Fitch Upgrades North Miami Beach, FL's Water Revs; Outlook Stable

AUSTIN, Texas--(BUSINESS WIRE)-- Fitch Ratings has upgraded to 'AA-' from 'A+' the following North Miami Beach, FL (the city) obligations:

--$50.5 million utility system revenue refunding bonds, series 2012.

The Rating Outlook is revised to Stable from Positive.

SECURITY

The bonds are secured by a senior lien pledge upon the net revenues of the city's water system (the system). Excluded from the pledge are surcharge revenues collected from customers outside the city limits.

KEY RATING DRIVERS

SUSTAINED IMPROVEMENT IN FINANCIAL PROFILE: The upgrade reflects continued improvements in the financial profile in fiscals 2014 and 2015, including a much-improved liquidity position. Fitch expects debt service coverage (DSC) and days cash on hand (DCOH) to remain commensurate with the 'AA' rating category.

MANAGEABLE DEBT BURDEN: Debt levels are somewhat mixed, with debt per capita below similarly-rated credits but debt to net plant slight higher. Debt metrics are expected to remain relatively stable despite a planned $25 million debt issuance in fiscal 2018 given the system's rapid debt amortization.

ELEVATED RATES: Current rates at 1.4x% of median household income (MHI) are relatively high, exceeding Fitch's affordability threshold. Additional inflationary rate adjustments are expected through the fiscal 2020 forecast but are anticipated to be relatively minor.

AMPLE INFRASTRUCTURE CAPACITY: Capacity is ample in terms of both water treatment and water supply. The city has no plans to add significantly to either for the long term. An interconnection with the Miami-Dade County water system provides redundancy and emergency supply.

STABLE CUSTOMER BASE: The system provides potable water to residents of the city and portions of the surrounding county. The mostly residential service area is suburban in nature and mostly developed with minimal customer concentration and limited growth expectations.

RATING SENSITIVITIES

FINANCIAL AND DEBT MANAGEMENT: The city of North Miami Beach's water system rating is sensitive to maintaining financial and debt metrics commensurate with the rating category. Downward rating pressure could occur if these metrics erode.

CREDIT PROFILE

The city is nearly fully developed and located in northeast Miami-Dade County, midway between the cities of Miami and Fort Lauderdale. The system provides water service to an estimated 177,000 people within the city (population of around 44,000) and the surrounding areas. The system has minimal customer concentration and most of the top customers are multi-family condominium connections, which contribute to the relatively stable residential customer base.

STRONG FINANCIAL RESULTS DRIVE UPGRADE

Historically, the system was challenged by little to no liquidity. The system had no cash on hand in fiscal 2010 but has incrementally built up reserve balances each year, ending fiscal 2015 with nearly 500 DCOH. Fitch expects the system's liquidity to remain within the improved historical levels to provide the system with financial flexibility.

Audited financials for fiscals 2014 and 2015 resulted in robust all-in and senior DSC. The system ended fiscal 2014 and 2015 with all-in DSC of 3.2x and 3.8x, respectively. With changes related to staffing and personnel in fiscals 2016 and 2017, operating expenses are projected to notably increase from prior years before moderating in fiscal 2018. Even after increased operating expenses and excluding connection fees, management's forecast projects all-in DSC at or above 1.9x coverage. The system's rate structure enhances revenue stability, with around one-third of monthly residential charges billed as fixed charges.

MANAGEABLE DEBT BURDEN

The five year capital improvement program (CIP) for fiscals 2017-2021 totals $38 million and is driven largely by enhancements to the sole water treatment plant and system-wide security improvements. The city anticipates debt funding about 65% of the CIP with a $25 million debt issuance in fiscal 2018. However, the upcoming completion of a utilities master plan could result in reprioritization of projects and affect CIP costs.

Slightly above average debt per customer and debt to net plant, are offset by other more favorable debt metrics. Debt per capita for fiscal 2015 at $406 is better than the 'AA' median of $577. Debt per capita is expected to remain around this level over the next five years even assuming the additional issuance in 2018. Along with below-average leverage, the system benefits from rapid amortization. More than half of the system's outstanding debt is amortized within 10 years, and 100% of debt is fully amortized within 20 years.

IMPROVED LOCAL EMPLOYMENT, INCOME LEVELS REMAIN LOW

The local economy, driven by retail commercial activity, leisure, and entertainment, has improved since the recession, but the unemployment rate remains above state and national levels. After reaching a high of over 12% in 2009, the county's unemployment rate is down to 5.6%, as of August 2016. County income levels remain low at roughly 80% of the national average, and 90% of the state average.

RATE FLEXIBILITY HAMPERED BY LOCAL WEALTH LEVELS

After implementing a 10% rate increase in fiscal 2015, both individual water bills and combined water and sewer bills exceed Fitch's affordability threshold, largely due to the below average MHI. Customers residing outside the city limits also pay a 25% surcharge. Based on Fitch's water usage metric of 7,500 gallons, an individual water bill is approximately $40 for customers within city limits. For customers residing outside the city's limits the monthly bill is nearly $50, which equates to 1.4% of the county's MHI. Positively, actual average residential monthly water usage is lower at about 6,200 gallons.

AMPLE SUPPLY AND CAPACITY

The city's raw water supply consists of groundwater from the Floridan and Biscayne aquifers pursuant to a 20-year consumptive use permit granted in 2007. Supply is well in excess of average demand, which has stabilized at about 20 million gallons per day (mgd) after experiencing declines in demand during the economic recession. At 32 mgd, treatment capacity at the system's plant comfortably exceeds both current and future expected demand. Any expansion at the treatment plant would likely be at least 10 to 15 years out.

Additional information is available at 'www.fitchratings.com'.

Applicable Criteria

Revenue-Supported Rating Criteria (pub. 16 Jun 2014)https://www.fitchratings.com/site/re/750012

U.S. Water and Sewer Revenue Bond Rating Criteria (pub. 03 Sep 2015)https://www.fitchratings.com/site/re/869223

Additional Disclosures

Dodd-Frank Rating Information Disclosure Formhttps://www.fitchratings.com/creditdesk/press_releases/content/ridf_frame.cfm?pr_id=1014061

Solicitation Statushttps://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=1014061

Endorsement Policyhttps://www.fitchratings.com/regulatory

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Fitch Ratings
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Source: Fitch Ratings

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