OREANDA-NEWS. Fitch Ratings has affirmed the 'A+' rating assigned to the following Vero Beach, FL revenue bonds:

--$32.3 million electric refunding revenue bonds, series 2003A.

The Rating Outlook is Stable.


The bonds are secured by a first lien on net revenues of the city's electric system.


SMALL ELECTRIC UTILITY SYSTEM: Vero Beach's electric utility system provides retail distribution service to a relatively small service territory located on the east coast of Florida. The customer base is overwhelmingly residential, resulting in good diversity in energy sales and related revenues. The local economy is limited but stable, and wealth indicators vary considerably throughout the service area.

ADEQUATE POWER SUPPLY: The city's electric utility system now exists as a pure distribution system following the recent decommissioning of its lone generating plant. Wholesale contracts with Florida Municipal Power Agency (FMPA) and the Orlando Utilities Commission (revenue bonds rated 'AA'/Stable) provide a stable and reliable power supply that meets the entirety of the city's needs.

SOLID FINANCIAL METRICS: Financial performance has steadily improved over the prior four fiscal years, leaving cash flow and liquidity metrics better aligned with rating category medians. The system ended fiscal 2015 with Fitch-calculated debt service coverage of 3.07x and 102 days cash on hand (DCOH). Coverage after satisfying an annual transfer made to the city's general fund was also strong at 2.05x. Similar financial results are incorporated in the system's current financial forecast ending in 2020.

RATES REMAIN ELEVATED: The utility's electric rates remain slightly higher compared to the statewide average for municipally owned utility systems, despite multiple rate reductions in recent years, driven by lower purchased power costs. The above-average cost of power and long-standing resistance to the system's rates from a portion of the rate base have the potential to limit rate increases if needed in the future.

FAVORABLE DEBT PROFILE: Leverage ratios compare well to medians for the rating category and should improve going forward as the system continues to fund the vast majority of its capital needs from cash flow.


POTENTIAL SALE OF CUSTOMER BASE: Recent efforts on the part of Florida Power & Light Company (FPL) to purchase the right to serve nearly 3,000 electric customers of Vero Beach's electric utility could have credit rating implications for Vero Beach depending on the terms of the sale, should it occur, and how the city employs any sale proceeds. The customers in question account for nearly 9% of Vero Beach's total customer base and make up the most affluent portion of the service territory.


The city's electric utility serves nearly 35,000 customers spanning a 40-square mile area midway down Florida's east coast. The electric utility is an enterprise fund of the City of Vero Beach (not rated by Fitch), providing distribution service on a retail basis.


The city's power supply continues to be sufficient to meet its current and future load requirements, despite periodic changes over the years in power supply strategy. Leading up to 2010 the city had been a participant in FMPA's all-requirements project, which effectively satisfied the entirety of its power supply needs.

However, beginning in 2010, the city exited the all-requirements project and instead entered into a 20-year load following its power supply contract with the Orlando Utilities Commission (OUC; revenue bonds rated 'AA'/Stable). The contract has, on balance, provided roughly two-thirds of the city's energy requirements, supplementing its capacity derived from entitlement shares in FMPA's Stanton I, Stanton II and St. Lucie projects (project revenue bonds rated 'A+', 'A+' and 'A'/Stable, respectively).

The city shifted its power supply strategy again in 2015 as it negotiated an amendment to its OUC contract and fully decommissioned its lone generating plant, thereby making the electric utility a pure distribution system. The decision to decommission its generation plant reportedly stemmed from the age of the units and associated level of capital investment needed to keep the plant in good repair. The OUC contract was amended in an effort to shorten the duration of the contract from 2030 to 2023 and to gain more favorable pricing terms.


Financial performance has steadily improved after reaching a low point in fiscal 2011. Fitch-calculated debt service coverage has increased in each of the prior four fiscal years, reaching 3.07x in fiscal 2015. Coverage of full obligations, including adjusted purchased power obligations and an annual transfer made to the city, has trended similarly, but at 1.23x in fiscal 2015, remains slightly below the median ratio of 1.40x.

