Fitch Upgrades Martin County, FL’s $90MM Utility System Improvement Bonds to ‘AA’; Outlook Stable

NEW YORK--(BUSINESS WIRE)-- Fitch Ratings takes the following rating action on Martin County, FL as part of its continuous surveillance effort:

--Approximately $90 million, series 2009A&B, series 2003, series 2001, and series 1998 utility system improvement bonds upgraded to 'AA' from 'AA-'.

The Rating Outlook is Stable.

RATING RATIONALE:

--The rating upgrade reflects the system's moderate debt profile coupled with solid system capacity, limited additional capital needs, and sound financial flexibility demonstrated by strong liquidity, solid financial margins, and affordable rates.

--Recently implemented and modest rate increases include automatic annual inflation adjustments through 2015, which Fitch expects will allow the system to maintain solid financial metrics and provide sufficient cash-flow to meet its capital needs.

--The customer base is mostly residential and has demonstrated resiliency through the current economic downturn.

--Legal provisions are below average.

KEY RATING DRIVERS:

--The system is expected to maintain a strong financial profile with solid debt service coverage margins and strong liquidity.

--While not anticipated, a significant change in capital requirements could impact rates, the debt burden and financial results.

--Solid system capacity and ample available water resources will allow the system to absorb future customer growth while ensuring long-term capital needs remain manageable.

SECURITY:

The bonds are secured by the net revenues of the water and sewer system, including special assessments and capital facilities charges (also known as connection charges).

CREDIT SUMMARY:

Martin County (implied 'AA' GO rating by Fitch), is located on the southeastern coast of Florida, and provides water and wastewater services to approximately 86,000 residents in the unincorporated areas of the county. The city of Stuart, the largest incorporated municipality in the county, has its own municipally owned system. The service area is primarily residential and stable despite a rise in home foreclosures (and inactive accounts) that has been prevalent over the past few years. More recently, the trend in home foreclosures appears to be abating, and management expects annual customer growth of 1% as former accounts become active and new sales occur. Capacity for both water and sewer remains ample, which should keep capital demands and the debt burden manageable. The system spends several million annually on routine renewal and replacement, helping ensure the system remains in good repair.

The system's strong historical financial performance eased somewhat in fiscal 2008 as total revenues and connection fees declined from the previous year. However, financial margins remained strong and the system achieved over 2.0 times (x) debt service coverage from all revenues (1.74x without connection fees). In fiscal 2009, while operating revenues increased, total available revenues, which include connection fees and other non-operating income, declined once again, leading to a lower, but a still good debt service coverage ratio of 1.84x (1.74x without connection fees). Financial performance improved in fiscal 2010 due to passage of a rate increase in fiscal 2009, which marked the system's first rate increase since fiscal 2001. Annual debt service coverage improved to almost 2.1x in fiscal 2010 including connection fees, and 1.94x without such fees. Coupled with a policy to increase rates annually based on changes in consumer prices, Fitch expects the system to maintain its solid financial footing on a going forward basis. The system's annually updated pro forma financial summary shows debt service coverage ranging between 1.7x and 1.9x.

Liquidity for the system is strong with unrestricted cash providing 337 days cash on hand in fiscal 2010. When including renewal and replacement funds (R&R), liquidity improves to over 500 days. The strong cash position may decrease somewhat over the next few years as capital needs are expected to be cash funded, however expectations are for liquidity to remain sound.

Rates remain affordable despite having been increased over the past few years with the average monthly residential bill at $76 for 7,500 gallons of use. The passage of annual rate indexing is considered prudent and while rates will rise, annual increases will be capped at 2.5%. Rates were increased 2.5% for fiscal 2011, and are projected to increase by just 0.5% for fiscal 2012. The annual indexing will continue through fiscal 2015. Rate affordability provides management with financial flexibility as additional future rate increases can be implemented with little or no political obstacle.

The system's 10-year capital improvement plan totals a very manageable $27 million and is expected to be paid for by annual renewal and replacement (R&R) and growth-related capital facilities fees. No additional debt is planned over the next five years. The debt burden is moderate at about $1,700 per customer and $1,100 per capita. Debt to net plant assets is a reasonable 38%. With no plans for additional bonds, debt ratios should moderate.

Legal provisions are below average with an additional bonds test (ABT) requiring net revenues plus special assessments equals at least 1.10x maximum annual debt service (MADS), or MADS coverage must be 1.20x when including capital facilities fees. The rate covenant has similar requirements for annual debt service coverage. The debt service reserve is fully funded with various surety policies, applied pro rata, from Assured Guaranty, Ambac, and FGIC. Fitch does not rate any of the monoline bond insurance companies.

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

In addition to the sources of information identified in Fitch's 'U.S. Revenue-Supported Rating Criteria', dated Oct. 8, 2010, this action was additionally informed by information from IHS Global Insight.

Applicable Criteria and Related Research:

--'U.S. Revenue-Supported Rating Criteria', dated Oct. 8, 2010;

--'Water and Sewer Revenue Bond Rating Guidelines', dated Aug. 6, 2008;

--'2011 Water and Wastewater Medians', dated Jan. 18, 2011;

--'2011 Outlook: Water and Wastewater Sector', dated Jan. 18, 2011.

For information on Build America Bonds, visit 'www.fitchratings.com/BABs'.

Applicable Criteria and Related Research:

Revenue-Supported Rating Criteria

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=564565

Water and Sewer Revenue Bond Rating Guidelines

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=395918

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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Fitch, Inc.
One State Street Plaza
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Primary AnalystAndrew DeStefano, +1-212-908-0284
Director
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Associate Director
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Media RelationsCindy Stoller, +1-212-908-0526
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Source: Fitch Ratings