Fitch Downgrades Vero Beach, Florida's Electric Revs to 'A+'; Outlook Stable
Ratings Endorsement
Policy
23 Aug 2012 9:59 AM (EDT)
Fitch Ratings-New York-23 August 2012: Fitch Ratings downgrades the following bonds of Vero Beach, FL (the city):
--$46.9 million electric refunding revenue bonds, series 2003A to 'A+' from 'AA-'.
The Rating Outlook is Stable.
SECURITY
The bonds are senior-lien obligations secured by net revenues derived by the city from the operation of its electric system (the system).
KEY RATING DRIVERS
ACCEPTABLE BUT WEAKER FINANCIAL METRICS: The rating downgrade is based primarily on the utility system's weakened trend in
financial performance. Debt service coverage (DSC) fell sharply to 1.9x in fiscal 2011 from an average of 3.5x over the prior four fiscal years,
and results through the first nine months of the current fiscal year as well as the city's proposed fiscal 2013 budget show only a nominal
improvement in financial performance. Longer term improvement is difficult to gauge given the city's continued inability to provide detailed
multi-year financial forecasting.
SMALL RETAIL ELECTRIC UTILITY: Vero Beach's electric utility system provides retail service to a relatively small, but stable service area
with somewhat below average demographics.
AMPLE POWER SUPPLY: Favorable wholesale contracts together with city-owned generation units provide sufficient resources to meet
peak demand.
FAVORABLE DEBT PROFILE: Leverage ratios compare well to medians for the rating category but the marked reduction in capital spending
for maintenance of existing assets in recent years is a concern. No additional debt issuance is planned and projected capital spending will be
funded from excess cash flow from operations. However, recent and near-term projected expenditures have been well below historical levels
and recorded depreciation.
POTENTIAL SALE OF THE UTILITY: Ongoing discussions about a sale of the city's electric utility are viewed as credit neutral by Fitch
based on the understanding that any potential sale would result in either repayment or defeasance of the outstanding series 2003A bonds.
CREDIT PROFILE
VERTICALLY INTEGRATED RETAIL SYSTEM
The City of Vero Beach is located 90 miles north of Palm Beach on the east coast of Florida. The city's retail electric system serves nearly
34,000 customers in a 40 square mile area that extends beyond city limits. The system's wholesale power purchases coupled with its own
generating units continue to provide ample power supply needed to meet the needs of its customer base.
The city exited from the all-requirements project with Florida Municipal Power Agency (FMPA; rated 'A+' with a Stable Outlook by Fitch) in
2010 in favor of a fixed contract rate of delivery arrangement. In addition, the city entered into a 20-year load-following agreement with
Orlando Utilities Commission (OUC; rated 'AA' with a Stable Outlook by Fitch) for supplemental wholesale power. The city effectively layers
in its entitlements from FMPA, followed by its power supply from OUC and its own generating units, which are dispatched by OUC. The load
following contract with OUC satisfies the full extent of the city's energy and capacity requirements. Electric sales in fiscal 2011 declined a
modest 3% from the prior year but were still above the fiscal 2009 total.
AVERAGE RETAIL RATES
Vero Beach's retail rates are about average compared with other public power utilities in the state. The system's typical residential bill was
about even with the statewide average residential electric bill (assuming 1,000KWH) of $121.34 as of June 2012. Historically, the city's rates
were considerably higher, but entering into the OUC contract prompted a 24% decline in charges.
The city adopted a series of base rate hikes in 2010, including a 2.3% increase for both fiscals 2011 and 2012 and a 1.2% increase in fiscals
2013 and 2014. Rate hikes were implemented as planned in fiscals 2011 and 2012, but the 1.2% rate increase adopted for fiscal 2013 was
postponed given better than expected operating results over the prior two fiscal years. Management expects the already adopted 1.2% base
rate increase for fiscal 2014 to be implemented as planned.
CHANGING FINANCIAL PROFILE
Financial performance eroded in fiscal 2011 as a full year of reduced rates resulting from the OUC contract prompted a 15% decline in total
revenues while operating expenses remained constant. DSC declined to a low point of 1.9x in fiscal 2011 after peaking at 4.3x in fiscal 2010.
Similarly, liquidity dropped to 93 days cash on hand after reaching a high point in the prior year of 106 days cash, despite limited capital
spending. The system makes an annual transfer to the city's general fund, which amounted to $5.6 million, or a sizable 28% of fiscal 2011
general fund revenues.
