Fitch Rates West Palm Beach, Florida's Utility System Revs 'AA-'; Outlook Stable.

NEW YORK -- Fitch Ratings assigns an 'AA-' rating to the City of West Palm Beach, Florida's (the city) $16 million utility system revenue refunding bonds, series 2007. The bonds are scheduled for negotiated sale on May 2 through Estrada Hinojosa and Company, Inc. and are secured by a pledge of net revenues of the city's water, sewer and stormwater system. Fitch also affirms the 'AA-' rating on the city's approximately $138 million outstanding utility system revenue bonds. The Rating Outlook is Stable.

The 'AA-' rating reflects the system's adequate debt service coverage, sound financial position, and sufficient water withdrawal and treatment capacity. Additionally, the city's monthly water and sewer user rates compare favorably with regional competitors. Offsetting risks include a high per customer debt burden and a somewhat limited service area economy characterized by below-average wealth levels. The city is currently in the process of reevaluating its long-term capital needs, which has hindered efforts to produce a formal capital improvement plan (CIP) and multi-year financial forecast. Because growth pressures appear to be easing, Fitch expects that when the city completes its CIP and financial forecast, anticipated by this fall in conjunction with a planned bond issuance, that results will indicate limited additional capital needs beyond those already contemplated and continued strong financial performance.

The city has ample existing water supply drawn from a series of wetlands in the western portion of the city, as well as a groundwater well-field that draws from the Floridan Aquifer and is used as a standby source. Treatment capacity of 47 million gallons per day (MGD) is sufficient to meet average demand, about 31 MGD in fiscal 2006. Pursuant to an interlocal agreement, the city owns 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 facility's treatment capacity of 62 million gallons per day (MGD) is sufficient given the average demand in 2006 of 38 MGD. The stormwater system serves properties located within the city limits and consists of a series of canals and storm sewers that drain into the Lake Worth Lagoon.

The city is in the process of creating a twenty year CIP and thus does not have a current, updated CIP. Officials anticipate the CIP will be completed by the fall prior to a utility system debt issuance of approximately $40 million-$50 million, which is expected to be the only debt issuance over the medium term. The debt issuance will help fund reportedly moderate capital needs that include a $20 million upgrade to water treatment plants, a $3 million upgrade to the wastewater treatment plant, and $22 million of general wastewater system improvements. Concurrent with the CIP process, the city has also commissioned an engineering study to facilitate rate change recommendations and a multi-year financial plan.

Financial operations are sound, with ample cash reserves and adequate debt service coverage. Fiscal 2006 results show projected maximum annual debt service coverage on outstanding parity debt of 2.1 times (x). 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. The city targets maintaining the general reserve account at 15% of operating revenues. Currently the account is funded at approximately 13% of operating revenues, though the city anticipates reaching the 15% by the end of the 2007 fiscal year.

West Palm Beach is located in southeast Florida on the intercoastal waterway. The area primarily is a residential and retirement community, whose economy is focused on agriculture and healthcare services. Income levels are on par with the state's and nation's and below the county's; the county is characterized by high wealth levels. Unemployment rates have shown marked improvement as demonstrated by a decrease from 6.5% in 2002 to 3.4% in 2005, reflecting the increasing diversification of the economy away from its agricultural base.

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