OREANDA-NEWS. Fitch Ratings affirms the 'AA-' rating on the following Marco Island, FL (the city) bonds:

--$109.5 million utility system improvement and refunding revenue bonds, series 2010A and 2013;
--$6.8 million taxable utility system refunding revenue bonds, series 2010B.

The Rating Outlook is Stable.

SECURITY

The bonds are secured by a senior lien pledge of the net revenues and capital facilities fees of the water and sewer system (the system). The series 2010A&B bonds are also secured by cash-funded debt service reserve funds.

KEY RATING DRIVERS

SOLID COVERAGE/DECLINING LIQUIDITY: The system maintains a sound financial profile. Senior lien debt service coverage (DSC) improved slightly to 2x in fiscal 2014 from 1.8x in fiscal 2013, with all-in DSC remaining strong at 1.9x. Liquidity fell in fiscal 2014 to 263 days cash on hand (DCOH) from 367 DCOH the prior year; however, the drop reflects the reclassification of some assets from unrestricted to restricted. Given the system's elevated debt profile, Fitch would be concerned if liquidity were to continue to decline.

HIGH DEBT BURDEN: The system is highly leveraged. Debt per capita levels are significantly higher than those of similarly rated credits and debt service payments consume about 40% of revenues. High debt levels reflect the purchase of the system in 2004 and capital upgrades made since the purchase. Following system upgrades, capital improvement plans (CIP) have declined and future projects focus on system maintenance.

AMPLE SUPPLY, IMPROVED TREATMENT: The system has ample water supply through its use of an aquifer recovery storage system. Recent upgrades and expansions to the wastewater treatment system have improved treatment methods and provided environmental benefits.

MODERATE CAPITAL NEEDS: The city's wastewater expansion is largely complete and the system's future capital needs are moderate.

SMALL, TOURISM-BASED ECONOMY: The area's economy is heavily concentrated in tourism, leading to significant demand fluctuations throughout the year. Wealth levels are well above state and national averages.

RATING SENSITIVITIES

MAINTENANCE OF FINANCIAL POSITION: Deterioration of the system's financial position, characterized by further softening in debt service coverage or escalating declines in liquidity, would pressure the rating. Fitch's expectation is that actual results will continue to outperform projections.

CREDIT PROFILE
Marco Island (GO bonds rated 'AA+' by Fitch) is located on the gulf coast of Florida in Collier County (implied GO rating of 'AA+' by Fitch). The retail utility system provides water, reclaimed water and sewer service to approximately 9,500 water and 9,100 sewer customers and was purchased by the city in 2004 from two private entities. The service area consists of two separate systems, one on the island and one for Marco Shores, a small area on the mainland. The customer base is mainly residential and has experienced minimal growth for the water system since the purchase.

INCREASED CAPACITY, AMPLE WATER SUPPLY

Water is supplied to the island from the Florida Aquifer (groundwater) and to Marco Shores from Henderson Creek (surface water). Treatment capacity of over 12 million gallons daily (mgd) is provided at two water treatment plants. Average system demand is 7.4 mgd and has seen moderate decline over the last several years. The system also utilizes an aquifer recovery storage system which allows for ample water storage (over 700 million gallons) in times of lower surface water flow from Henderson Creek.

Growth of the sewer system has been greater than for the water system as the city has begun to incorporate additional septic tank users through its septic tank replacement program (STRP). The seven-year-long STRP is now finished, with all construction having been completed and remaining development connections coming online in fiscal 2014. Part of the STRP was the 40% expansion of the wastewater treatment capacity to accommodate an additional 1,100 sewer connections. The recently expanded treatment capacity is more than adequate to handle these connections, with over 60% of treatment capacity remaining. The system expansion and upgrades produce higher quality effluent that is suitable for use in irrigation and reduces the demand for potable water.

HIGH DEBT LEVELS; MODERATE FUTURE CAPITAL NEEDS

The system is highly leveraged as a result of the acquisition and the capital improvements made to the wastewater system. Fiscal 2014 debt per capita totals approximately $8,951 based on the estimated population. Population swells to approximately 45,000 in peak seasons, resulting in an estimated debt per capita of $3,431. Both figures are significantly higher than the 'AA' rating category level of $521 per capita.

Debt amortization is on par with 'AA' medians and the city has plans to cash-fund future capital needs. For the near- and intermediate-term, debt levels will remain high but will continue to trend downward now that the STRP is completed. System infrastructure is reportedly in good condition and the average age of plant is a low five years, well below the industry average of 14 years. The current CIP for fiscal 2016-2020 totals $35 million. In 2013, the city increased its annual funding of a renewal, replacement and improvement fund to 12.5% from 5% of previous year's gross revenues.

SOLID FINANCIAL PROFILE SUPPORTED BY RATE ADJUSTMENTS

The financial profile of the system is solid. DSC has been sound and stable with all-in coverage averaging 1.7x over the last four years. Fiscal 2014 all-in DSC was a healthy 1.9x, well above the 1.4x projected. Forecasts provided by management appear reasonable with conservative assumptions that include: inflationary rate adjustments, flat customer growth, and increased funding of renewal, replacement and improvement fund. Those forecasts point to all-in DSC hovering at 1.4x through fiscal 2020, but Fitch expects actual results will be in line with historical performance of closer to historical norms. Liquidity, which peaked in 2010 at over 600 DCOH, has since declined to still reasonable 263 DCOH. The decline was largely due to the system cash-funding the series 2003 debt service reserve after the surety provider was downgraded and reclassification of some current assets from unrestricted to restricted.

The city council has a history of increasing rates to provide for debt service repayment and the preservation of finance performance. The monthly residential water and sewer bill (based on average consumption of 7,500 gallons) totals $125 or 2.2% of the city's above-average median household income (MHI); above Fitch's 2% MHI threshold. In fiscals 2010 and 2011, the city council adopted rate increases of 9.5% and 10.5%, respectively. At that time, additional 6% rate increases were planned for fiscal years 2012 and 2013; however, due to anticipated strong financial performance, the subsequent increases were not implemented. The city anticipates additional rate increases ranging between 2.1% and 2.4% through 2020. The city also plans to undergo a rate study in the fall of 2015. The current rate structure provides for a 46% fixed base rate which helps to stabilize revenues.

SMALL, TOURISM-BASED ECONOMY

Located off the coast of western Florida, Marco Island is a popular tourism destination with the peak season population roughly tripling the year-round population. Wealth levels continue to be among the highest in the state at 48% and 31% above state and national averages, respectively. The city is approaching build-out with the majority of growth coming from renovations and expansions of current properties. Unemployment rates, which are only available at a county level, have declined to 4.6% for April 2015, on par with the state and slightly better than the nation's 5.4%. Due to the concentration in tourism, the county has historically experienced moderate seasonality in its unemployment rates with higher rates in the late summer to early fall.