Fitch Rates West Palm Beach, FL's $54MM VR Utility System Revs 'AA-', Underlying.

NEW YORK -- Fitch Ratings assigns an underlying 'AA-' rating to West Palm Beach, Florida's (the city) approximately $54 million utility system variable-rate revenue refunding bonds, series 2005. The bonds are scheduled to price through negotiation with a syndicate led by Bear Stearns & Co. Inc. on or about April 12. Secured by the net revenues of the city's water, sewer and stormwater utilities, the series 2005 bond proceeds will be used to partially refund outstanding series 1999 and 2000 utility system revenue bonds for an estimated net present value savings of 8.4% of the refunded par. In addition, Fitch affirms its 'AA-' rating on approximately $95.3 million in outstanding parity debt. The Rating Outlook is Stable.

The series 2005 bonds will be issued as variable-rate demand obligations and are expected to be insured by Financial Guaranty Insurance Co. with liquidity to be provided by Bank of America, N.A. in the form of a standby bond purchase agreement. Fitch expects to issue a short-term rating on the bonds nearer to closing. The city plans to enter into two swap agreements with Bear Stearns Financial Products and Citibank (rated 'AA+' by Fitch) to synthetically fix the interest rate paid on the debt. Regular swap payments will rank on parity with debt service; termination payments are subordinate.

The 'AA-' rating on the utility system revenue bonds is based on the system's sound financial operations and debt service coverage, competitive water and sewer rates compared to surrounding utilities, and above-average legal provisions. The rating also considers the service area's below-average wealth levels compared to neighboring areas and unemployment rates historically higher than those of Palm Beach County and the state.

The series 2005 utility system bonds are secured by a pledge of the net revenues of the city's water, sewer and stormwater systems. The city has ample existing water supply drawn from a series of wetlands in the western portion of the city as well as a surficial groundwater wellfield that draws from the Floridian Aquifer and is used as a standby source. The water is generally of good quality and requires little treatment. Pursuant to an interlocal agreement the city owns and operates the East Central Regional Wastewater Reclamation Facility, which provides wastewater treatment for the city and the communities of Lake Worth, Palm Beach, Palm Beach County, and Riviera Beach. The city is currently allocated 30.9% of the plant's 55-mgd treatment capacity. An expansion is in progress which will increase the city's share by 3.5 mgd, providing ample system capacity for further growth. The stormwater system serves properties located within the city limits and comprises a series of canals and storm sewers that drain into the Lake Worth Lagoon. The fiscal 2004-2009 capital improvement plan (CIP) totals $152 million, and comprises approximately 39% water projects, 34% sewer, and 27% stormwater. Funding sources include approximately $11 million in parity debt planned to be issued in fiscal 2007. The balance of the plan is mostly cash funded from various sources including impact fees revenue and renewal and replacement funds.

Financial operations are sound, shown by ample cash reserves and sound debt service coverage. Fiscal 2004 unaudited results show that revenues covered projected minimum annual debt service (MADS) on this issuance and outstanding parity debt 2.4 times (x) excluding impact fees, and 2.6x including impact fees. Coverage is projected to remain at or above 2.0x MADS excluding impact fees through fiscal 2008 given planned rate increases and projected customer growth. The flow of funds is a closed-loop structure whereby all excess revenues after debt service and funding of the reserve account and renewal and replacement account flow to the general reserve account. It is the city's policy to maintain the general reserve account at a level equal to at least 15% of budgeted operating revenue. The general reserve account is currently funded at approximately $11 million, about 21% of fiscal 2004 operating revenues.

West Palm Beach is located in southeast Florida, on the intercoastal waterway. Primarily a residential and retirement community, the area economy is focused on agriculture and health care services. Income levels are on par with the state and nation and below the county, which is characterized by high wealth levels. The 2004 unemployment rate of 6.9% was higher than the state and county rates of 4.8% and 5.5%, respectively.