Preliminary results through the first nine months of the current fiscal year indicate positive cash flow of approximately $3 million relative to
the adopted budget. The preliminary surplus incorporates the payment of year-to-date costs related to annual debt service, the annual
general fund transfer and a $2.5 million transfer to the renewal and replacement (R&R) fund for capex. DSC improves to 2.3x based on yearend projections but is still well below historical margins.
The fiscal 2013 proposed budget assumes no change in total operating revenues, a slight 4% decline in operating expenses and no change
in the amount transferred to the general fund compared to the prior year. The proposed budget projects $6 million in operating income that
will be transferred to the R&R fund for capex. Fitch believes the availability of multi-year financial projections would provide a better
understanding of management's planning and financial targets, particularly given the possible sale of the system.
While no definitive timeline regarding the sale of the system to Florida Power & Light (FP&L) has been determined, officials indicated that a
deal could be finalized by 2014. Fitch will continue to monitor the events surrounding the possible sale, as well as the system's ability to
preserve its financial position during this uncertain period. Fitch also notes that the bond resolution outlines bondholder protections in the
event of a sale of the system. In addition, the city maintains 62% equity in the utility as of fiscal 2009, which should offset concerns about
sale proceeds sufficiently covering outstanding indebtedness.
ROUTINE CAPITAL SPENDING
Capital needs through 2017 are manageable with projected capital spending totaling approximately $34.3 million. The system's capital
program will address distribution system improvements and routine maintenance and will continue to be funded from excess cash flow from
operations. No additional debt issuance is planned. Projected capex will be in excess of more recent spending levels on average, but still
slightly below historical depreciation amounts.
Debt levels are favorable as debt/customer of nearly $1,600 is about half the median figure and debt/FADS was low at 4.2x in fiscal 2011.
MIXED SERVICE TERRITORY
The system's customer base is diverse as the 10 largest users accounted for a modest 12% of total revenues in fiscal 2011. Demographics
for the service area are below average, although the system's collections have reportedly remained at or close to 100%. Income levels are
mixed; per capita money income ranks higher than state and national averages while median household income is comparatively lower than
both. Area unemployment has demonstrated considerable improvement over the last year but remains high at 11.3% in June 2012.
Customer growth is not expected as residential development has slowed considerably in what is already a largely built-out service area.
Contact:
Primary Analyst
Christopher Hessenthaler
Senior Director
+1-212-908-0773
Fitch, Inc.
One State Street Plaza
New York, NY 10004
Secondary Analyst
Ryan A. Greene
Director
+1-212-908-0593
Committee Chairperson
Dennis Pidherny
Senior Director
+1-212-908-0738
Media Relations: Elizabeth Fogerty, New York, Tel: +1 (212) 908 0526, Email: elizabeth.fogerty@fitchratings.com.
Additional information is available at 'www.fitchratings.com'. The ratings above were solicited by, or on behalf of, the issuer, and therefore,
Fitch has been compensated for the provision of the ratings.
This action was informed by information identified in Fitch's Revenue-Supported Rating Criteria and U.S. Public Power Rating Criteria.
Applicable Criteria and Related Research:
--'U.S. Public Power Rating Criteria', Jan. 11, 2012;
--'Revenue-Supported Rating Criteria', June 12, 2012.
Applicable Criteria and Related Research:
U.S. Public Power Rating Criteria
Revenue-Supported Rating Criteria
ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS
AND DISCLAIMERS BY FOLLOWING THIS LINK: HTTP://FITCHRATINGS.COM/UNDERSTANDINGCREDITRATINGS. IN ADDITION,
RATING DEFINITIONS AND THE TERMS OF USE OF SUCH RATINGS ARE AVAILABLE ON THE AGENCY'S PUBLIC WEBSITE
'WWW.FITCHRATINGS.COM'. PUBLISHED RATINGS, CRITERIA AND METHODOLOGIES ARE AVAILABLE FROM THIS SITE AT ALL
TIMES. FITCH'S CODE OF CONDUCT, CONFIDENTIALITY, CONFLICTS OF INTEREST, AFFILIATE FIREWALL, COMPLIANCE AND
OTHER RELEVANT POLICIES AND PROCEDURES ARE ALSO AVAILABLE FROM THE 'CODE OF CONDUCT' SECTION OF THIS
SITE.
Copyright © 2012 by Fitch, Inc., Fitch Ratings Ltd. and its subsidiaries.