Fitch Rates West Palm Beach, Florida's $100MM Utility System Revs 'AA-'; Outlook Negative

TAMPA, Fla.--(BUSINESS WIRE)--Fitch Ratings has assigned an underlying long-term 'AA-' rating to the City of West Palm Beach, FL's $100.3 million utility system variable rate revenue bonds, series 2008C. The bonds are scheduled to close on July 23rd and are secured by a pledge of net revenues of the city's water, sewer and stormwater system. The bonds are expected to be insured by Assured Guaranty, whose insurer financial strength is rated 'AAA' by Fitch. Prior to closing, Fitch will assign a short-term rating to the bonds based on the liquidity support provided by Dexia Credit Local in the form of a standby bond purchase agreement. The Rating Outlook is Negative.

The 'AA-' rating reflects the strength of the service area, the system's adequate debt service coverage and financial position, and sufficient water withdrawal and treatment capacity. Offsetting risks include the system's high existing leverage ratios which will more than double with $228 million in additional debt planned by fiscal year (FY) 2011. Although the five-year capital improvement plan (CIP) is larger than was anticipated one year ago, identified system resources appear to be sufficient to fund the infrastructure needs and maintain adequate liquidity and coverage ratios.

The Palm Beach County Health Department identified several deficiencies with the water utility over the past year. Specifically, lead levels exceeded those permitted and E Coli and other coliform were present in the water supply. Although both issues have been resolved, the resulting study and recommendations by an independent consultant resulted in the identification of sizeable capital needs to ensure water quality reliability, most of which were not anticipated. The FY 2008-2012 CIP totals $264 million, with 79% earmarked for water system improvements. The vast majority of the plan is expected to be debt funded, including the current offering and an additional $127 million planned in 2011.

Financial operations, while sound, have been pressured by declining sales from drought conditions as well as unexpected capital outlays. Fiscal 2007 results show projected maximum annual debt service (MADS) coverage on outstanding parity debt, including impact fees, of 2.1 times (x). Coverage is expected to decline with the addition of debt planned in the CIP although additional rate revenue provides a substantial cushion; coverage of MADS drops to 1.3x in FY 2008 but increases to 1.8x by fiscal 2011 after incorporating all revenue bonds planned over the five year planning timeframe.

Although the city targets maintaining the general reserve account at 15% of operating revenues, it is expected to be funded at approximately 5% at the close of the fiscal 2008. Increased rates were approved by the City Commission earlier this year, providing for a rapid escalation in customer charges over the next five years, including 48% and 28% increases effective June 1, 2008 for the water and wastewater systems, respectively. City officials expect the approved rate structure to increase the general reserve account to approximately 20% by FY 2012. The flow of funds is a closed-loop structure, whereby all excess revenues after debt service and funding of the reserve account and renewal and replacement account flow to the general reserve account.

The city's water supply is drawn from a series of wetlands in the western portion of the city, as well as a groundwater well-field that draws from the Floridan Aquifer and is used as a standby source. Water and wastewater treatment capacity is sufficient to meet customer demands. Located along the intercoastal waterway in Palm Beach County, West Palm Beach (GO bonds rated 'AA' by Fitch) offers more affordable living opportunities than other parts of this wealthy county (county's GO bonds rated 'AAA' by Fitch). Development in the western portion of the city, as well as the addition of new housing units in the city's downtown, has resulted in strong population growth, increasing an estimated 20% since the 2000 census and reaching almost 99,000 in 2006. The unemployment rate is up from 3.3% in 2006 to 4.0% in 2007 but remains below the national average and on par with the state average. Per capita money income levels are 16% higher than both the state and national rates but remain below the county's very high levels.

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Fitch Ratings
Kelly McGary, 813-223-6600 (Tampa)
Christopher Hessenthaler, 212-908-0773 (New York)
Christopher Kimble, 212-908-0226
(Media Relations, New York)