Fitch Affirms Key West, Florida Sewer System Rev Bonds at 'A'; Outlook Stable.

NEW YORK -- In the course of routine surveillance, Fitch Ratings affirms its 'A' rating on Key West, Florida's $24.7 million of outstanding sewer system revenue bonds. The Rating Outlook is Stable.

The 'A' rating reflects the sewer system's (the system) strong financial performance leading to solid liquidity levels and healthy debt service coverage, as well as a stable customer base. The system's credit strengths are tempered by a tourism-based economy, reliance on the military presence and a continued exposure to severe weather events that could adversely impact system assets and tourism. After experiencing costly regulatory and environmental issues in 1999, the system now enjoys a modernized infrastructure with ample capacity and limited capital needs.

Financial operations for the system remain solid. Coverage for the system's senior debt service for fiscal 2008 was strong at 3.2 times (x). Including the system's subordinate state revolving fund loan payment, coverage was still high at 2.7x. Historical debt service coverage of all obligations has remained at or close to 2.0x since fiscal 2005, and system liquidity remains strong, with nearly 400 days of cash on hand. While system capital needs remain moderate and the city continues to fund ongoing capital projects from system operations, Fitch expects the system's financial position to remain favorable. Internal financial projections show debt service coverage remaining above the internal target of 1.5x.

The system has made a significant investment in plant and line infrastructure in recent years, which have enhanced operations and allowed the system to meet all regulatory requirements. Consequently, intermediate term capital needs are manageable, totaling a little over $19 million over the next five years. Major planned improvements include an aeration retrofit of the treatment plant and a force main project, which will improve capacity flows throughout the system.

Rates for the system are relatively high, but still provide some flexibility. Sewer rates have been raised about 1.5% annually over the past five years. Projected rates are expected to increase 1.4% for fiscal 2010 then rise between 2.5%-3% annually over the next five years. In comparison to neighboring communities, rates are reasonable for the Florida Keys, which are above state and national averages. The system remains under the private management of Operations Management International (OMI), who has had a 20 year history of operating the wastewater system.

The system serves the city of Key West, the southernmost city in the continental U.S. The city's population of 24,000 has declined approximately 4% over the last three years, although projected population and customer base are expected to remain flat. The city's economy relies heavily on tourism and military (both the U.S. Navy and U.S. Coast Guard have a presence). The city hosts about a half-million airline passengers annually and in fiscal 2009 had over 860,000 cruise ship passengers (which was the highest passenger count since fiscal 2005). The city's 2008 median income levels were 109% above the state average.

Additional information is available at www.fitchratings.com.

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