AUSTIN, Texas--(BUSINESS WIRE)--Fitch Ratings affirms the 'AA-' rating on the following Melbourne (the city), FL water and sewer revenue bonds:
--$24.4 million outstanding waterworks and sewer system revenue bonds;
--$62.3 million outstanding waterworks and sewer system revenue refunding bonds.
The Rating Outlook is Stable.
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
SOLID FINANCIAL PERFORMANCE: Debt service coverage (DSC) registered a healthy 2.4x on an all-in basis for fiscal 2013 and liquidity of 381 days cash on hand remains near 'AA' category median levels for fiscal year 2013. Fitch projects all-in DSC will decline to a still adequate 1.6x in fiscal 2016 due to an increase in debt service carrying costs. Due to city plans to cash fund the majority of the next five years of capital projects, liquidity figures will also see some contraction.
MODERATE DEBT LEVELS: Debt ratios are moderate overall, although debt per capita and debt to net plant is somewhat elevated. The debt per capita ratio is expected to decline due to small scale future borrowings and rapid amortization.
LIMITED RATE FLEXIBILITY: Rates have been raised steadily to enhance financial margins, however, they are now approaching Fitch's affordability threshold and rate flexibility might be pressured going forward.
MANAGEABLE CAPITAL COSTS: System capital needs are down from prior years and 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 rate covenant and additional bonds test.
STABILITY EXPECTED: The rating is sensitive to shifts in various credit fundamentals including financial and operating performance and capital and debt management. The Stable Outlook reflects Fitch's belief that these changes are unlikely over the outlook period.
Melbourne is located in southern Brevard County (sewer revenue bonds rated 'AA-' by Fitch) 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. City unemployment for July 2014 of 6.8% is slightly above than the state (6.6%) and nation (6.5%). Wealth levels have historically been and remain low at 89% and 80% of the state and national levels, respectively.
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 Floridan 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.
SOUND FINANCIAL METRICS
Financial performance has trended upward for the past several years after reaching low levels in fiscal 2009. Total DSC for fiscal 2013 registered 2.4x, showing substantial improvement from 1.1x DSC in fiscal 2009. Unaudited fiscal 2014 financial results point to similarly strong DSC. The system has completed several debt refinancings over the course of the last two years reducing debt carrying costs for fiscal years 2014 and 2015. Debt service costs start to climb in fiscal 2016 and as a result, total DSC will slip to 1.6x which is still adequate for the rating level. Fitch believes management's forecasts and the related assumptions are sound and generally conservative in nature. The city reports higher revenue collections, lower debt service costs and reduced operating expenditures. As a result, the city's audited financial results have surpassed its forecasts for the last two fiscal years.
Liquidity remains healthy at 381 days of cash on hand (DCOH) for fiscal 2013 and aligns closely to the 'AA' median of 398 DCOH. This is a notable increase from just 137 days in fiscal 2009. The system anticipates cash funding a majority of capital projects over the next five years, which could result in weaker cash balances closer to 200 days through at least the 2017 forecast period. This contraction of liquidity will place great emphasis on management achieving continued stable financial operations.
CONSISTENT RATE INCREASES SUPPORT FINANCIAL PERFORMANCE
The city historically has adopted multiple year rate packages to provide for moderate annual rate increases. The city council amended the rate ordinance in fiscal 2013 holding rates flat to provide some rate relief to customers. The current adopted rate package includes 5.5% increases to water and sewer rates through 2017. In response to increasing rates customers have conserved usage, with average monthly residential usage reported at a low 4,000 gallons. This reduced consumption level is much lower than the industry average of 10,000 gallons a month and equates to a lower bill of $65.50 or 1.9% of MHI. Fitch views positively the implementation of multi-year rate packages; however, as rates increase and monthly bills surpass Fitch's 2% MHI affordability threshold, rate flexibility could become more limited in the future.
MODERATE DEBT PROFILE ON THE DECLINE
The system's fiscal 2015-2019 capital improvement plan (CIP) totals $77 million. Prior CIPs were primarily debt financed; however, management has shifted focus and is now largely cash financing capital improvements with a small debt issuance anticipated in the 2017 timeframe. The system's debt profile includes senior lien revenue bonds and state revolving loans, which are subordinate to the senior lien revenues bonds. Overall, system debt levels remain moderately high at $790 on a per capita basis and 81% debt to net plant. Given the city's rapid amortization at over 90% in 20 years and minimal planned debt financings, debt ratios are expected to decrease in 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 improvements 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 18 years, notably higher than the 14 years of similarly rated credits, indicating deferred system maintenance.
Additional information is available at 'www.fitchratings.com'
In addition to the sources of information identified in Fitch's U.S. Municipal Revenue-Supported Rating Criteria, this action was additionally informed by information from Creditscope.
Applicable Criteria and Related Research:
--'Revenue-Supported Rating Criteria' (June 2014);
--'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
U.S. Water and Sewer Revenue Bond Rating Criteria
2014 Water and Sewer Medians
2014 Outlook: Water and Sewer Sector