Fitch Affirms Brevard County, FL Water and Sewer Revenue Bonds at 'AA-'
--$25.5 million water and wastewater utility revenue bonds series 2014.
The Rating Outlook is Stable.
The bonds are secured and payable from a first lien on the net revenues of the water and wastewater system (the system or utility).
KEY RATING DRIVERS
SOUND FINANCIAL PERFORMANCE: Financial performance has been strong, meeting prior projections and expected to remain strong even after planned issuance of additional debt in the near term. Liquidity for fiscal 2015 is very strong at 548 days of cash on hand, but this is projected to decline with ongoing capital improvement plan (CIP) spending.
DEFERRED SYSTEM MAINTENANCE: The age of plant is high at 35 years despite an absence of regulatory issues. As a result, the CIP is focused on major rehabilitation as well as expansion of a wastewater treatment plant that is near capacity.
MODEST DEBT LEVELS: Debt ratios are expected to remain modest even with the planned debt issuance in the near term. The county plans to fund its modest capital needs beyond the current five-year CIP with rate revenue and reserves.
POTENTIAL RATE PRESSURE: The system serves non-contiguous areas resulting in higher operating costs than regional municipalities. Adopted rate increases may result in combined utility costs at Fitch's affordability threshold of 2% of median household income (MHI) by fiscal 2018, somewhat limiting future rate flexibility.
CONTINUED HEALTHY FINANCIAL METRICS: Maintenance of strong all-in debt service coverage (DSC) and solid liquidity are key credit considerations. Low leverage could result in upward rating pressure over time.
Brevard County (Fitch implied 'AA' general obligation rating) occupies approximately 1,557 square miles and is located on the central east coast of Florida. County population was estimated at 568,088 in 2015 and is projected to grow at roughly 1% annually. The utility is charged with serving all the unincorporated areas of the county. Serving 3,182 water and 53,630 wastewater connections, the system is composed of several distinct service areas located throughout the county.
MODEST DEBT PROFILE BUT MAJOR REHAB NEEDS
The system was originally established in 1968 when the county acquired 11 separate wastewater systems and one water system from private investors. Since that time, the county has made various additions to the system, the most substantial of which resulted in a consolidation of the individual wastewater systems into a regional utility system in 1984. This was done to streamline operations and maintenance as well as to improve facility performance and reduce operating costs. The system now includes one water treatment plant and distribution system and five wastewater treatment plants and distribution systems. The average age of plant is 35 years, considered very high, and indicating deferred system maintenance.
The bonds issued to finance the consolidation and improvements were defeased in fiscal 2011 and prior to issuance of the series 2014 bonds, the system had no debt. Current outstanding debt to net plant assets is favorable at 21%. The system's 2016-2020 CIP totals $156 million, with most projects planned in the first three years. A substantial portion of the CIP is devoted to rehabilitation of all of the treatment plants and distribution lines. In addition, the CIP includes an expansion to one of the wastewater treatment plants. The CIP will be 38% debt funded, including remaining proceeds from the series 2014 bonds and approximately $41.5 million in state revolving fund loans subordinate to the bonds. Capital needs beyond 2018 are projected to be manageable at an estimated $8 million annually, which the county plans to fund with recurring revenues.
ADEQUATE FINANCIALS AND STRONG FORECAST
The county prepared a financial feasibility and engineering study in connection with the adopted CIP and the series 2014 bond issuance. The CIP appears affordable along with the already adopted rate increases. The forecast included up to $50 million in new debt. Financial results in fiscal 2015 exceeded projections with very high DSC at 9.5x and liquidity at 548 days. These results included two rate increases in 2014 and 2015 implemented to embark on the current CIP.
Similar results are expected in fiscal 2016 due to the delay in debt issuance from what was originally forecast. Including the additional debt, all-in DSC on the projected debt is still expected to be very strong at more than 2.5x through 2019. Beyond the forecast period, the county does not intend to issue additional debt and plans to continue implementing smaller annual rate increases tied to an inflationary index. As the county implements the CIP, it plans to utilize surplus revenues and cash on hand for system improvements, reducing the cash position to a still adequate but much lower 100 days.
COLLECTIONS AND RATE INCREASES
About 98% of the sewer connections are served by the municipalities of Cocoa and Melbourne (utility system revenue bonds rated 'AA', Stable Outlook). These make up roughly 98% of total sewer customers. The billing and collections for these customers are done by the respective cities (that provide the water service) through formal agreements. These agreements include stipulations for water disconnect in the event a customer pays only a part of the bill. The county pays the cities a fee for the billing service. System-wide collection rates are strong.
In conjunction with the 2014 debt issuance and implementation of the CIP, the county adopted multiple rate increases through fiscal 2018 that are projected to bring rates to roughly 2% of MHI, somewhat limiting future rate flexibility. Including 9% and 6% rate increases implemented for fiscal years 2014 and 2015, respectively, combined rates total roughly $75 a month, or 1.9% of MHI. Prior to the 2014 rate increase, rates remained unchanged since 2008.
The area economy was hit by the 2008 recession as well as the termination of the space shuttle program in 2011. Despite the hardships, the county's highly educated workforce has spurred the development of new and/or expanded technology-based enterprises reflected in recent job growth. Growth in the tourist sector also contributed to an uptick in jobs. County unemployment rates have generally been slightly higher that the state and U. S. overall but continues to improve year over year to 5.2% in June 2016, (state 4.9%, U. S. 5.1%) from 6% in June 2015. County population growth has been very modest and projected to remain modest. Wealth levels as measured by MHI are generally better than the state but lower than the U. S. Poverty rate is lower than both the state and the U. S.