OREANDA-NEWS. Fitch Ratings has affirmed the 'AA' rating for the following Martin County, FL's (the county) revenue bonds:

--Approximately $34 million utility system revenue refunding bonds, series 2009A & B.

The Rating Outlook is Stable.

SECURITY

The bonds are secured by a senior lien pledge of the net revenues of the water and sewer system, including special assessments and connection fees.

KEY RATING DRIVERS

SOLID FINANCIAL PERFORMANCE: Net system revenues have yielded senior and all-in debt service coverage (DSC) levels close to or above 2.0x for the past five years and a financial forecast predicts coverage levels to continue at this rate. Liquidity has exceeded 400 days cash on hand (DCOH) during this same time and likewise is expected to remain robust.

FLEXIBLE CAPITAL PROGRAM: The system's five-year capital improvement plan (CIP) appears manageable and includes rehabilitation and renewal (R&R) projects as well as a sewer system expansion program. Capital projects are projected to be ably funded by internal resources supported by modest rate increases as well as by additional debt to fund the sewer expansion program, repaid primarily by special assessment charges.

LOW DEBT: Already low leverage ratios continue to improve, yielding ample capacity to fund the system's sewer expansion program.

STABLE OPERATING PROFILE: The customer base is stable and mostly residential. The system has sufficient long-term water supply and treatment capacity to meet current moderate customer growth and demand expectations.

RATING SENSITIVITIES

MAINTENANCE OF STRONG FINANCIAL METRICS: Upward rating movement could be warranted should the system maintain its strong financial performance and metrics as it phases in additional debt to connect new costumers to the sewer system.

CREDIT PROFILE

STABLE RESIDENTIAL CUSTOMER BASE

Martin County (implied 'AA' general obligation [GO] rating by Fitch) is located on the southeastern coast of Florida, just north of Palm Beach County. The county's water and sewer system provides service to approximately 90,000 residents in the unincorporated areas of the county as well as the Town of Sewall's Point and Ocean Breeze. The city of Stuart, the largest incorporated municipality in the county, has its own utility system. The system also provides reuse (irrigation quality) water to local golf courses and residential subdivisions within the county.

The water and sewer system's customer base is mostly residential and population growth has been a steady 1%-2% over the past several years. Management reports an uptick in building permits for new development of both vacant and existing parcels. Local employment is largely limited to the agricultural, tourism, and healthcare services sectors; however, residents have access to broader employment opportunities in adjacent St. Lucie and Palm Beach counties. Unemployment continues to decline (only 5.1% in October 2015 versus 5.8% the year prior) to be more aligned with state and national job growth trends.

SOUND FINANCIAL PERFORMANCE EXPECTED TO CONTINUE

The system's strong financial performance trend of elevated DSC and healthy liquidity continued in fiscal 2014, again led by steadily increasing operating revenues and stable expenses. Historically, senior lien DSC has approximated 2.0x when excluding somewhat variable connection fees, and all-in coverage, including annual debt service for state revolving fund loans and an interfund loan with the county's sanitation department, approximated 1.9x net of connection fees. By fiscal 2014 both senior lien and all-in DSC exceeded 2.0x (without connection fees).

The county's policy to increase rates annually by at least the CPI has supported these recent and historical solid financial results. According to the most recent financial pro forma (which management updates annually), senior lien coverage levels are conservatively forecast to approximate 2.0x and all-in DSC around 1.8x through 2020.

Liquidity, as measured by DCOH, has exceeded 400 days since fiscal 2010 despite a nearly 100%-cash funded CIP during that time. The majority of the system's liquid assets are comprised of highly rated short-term investments. In fiscal 2014, $5.7 million of the system's restricted assets was earmarked for R&R and is considered available for system operations. When coupled with the system's $22.9 million in unrestricted cash the system's available liquidity equated to roughly 630 DCOH that year.

The system's financial forecast compiled by a third-party rate consultant predicts that continued surplus revenues, combined with annual capital facilities charges tied directly to capital expansion projects, should support continued robust liquidity going forward. Fitch views these expectations as reasonable based on a historic trend of strong cash generation amid stable consumption patterns and modest rate increases.

LOW RATES BOLSTER FINANCIAL FLEXIBILITY

Further supporting the system's solid financial profile is the degree of financial flexibility afforded to management by its reasonable rate structure. Rates have historically been tied to changes in the annual CPI and are capped by a formal county policy at 2.5%. The system's rate consultant recommends a continuation of the current CPI-led rate increase program as revenue generation is shown to remain sufficient for yielding strong margins while cash-funding the CIP. Combined water and sewer charges equate to less than 2% of the average customer's median household income, below Fitch's affordability threshold. In addition to a cooperative county commission with a history of approving rate increases, this margin lends management sufficient rate-raising flexibility above the CPI adjustment should revenue generation not meet expectations.

FLEXIBLE AND AFFORDABLE CAPITAL PROGRAM

The system's current five-year CIP totals $38.5 million and is dedicated primarily to R&R projects. Management currently expects to fund CIP needs entirely by internal cash flow. An additional $33 million in capital spending, for a combined total of about $70 million, is currently contemplated to be expended for the connection of existing private septic system users to the county sewer system. This portion of the CIP will be entirely debt-funded, likely by a low-interest, 20-year SRF loan. Management and a third party engineering consultant have identified 2,145 homes that will be mandatorily converted to the county sewer system over the next five years, with more to come in the longer term.

MINIMAL DEBT BURDEN

The system's debt burden is low as it equates to only 37% of net plant and to about $1,600 per customer. These metrics compare favorably to the 'AA' medians of 47% and $2,050, respectively. Debt repayment is rapid with 59% and 96% to be retired in 10 and 20 years, respectively. Including the $33 million likely to be issued over the next three years to support the sewer expansion program, the aforementioned debt metrics are projected to remain well below the medians for 'AA'-rated credits.

The consulting engineer's model indicates that upwards of 75% of the projected new debt will be repaid through non-ad valorem special assessments attached to the existing homeowner's tax bill. The balance will be supported by connection fees paid by these homeowners, as well as net system revenues including the incremental additional revenues generated by the new customer base. The net impact of additional revenues, expenses, special assessments and additional debt service is incorporated into the aforementioned financial projections that predict continued strong DSC and liquidity. No additional debt is currently contemplated by management beyond this issue therefore debt metrics should continue to improve.

SUBSTANTIAL TREATMENT CAPACITY AND SUPPLY

Capacity for both water and sewer treatment remains ample and the county's consumptive use permits issued by the South Florida Water Management District are valid through 2025. Overall system water demand averages about 50% of its 18.8 million gallons of water a day (mgd) permitted capacity, and likewise the system's sewer flows represent just less than 50% of its treatment capacity. These consumption rates afford the system the ability to sustain capacity for moderate projected customer growth as well as ably incorporate the additional sewer connections projected to be mandatorily converted from private septic systems. Moreover, internal and external system interconnections provide further redundancy and backup resources. All water, wastewater, and reuse treatment processes meets all federal, state, and local regulatory requirements.