and Melbourne (utility system revenue bonds rated 'AA-', Stable Outlook).

The system is composed of several distinct service areas located throughout the county. The system serves about 3,000 water connections in the northern unincorporated portion of the county and about 52,000 wastewater connections in the north, central, and southern areas of the county.

MODEST DEBT PROFILE BUT MAJOR REHAB NEEDS

The system was originally established in 1968 when the county acquired 11 separate wastewater systems and one water system from private investors. Since that time, the county has made various additions to the system, the most substantial of which resulted in a consolidation of the individual wastewater systems into a regional utility system in 1984. This was done to streamline operations and maintenance as well as to improve facility performance and reduce operating costs. The system now includes one water treatment plant and distribution system and five wastewater treatment plants and distribution systems. The bonds issued to finance the consolidation and improvements were defeased in fiscal 2011 and the system currently has no debt outstanding.

The system's 2014-2019 CIP totals $132 million or a modest $2,416 per connection. The 35-year average age of the plant is considered very high, indicating deferred system maintenance. A substantial portion of the CIP is devoted to rehabilitation of all of the treatment plants and distribution lines. In addition, the CIP includes a needed expansion to one of the wastewater treatment plants. The CIP will be 58% debt funded, including the current issuance and an additional $50 million in parity debt to be issued in 2016. Beyond 2019, the CIP is roughly $6.5 million annually for five years, which the county plans to fund with recurring revenues.

ADEQUATE FINANCIALS AND STRONG FORECAST

While the prior senior lien obligations were outstanding, system DSC was a somewhat low 1.2x. Fiscal 2013 year-end liquidity was strong at 268 days of cash on hand.

The county prepared a thorough financial feasibility and engineering study in connection with the adopted CIP and the current bond issuance. The CIP appears affordable along with the already adopted rate hikes and including the proposed $50 million bond sale planned for fiscal 2016. DSC on the projected debt is expected to exceed 2.5x through 2019. Beyond the forecast period, the county does not intend to issue additional debt and plans to continue implementing smaller annual rate hikes tied to an inflationary index. As the county implements the CIP, it plans to utilize surplus revenues and cash on hand for system improvements, reducing the cash position to a still adequate but much lower 100 days.

COLLECTIONS AND RATE HIKES

For fiscal 2013, the system had 2,877 water connections and 51,821 sewer connections. About 98% of the sewer connections are served by the municipalities of Cocoa (56.5%) and Melbourne (41%). These make up roughly 98% of total sewer customers. The billing and collections for these customers are done by the respective cities (that provide the water service) through formal agreements. These agreements include stipulations for water disconnect in the event a customer pays only a part of the bill. The county pays the cities a fee for the billing service. System-wide collection rates are strong.

Combined rates and charges total $67 a month, or 1.6% of MHI. This includes a 9% rate increase implemented for fiscal 2014. The county has adopted multiple rate hikes through fiscal 2018 that are projected to bring rates to roughly 2% of MHI, somewhat limiting future rate flexibility. Prior to the 2014 rate increase, rates remained unchanged since 2008. The adopted rate increase for 2015 is 6% followed by 5% annual rate hikes through 2018.

BOND COVENANTS

The new debt is being issued under a new master indenture with somewhat lax covenants featuring a 1.1x rate covenant and same additional bonds test. The county does not plan to maintain a debt service reserve fund or surety policy. However, the closed loop in the flow of funds that enables the utility to preserve excess revenues for reinvestment into the system somewhat mitigates these weaknesses. The county will maintain a repair and replacement fund with $1.5 million funded with currently available reserves.

ECONOMY

The area economy was hit by the recession as well as the termination of the space shuttle program. Despite the hardships, the county's highly educated workforce has spurred the development of new and/or expanded technology-based enterprises reflected in recent job growth. Growth in the tourist sector also contributed to an uptick in jobs. County unemployment rates have generally been slightly higher that the state and U.S. overall but improved materially year over year to 6.7% in June 2014 (state 6.2%, U.S. 6.3%) from 8.4% in June 2013. County population growth has been very modest and projected to remain modest. Wealth levels as measured by MHI are generally better than the state but lower than the U.S. Poverty rate is lower than both the state and the U.S.

Additional information is available at 'www.fitchratings.com'.

In addition to the sources of information identified in the Revenue-Supported Rating Criteria, this action was additionally informed by information from CreditScope.

Applicable Criteria and Related Research:

--'Revenue-Supported Rating Criteria' (June 2013)

--'U.S. Water and Sewer Revenue Bond Rating Criteria' (July 2013)

--'2014 Water and Sewer Medians' (December 2013)

--'2014 Outlook: Water and Sewer Sector' (December 2013)

Applicable Criteria and Related Research:

Revenue-Supported Rating Criteria

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=750012

2014 Outlook: Water and Sewer Sector

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=724357

2014 Water and Sewer Medians

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=724358

U.S. Water and Sewer Revenue Bond Rating Criteria

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=715275

Additional Disclosure

Solicitation Status

http://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=860694

ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: HTTP://FITCHRATINGS.COM/UNDERSTANDINGCREDITRATINGS. IN ADDITION, RATING DEFINITIONS AND THE TERMS OF USE OF SUCH RATINGS ARE AVAILABLE ON THE AGENCY'S PUBLIC WEBSITE 'WWW.FITCHRATINGS.COM'. PUBLISHED RATINGS, CRITERIA AND METHODOLOGIES ARE AVAILABLE FROM THIS SITE AT ALL TIMES. FITCH'S CODE OF CONDUCT, CONFIDENTIALITY, CONFLICTS OF INTEREST, AFFILIATE FIREWALL, COMPLIANCE AND OTHER RELEVANT POLICIES AND PROCEDURES ARE ALSO AVAILABLE FROM THE 'CODE OF CONDUCT' SECTION OF THIS SITE. FITCH MAY HAVE PROVIDED ANOTHER PERMISSIBLE SERVICE TO THE RATED ENTITY OR ITS RELATED THIRD PARTIES. DETAILS OF THIS SERVICE FOR RATINGS FOR WHICH THE LEAD ANALYST IS BASED IN AN EU-REGISTERED ENTITY CAN BE FOUND ON THE ENTITY SUMMARY PAGE FOR THIS ISSUER ON THE FITCH WEBSITE.

Contacts

Fitch Ratings
Primary Analyst
Gabriela Gutierrez, CPA
Director
+1 512-215-3731
Fitch Ratings, Inc.
111 Congress, Suite 2010
Austin, TX 78701
or
Secondary Analyst
Eva Rippeteau
Associate Director
+1 212-908-1105
or
Committee Chairperson
Karen Ribble
Senior Director
+1 415-732-5611
or
Media Relations, New York
Elizabeth Fogerty, +1 212-908-0526
elizabeth.fogerty@fitchratings.com

Contacts

Fitch Ratings
Primary Analyst
Gabriela Gutierrez, CPA
Director
+1 512-215-3731
Fitch Ratings, Inc.
111 Congress, Suite 2010
Austin, TX 78701
or
Secondary Analyst
Eva Rippeteau
Associate Director
+1 212-908-1105
or
Committee Chairperson
Karen Ribble
Senior Director
+1 415-732-5611
or
Media Relations, New York
Elizabeth Fogerty, +1 212-908-0526
elizabeth.fogerty@fitchratings.com