The city's goal of maintaining no less than 90 days of unrestricted cash and investments on hand continues to drive budget adoption and the establishment of rates. Notwithstanding fiscal 2013 when $3.5 million of cash reserves were used to retire an outstanding loan obligation, DCOH has been consistently above 90 days since 2012. Fitch considers the 90-day target to be a sufficient amount of liquidity on hand given the utility's ability and willingness to adjust rates on a quarterly basis in order to recover costs.

Annual transfers to the city are budgeted to equal 6% of projected gross revenues from electric sales, slightly higher than the median percentage (5.1%) for similarly rated systems. Fitch notes the transfer is made, pursuant to the revenue bond indenture, after satisfying annual operating and maintenance costs and debt service obligations.

Financial projections show debt service coverage remaining strong at no less than 2.75x through 2020, and at an annual average of 1.48x after including the annual transfer to the city's general fund. The forecast, which was completed as part of a recent rate study, shows revenue sufficient to fund all projected obligations, including capex, while still maintaining cash reserves equal to no less than 90 days of operating costs.


Approximately 38% of customers served are located within the city's boundaries. Slightly more than half (53.6%) reside in unincorporated portions of the county that border the city, while the balance (8.6%) reside in nearby Indian River Shores (the town).

Indian River Shores, despite its high wealth levels, has continued its efforts to cease being served by Vero Beach, FL, because of the utility's high rates. The town has publicly requested FPL be its alternative electric provider, citing its consistently lower rates as the primary reason. Attempts by Indian River County on behalf of the town have included making multiple requests to the state's public service commission (PSC) to alter the existing service territory once the franchise agreement with the county and Vero Beach expires in 2017. The PSC ruled in 2015 against the town's request, prompting the matter to ultimately go before the state Supreme Court, which effectively affirmed the PSC's initial ruling.

The matter remains ongoing, as FPL and Indian River Shores recently put forth an offer to purchase the Vero Beach customer base that lies within Indian River Shores. The offer, which includes $30 million from FPL and $3 million from the town, was voted down this week by the Vero Beach city council reportedly because the offer falls well short of what the city believes would sufficiently offset remaining fixed costs, including outstanding bonds. FPL has stated that the offer will remain in place until August 25.

Until fully resolved, Vero Beach's sale of the wealthiest portion of its customer base remains a credit concern that will continue to be monitored. The transaction, should it occur, and the city's subsequent plan for using the proceeds from the sale will determine the extent to which Fitch takes any rating action. If proceeds are transferred to the city or returned to customers in the form of lower rates, downward rating pressure could materialize. Alternatively, using proceeds to reduce debt and/or improve liquidity could result in upward rating momentum.


The utility's five-year capital improvement program ending in 2021 appears manageable, sized at approximately $27.2 million. The vast majority of planned spending will shift from power production to improving transmission and distribution assets given the retirement of the city's generating units. Annual capex, on average, should double spending levels realized in recent years.

Funding sources will come almost entirely from excess cash flow, which should allow the system's already low debt levels to continue to improve. The city expects to execute a private loan in support of the capital plan, although the borrowing is anticipated to be modest at about $5 million.

Leverage metrics compare well to median ratios for similarly rated systems. The ratio of debt-to-funds available for debt service (FADS) improved to 1.9x in fiscal 2015, as did debt on a per customer basis, now measuring well below $1,000. Fitch's median ratios for the rating category, by comparison, are significantly higher at 4.9x and nearly $3,000. Adjusted debt-to-FADS, which adjusts for purchased power obligations, also ranks below the median ratio at 5.2x compared to 6.0x. Equity has continued increasing, growing to nearly 77% of capitalization in fiscal 2015.


The city's electric utility serves a small but relatively stable and decidedly diverse service territory. Residential customers dominate the customer base and consistently account for half of aggregate energy sales. Small commercial customers comprise the vast majority of the balance, leaving just 2% of remaining sales attributable to industrial accounts. Very little customer concentration exists as a result, as less than 12% of energy sales stemmed from the system's 10 largest end users.