OREANDA-NEWS. Fitch Ratings has assigned an 'A+' rating to the following City of Riviera Beach Utility Special District (the district), FL's revenue bonds:

--$35 million water and sewer revenue bonds, series 2016.

The bonds are expected to sell via negotiation the week of August 22. Bond proceeds will be used to finance the costs of acquiring, constructing and equipping improvements and upgrades to the water and sewer system, including reimbursement of any moneys previously advanced by the district for such improvements, and pay issuance costs.

In addition, Fitch affirms the following ratings:

--$22 million water and sewer refunding revenue bonds, series 2014 at 'A+'.

The Rating Outlook is Stable.

SECURITY

The bonds are secured by and payable from a senior lien pledge of the net revenues of the district's water and sewer utility system.

KEY RATING DRIVERS

STRONG FINANCES: The district's financial profile has been strong for the past several years evidenced by high cash flows and debt service coverage (DSC), and robust liquidity. Financial ratios will weaken as the debt service from the 2016 bonds begins to amortize; however, projections provided by a feasibility consultant indicate results will remain solid with approved rate increases.

RISING DEBT BURDEN: The 2016 bonds will more than double the district's debt burden with key debt metrics rising considerably from historical levels. However, the new debt was previously anticipated as a major funding source for the district's capital plan and Fitch believes the pro forma debt burden is manageable and on par with similarly-rated water and sewer utility systems.

MANAGEABLE LONG-TERM CAPITAL PLAN: The district's updated five-year capital improvement plan (CIP) through fiscal 2020 totals $56.7 million, most of which will be funded from bond proceeds, and continues renewal, maintenance and upgrade projects outlined in a 2011 comprehensive master plan.

RISING BUT COMPETITIVE RATES: Charges for combined service are regionally competitive but somewhat elevated relative to the city's median household income. Approved rate increases through 2019 are sizable, especially for wastewater, but will allow the district to remain on solid financial footing.

SOMEWHAT WEAK SERVICE TERRITORY: The local economy is somewhat limited and the city's top employers are fairly concentrated, although its location within Palm Beach County's deep and diverse employment base and the system's strong liquidity slightly mitigate these concerns.

RATING SENSITIVITIES

FINANCIAL PERFORMANCE: The rating anticipates the district will maintain a solid financial profile in line with the pro forma identified in the feasibility consultant's report. While not anticipated, significant deviation in actual financial performance in either direction could lead to a rating change.

CREDIT PROFILE

The City of Riviera Beach is located in Palm Beach County (GOs rated 'AAA' by Fitch) in southeastern Florida, approximately five miles north of the city of West Palm Beach and 90 miles north of Miami. The city had an estimated population of 33,649 in 2015.

The district was formed in 2004 to acquire, manage and maintain the water and sewer services for the city and adjacent communities. The district's governing board consists of city council members, while day-to-day operations are primarily managed by Riviera Beach municipal employees.

The district's service area is approximately 11 square miles in total, covering the city's corporate limits as well as the town of Palm Beach Shores, Port of Palm Beach and a portion of the city of West Palm Beach and other unincorporated areas. The district provides retail water and wastewater (collection and conveyance only) service to 42,000 residents through 13,000 water and sewer connections.

STRONG FINANCIAL PERFORMANCE

Prior to fiscal year 2010 financial metrics were fairly weak due to economic contraction, rising operational costs, and a prior disinclination to raise utility rates. However, since then, financial performance has improved with the implementation of a series of financial policies as well as significant rate increases that began with the adoption of a multi-year rate plan in 2009. Robust annual cash flows led to strong DSC for the past five years (2.9x or higher on an all-in basis), provided funding sources for increased capital spending and improved the district's liquidity position.

For fiscal 2015, which is unaudited, free cash flow (the amount of annual cash flow remaining after O&M, debt service and transfers) totaled $5 million or a strong 215% of depreciation. Similar cash flow results for the past few years have led to a very robust liquidity position. At fiscal-end 2015, the district recorded approximately $23 million in unrestricted cash and equivalents, equating to a healthy 500 days' of operations.

Fitch anticipates a combination of increasing direct debt service from the 2016 bonds, rising sewer treatment costs and greater payments in lieu of taxes (PILOTs) to weaken financial results. However, the rising costs will be somewhat offset by another multi-year rate plan approved in 2015 that will raise sewer rates by approximately 33% and water rates by 8% over the next three years.

