AUSTIN, Texas--(BUSINESS WIRE)--Fitch Ratings affirms its ratings on the following Melbourne, FL (the city) bonds as part of its continuous surveillance effort:
--$48 million water and sewer refunding revenue bonds, series 2002B and 2007A at 'AA-';
--$47.9 million water and sewer refunding and improvement revenue bonds, series 2002A and 2004 at 'AA-;
--$26.6 million water and sewer improvement revenue bonds, series 2007B at 'AA-'.
The Rating Outlook is Stable.
SECURITY
The bonds are secured by a first lien pledge of net revenues of the system and impact fees. The bonds are also secured by a cash funded debt service reserve to the IRS standard.
KEY RATING DRIVERS
Below Average Coverage: Debt service coverage has declined in recent fiscal years, falling below the median average for similarly rated credits.
Moderate Capital Needs: Capital needs are moderate and primarily related to maintenance of facilities.
Low Debt Levels: Debt levels are slightly below average compared to the median category, and are anticipated to remain affordable, on per customer basis, even with planned bond issuance in the near term.
Limited Rate Flexibility: Utility rates are currently 1.8% of median household income (MHI) and are expected to reach Fitch's affordability threshold of 2% in the next two years.
Weak Legal Provisions: Legal provisions are considered below average with a 1.0 times (x) coverage rate covenant and additional bonds test.
CREDIT PROFILE
Financial performance rebounded for fiscal 2010 after a difficult fiscal 2009. Historically, coverage levels have been ample with coverage remaining over 1.95x prior to 2009. In fiscal 2009 coverage fell to 1.1x but rebounded to 1.6x in fiscal 2010. Management predicted a decline in coverage to 1.2x for 2009, but reduced sales due the economic recession and increased chemical expenses resulted in the lower than expected results. Prospectively, management forecasts coverage to gradually increase over the next five years, averaging 1.7x. The city will be completing a full five-year rate study in 2012. Liquidity remains strong at 200 days for fiscal 2010.
The city has successfully adopted multiple year rate packages which increased water and sewer rates by 5% annually. The rate package has allowed the city to gradually increase rates and maintain operations, while avoiding sharp rate increases. Fitch believes the city retains some rate flexibility, even though Melbourne rates are on the higher end of the spectrum when compared to neighboring communities. Fitch feels the adoption of multiple year rate increase provides a consistent and predictable revenue source.
The system's five-year capital improvement plan (CIP) totals $52 million or $631 per customer. A substantial portion of the plan is devoted to rehabilitation to the city's wastewater systems and continued improvement to the reclaimed water system. Management expects to finance the plan with $22 million in parity debt in fiscal 2014 and $13 million in state revolving fund (SRF) loans in 2013. Overall the city debt levels, $1,423 on a per customer basis, are below average when compared to the 'AA' median level of $1,502 per customer. Debt levels will rise in the near term due to the planned bond issuance, but should still remain at a comfortable level for the rating category. Bond covenants are characterized as weaker than average due to the 1.0x rate covenant and additional bonds test.
The system provides water service to roughly 150,000 people on a retail basis in and around the city, and wholesale service to the city of West Melbourne. Raw water from Lake Washington and three lower-Florida aquifer production wells provides ample supply, and the system has sufficient treatment capacity. The sewer system serves about 70,000 people, almost all within the city limits. The system's two wastewater treatment plants currently provide adequate capacity for secondary treatment.
Melbourne is located in southern Brevard County on the Atlantic coast. Employment is centered on high technology, medical and service industries and tourism. Agriculture is also an important part of the economy. Unemployment rates for June 2011 equaled 10.5%, higher than the national average, but below the state. Wealth levels remain low.
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', dated June 20, 2011;
--'Water and Sewer Revenue Bond Rating Guidelines', dated Aug. 10, 2011;
--'2011 Water and Wastewater Medians', dated Jan. 18, 2011;
--'2011 Outlook: Water and Wastewater Sector', dated Jan. 18, 2011.
Applicable Criteria and Related Research:
Revenue-Supported Rating Criteria
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=637130
U.S. Water and Sewer Revenue Bond Rating Criteria
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=647331
2011 Water and Wastewater Medians
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=593285
2011 Outlook: Water and Wastewater Sector
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=593286
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