NEW YORK--(BUSINESS WIRE)--Fitch Ratings affirms its 'AAA' rating on the following Indian River County, FL (the county) revenue bonds:
--$21.3 million water and sewer system revenue refunding bonds, series 2009.
The Rating Outlook is Stable.
SECURITY
The bonds are supported by the net revenues of the county's water and sewer system (the system).
KEY RATING DRIVERS
EXCELLENT FINANCIAL PROFILE: The system has produced over 2.0x debt service coverage (DSC) for the past five years and has maintained excellent liquidity. Unaudited fiscal 2014 results show 2.3x DSC and nearly $36 million in unrestricted available cash, equating to approximately 830 days cash on hand.
MINIMAL CAPITAL NEEDS, LOW DEBT: The system's capital improvement program (CIP) is limited and primarily addresses renewal and replacement (R&R) projects. Debt levels are low and are expected to decline further following the county's payment of existing and callable senior lien debt with cash in mid- calendar year 2015.
CONSERVATIVE AND ATTENTIVE MANAGEMENT: The management team has many years of service and familiarity with the system and in the field and is conservative in their financial projections and budgeting practices.
AFFORDABLE AND FLEXIBLE RATE STRUCTURE: The system has not increased rates since 1999 due to low population growth and wide operating margins. Though it has no plans to do so in the foreseeable future, the system is authorized to impose consumer price index adjustments if necessary.
RATING SENSITIVITIES
RATING STABILITY EXPECTED: The rating is sensitive to shifts in fundamental credit characteristics, including maintaining strong financial metrics and ensuring adequate capital investment. The Stable Outlook reflects Fitch's expectation that such shifts are unlikely.
CREDIT PROFILE
Indian River County (implied unlimited tax general obligation rating of 'AAA' by Fitch) is located on Florida's central Atlantic coast about 86 miles southeast of the city of Orlando. The county covers nearly 500 square miles and has a population of nearly 144,000. The economy is supported by construction, manufacturing, health care, tourism, educational services, retail, and distribution.
STRONG CURRENT AND FUTURE FINANCIAL PROFILE
The system's financial performance has been historically solid, with above 2.0x DSC consistently since 2009 and 2.6x DSC in fiscal 2013. The county's conservative management maintains this positive coverage level as well as substantial cash reserves in an effort to guarantee available cash for unforeseen system needs. Unaudited coverage for fiscal 2014 is expected to be 2.6x and near 2.0x through fiscal 2019 according to a management-provided financial forecast. Based on historic performance and restrained capital and expenditure needs, Fitch expects that positive financial results will continue.
Liquidity is extremely strong, with the system ending fiscal 2013 with more than $43 million in unrestricted cash, equivalent to nearly 1,000 days of operating expenses on hand. Unaudited fiscal 2014 results show a decline in cash to roughly $36 million as the system cash-funded a portion of the Osprey Marsh capital project. The fiscal 2014 cash balance nonetheless yielded roughly two years' worth of cash available for operations.
LOW DEBT, MANAGEABLE CAPITAL NEEDS
The system's low debt profile is a key credit strength. Debt per customer is just $589 in fiscal 2013, well below average compared to other similarly rated systems. Debt to net plant was also low at just 21% for the same period, and debt amortization is well above average with 100% of outstanding bonds retired within 10 years. Management has indicated that it will spend roughly $14 million in available cash to redeem a portion of its outstanding callable debt in 2015, reducing its overall burden going forward by 38%. Cash projections even after this payment remain robust.
The county's modest four-year $13 million CIP will be funded equally by grants and existing cash. Historic capital spending since 2010 has been variable, with capital expenditures (CapEx) relative to the rate of annual depreciation averaging only 41% during that time. While Fitch views this level of CapEx as somewhat weak and possibly as an indicator of deferred maintenance, the system underwent substantial capital investment in 2008 to ensure long-term supply and capacity availability, and management has described the system's current and future capital needs as in R&R and growth accommodation stages, with several intermittent larger projects that are ably paid for with existing and growing cash. In addition, management restricts $3.5 million of cash annually solely for R&R so that resources are always available to meet capital needs as they may arise. Fitch is comfortable with the level of capital investment based on the system's abundance of available cash, ample debt-issuance capacity, and affordable rate structure that would allow for additional revenue growth if necessary.
LOW CUSTOMER CHARGES
The average residential customer bill of $60 for combined service assuming 7,000 gallons of use is affordable at 1.6% of median household income (MHI). Rates should stay competitive as the county has a very manageable capital program that is expected to be funded with cash and connection fees. Rates have not been raised since 1999, and though management has no plans to raise them in the financial forecast, it is entitled to do so per a rate resolution should the necessity arise.
ABUNDANT WATER SUPPLY AND SOUND INFRASTRUCTURE
The county's water and sewer system provides services to a mostly residential customer base of approximately 46,200 water, and 26,900 sewer accounts as of fiscal 2014. There is no customer concentration, and despite recent economic and housing market weakness, the county's mostly residential customer base has been relatively stable.
Water is supplied through various wells from the Floridan Aquifer, with treatment provided by one of two county-owned treatment facilities. The water treatment plants have a combined 20.1 million gallons per day (mgd) of treatment capacity, which is more than sufficient to meet the system's average daily demand in fiscal 2014 of 8.8 mgd. Water use is regulated by the St. Johns Water Management District through a consumptive use permit that expires in 2031. Management believes current supply sources will be capable of meeting the county's long-term demand through at least 2030.
Wastewater is treated at one of four regional treatment plants, with a combined current treatment capacity of 12.9 mgd. Average daily flow for the system is just 4.5 mgd, leaving plenty of treatment capacity to meet future growth. Effluent is treated to 100% re-use standards, and as a result the county does not expect to face significant capital or other regulatory compliance costs related to numeric nutrient mandates for effluent discharged into local surface water.
STABLE LOCAL ECONOMY
The county's economy continues to see improvement following the economic downturn, categorized by higher consumer spending and increases in tax rolls, sales tax and building permit revenues, and a decline in foreclosure rates. The county's unemployment rate has declined to 7.8% as of September 2014, yet remained higher than that of the state (6.1%) and nation (5.7%). Finally, the county's MHI is around 10% lower than the state and 20% below the national average. However, individual poverty rates are slightly more favorable than the state and nation.
Additional information is available at 'www.fitchratings.com'.
In addition to the sources of information identified in Fitch's 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 2012);
--'2015 Water and Sewer Medians' (December 2014);
--'2015 Outlook: Water and Sewer Sector' (December 2014).
Applicable Criteria and Related Research:
U.S. Water and Sewer Revenue Bond Rating Criteria
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=715275
2015 Water and Sewer Medians
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=818409
2015 Outlook: Water and Sewer Sector
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=818410
Revenue-Supported Rating Criteria
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=750012
Additional Disclosure
Solicitation Status
http://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=978630
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