Pro forma financial results compiled by the district's feasibility consultant show a decline in DSC to approximately 1.9x in fiscal 2017, which is still solid for the rating. The report also shows a rise in coverage ratios in fiscals 2018 and 2019 to roughly 2.6x, due mainly to revenue growth from the approved rate increases. When including the projected PILOTs, which are paid after operating expenses and debt service, coverage of all fixed obligations falls to approximately 1.4x in fiscal 2017, but improves to 1.9x by 2019.

RISING YET COMPETITIVE RATES

Rates are comprised of base charges, including a monthly billing fee, and volumetric charges with an inclining structure to promote conservation. Base charges represent a very strong 47% of the total bill. Assuming 5,000 gallons of water use per month, rates are a slightly elevated $60 for combined water and sewer service, which is approximately 2% of median household income (MHI). Overall, rates are competitive compared to those charged by neighboring utilities, but are headed higher due to the aforementioned multi-year rate plan approved in 2015.

Once the rate plan is fully implemented, monthly charges will be high. While multi-year rate increases are generally viewed favorably as they typically remove the potential for political interference, rate setting flexibility may become constrained over time as affordability becomes an issue for many rate payers, especially given the lower median income of this area.

MANAGEABLE CAPITAL PLAN, RISING DEBT PROFILE

The district's five-year CIP totals a very manageable $56.7 million, or approximately $11.3 million annually (on average). Historic capital spending has averaged closer to $4 million annually since fiscal year 2008, which has resulted in significant deferred maintenance and a high average age of plant of 20 years in fiscal 2015. The CIP will continue to address aging infrastructure including regulatory improvements, renewal and replacement projects, water quality and system security enhancements, and other overall facility enhancements identified in a long-term master facilities plan.

The master plan, which totals roughly $200 million, identifies projects from highest to lowest priority and groups these projects in stages for completion over 20 years (through 2032). Projects of highest priority are included in the current CIP, which is expected to be funded from a combination of 2016 bond proceeds and internal resources (cash and cash flows). Fitch believes capital spending beyond the five-year CIP to be manageable, although rating pressure could result if significant additional leveraging is needed to meet future capital needs over the longer term.

The district's debt burden will rise with the issuance of the 2016 bonds, which will more than double the amount of the district's outstanding debt. Debt as a percent of net capital assets is roughly average at 56% in fiscal 2015, but will rise to over 100%. Likewise, debt to system equity, which is roughly 1.0x in fiscal 2015, will jump to more than 2.0x after issuance. On a per customer basis, debt is relatively low at $965 in fiscal year 2015; however, Fitch projects this ratio will exceed $2,200 for the next several years, a level that is consistent with other 'A' category water and sewer utilities rated by Fitch.

Annual debt service will also double but remain a very manageable 20% of gross district revenues. The 2016 bonds comprise the only debt expected in the five year capital forecast, although some additional future debt may be needed to fund the CIP's forecasted capital investments beyond 2020.

SOLID OPERATIONS

The district owns and operates one water treatment plant and a water distribution system as well as a wastewater collection and transmission network. The water system serves the residents of the city, Peanut Island, the Town of Palm Beach Shores, a portion of the City of West Palm Beach, and customers in unincorporated parts of Palm Beach County.

The city's water use permit (WUP) was last issued by the South Florida Water Management District in March 2012 for 20 years to allow a withdrawal of 9.1 million gallons per day (mgd) from the surficial Biscayne Aquifer. Actual customer consumption averages 7.0 mgd; however, the utility's water treatment plant has a design capacity to treat and supply up to 17.5 mgd, should flows increase.

The wastewater system serves the city, the Towns of Palm Beach Shores and Mangonia Park, and Peanut Island, for a combined service area of 10.3 square miles. All flows are conveyed through the district's transmission network for treatment and disposal by the East Central Regional Water Reclamation Facility (ECRWRF, or the plant), which is jointly owned by the city and several surrounding municipalities and operated by the City of West Palm Beach.

The shared ownership of the ECRWRF was established via an Interlocal Agreement in 1992 and is currently in place through 2052. The district is allotted 8.0 mgd of flows to the ECRWRF, or 11.43% of the plant's 70 mgd capacity, comfortably above its actual flows of 5.0 mgd on average. The city pays for both operational costs and shared debt service obligations to the ECRWRF through its operating expense budget.