Fitch Ratings has assigned an ‘AA-‘ rating to the following Melbourne, Florida (the city) bonds:
–Approximately $14.7 million water and sewer refunding revenue bonds, series 2013.
The bonds will be sold via negotiation the week of Jan. 14. Bond proceeds will be used to refund a portion of the city’s water and sewer refunding and improvement revenue bonds, series 2004 and pay the cost of issuance.
In addition, Fitch affirms the ratings on the city’s following bonds:
–Approximately $102.5 million in outstanding parity water and sewer revenue bonds (pre-refunding) at ‘AA-‘.
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
IMPROVED FINANCIAL PERFORMANCE: Debt service coverage (DSC) improved to 2.0x in fiscal 2011 and liquidity levels are also up after both fell to low levels in fiscal 2009.
MODERATE DEBT LEVELS: Debt ratios are moderate overall, although debt per capita and debt to net plant is somewhat elevated. Debt ratios are expected to increase slightly given planned borrowing to support capital improvements.
LIMITED RATE FLEXIBILITY: Rates have been raised steadily to enhance financial margins, although user costs have reached Fitch’s affordability threshold of 2% of median household income (MHI). Costs are also considered moderately high when compared to surrounding communities.
MANAGEABLE CAPITAL COSTS: System capital needs, which are down from prior years and which are in line with utility expenditures nationally, are 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.
SOUND FINANCIAL METRICS
Financial performance has trended upward for the past two years after reaching low levels in fiscal 2009. Total DSC for fiscal 2011 registered 2.0x, showing substantial improvement from 1.1x DSC in fiscal 2009. Unaudited financial results for fiscal 2012 show continued strong DSC of 2.0x on an all-in basis. Management’s financial forecast, which includes reasonable to somewhat conservative assumptions, projects total DSC at 1.6x for fiscal 2013, growing to 1.8x by fiscal 2016. Liquidity has also improved from previously low results, growing to 328 days of cash on hand for unaudited fiscal 2012 from just 137 days in fiscal 2009.
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 did amend the rate ordinance to keep rates flat for fiscal 2013 and provide users with some rate relief. However, 5.5% to 7% annual increases have been approved for fiscals 2014-2017. Fitch believes the city retains some rate flexibility, although Melbourne’s rates are on the higher end of the spectrum when compared to neighboring communities. User charges are also currently at Fitch’s 2% of MHI affordability benchmark.
RISING DEBT PROFILE TO ADDRESS SYSTEM MAINTENANCE
The system’s fiscal 2013-2017 capital improvement plan (CIP) totals $56 million. The CIP will be 75% debt funded, including $14 million in parity debt to be issued in 2014. The system has also applied for $13 million in state revolving fund loans.
This issuance will refund a portion of the series 2004 bonds for an annual savings of over $115,000 per year. Overall, system debt levels remain moderately high at $775 on a per capita basis and 76% debt to net plant. Given the city’s planned debt financing of the CIP, debt ratios are expected to increase further for 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 improvement 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 17 years, notably higher than the 12 years of similarly rated credits, indicating deferred system maintenance.
ADEQUATE SUPPLY AND TREATMENT CAPACITY
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.
Melbourne is located in southern Brevard County 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. Unemployment rates for October 2012 equaled 8.2%, higher than the national average (7.5%) but on par with the state. Wealth levels have historically been and remain low at 88% and 80% of the state and national levels, respectively.
In addition to the sources of information identified in the 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 Jun. 12, 2012;
–‘Water and Sewer Revenue Bond Rating Guidelines’, dated Aug. 3, 2012;
–‘2013 Water and Sewer Medians’, dated Dec. 5, 2012;
–‘2013 Outlook: Water and Sewer Sector’, dated Dec. 5, 2012.
Applicable Criteria and Related Research:
Revenue-Supported Rating Criteria
U.S. Water and Sewer Revenue Bond Rating Criteria
2013 Water and Sewer Medians
2013 Outlook: Water and Sewer Sector