2011-02-09 19:34:19 -

During the course of routine surveillance, Fitch Ratings has affirmed the following rating on St. Augustine, Florida's (the system) water and sewer revenue bonds.

--$25.4 million in outstanding water and sewer revenue bonds at 'AA-'.

The Rating Outlook is Stable.

RATING RATIONALE.

-- Debt service coverage has narrowed, as connection fees have declined during the current economic downturn, but remains adequate.

--Operating revenues have remained stable and liquidity has grown to healthy levels.

--System leveraging is below average, and the system employs pay-as-you-go capital funding for its on-going rehabilitation projects.
Future capital needs and revenue bond issuance are anticipated to be minimal, although the system does not publish a capital improvement plan.

--The

system benefits from ample water supply and water treatment capacity, although the system projects augmenting sewer capacity in the middle of the decade.

--Utility rates are above average, especially when considering the area's below-average income indicators.

--The service territory is small and the limited local economy is concentrated in tourism.

KEY RATING DRIVERS.

--Diminishment of current debt service coverage levels and/or significant changes in the system's cash position.

--Customer growth that exceeds current projections and increases capital pressures.

SECURITY.

The bonds are secured by net revenues of the system, including connection fees.

CREDIT SUMMARY.

The system serves 11,230 water customers and 8,831 sewer customers within the city and unincorporated portions of St. Johns County. Water supply is derived from the city's well-field, which extracts water from the Floridan Aquifer. Supply is considered sufficient for the next decade, with the 8.55 million of gallons per day (mgd) withdrawal capacity well above the current demand of 3.8 mgd. The water treatment plant's 6.0 mgd capacity has roughly 40% capacity remaining and should be sufficient to handle long-term customer growth projections. The city's wastewater treatment system provides collection and treatment with a maximum capacity of 4.95 mgd, which the system anticipates expanding to 6.0 mgd in the middle of the decade. Current average daily flow is 3.7 mgd, although the maximum flow of 9.6 mgd was well above treatment capacity.

Debt service coverage has narrowed as volatile connection fees have diminished with the decline of development, although operational revenues have remained relatively stable and coverage continues to be adequate. Debt service coverage including connection fees equalled 1.7 times (x) in fiscal 2010 (unaudited), similar to the 1.6x of fiscal 2009 but well below the range of 2.4x to 4.3x during years of significant economic growth in the city. While the system does not produce formal projections, it budgets to attain coverage inclusive of connection fees just above its covenant of 1.25x. Liquidity has increased over the years, and was healthy with 451 days of cash on hand at the end of fiscal year 2010.

Rates are above Fitch's affordability threshold, with a typical residential customer paying roughly $87 per month for combined service.

The combined bill represents a high 2.8% of median household income.

Rate increases, which have historically been regularly implemented, are subject to annual cost-of-living index increases; the annual escalators are subject to override by the city commission.

The system's debt burden is below median levels for the rating category.

Outstanding debt per customer of $1,035 is projected to decline to under $800 by fiscal 2014. The city does not publish a formal capital improvement plan. The city is in the process of issuing tax-supported debt that is not included in debt calculations to fund $4.8 million of utility projects, with an additional $9.3 million for projects that include a utility component. Annual system rehabilitation of around $700,000 is funded through pay-as-you-go financing. The wastewater treatment plant expansion is expected to be funded with grants and reserves. No other significant future capital projects have been identified and the city does not anticipate issuing revenue bonds within the next five years.

St. Augustine (implied GO rating of 'AA-' with a Stable Outlook by Fitch) is located on Florida's northeast coast, approximately 35 miles south of Jacksonville. The city's limited local economy is concentrated in tourism, although the largest employers provide some diversification.
The city has demonstrated resilience during the current economic downturn, maintaining sound per capita market value despite tax base declines. Wealth levels are below state and national averages, and the city reports unemployment below the county's level, which at 10.2% in November 2010 was above the nation's but below the state's rate.

Legal provisions are generally standard. The rate covenant includes a 1.25x debt service coverage requirement from net revenues. Similarly, the additional bonds test requires 1.25x coverage of maximum annual debt service (MADS) by net revenues for the most recent fiscal year. The debt service reserve fund (DSRF) is funded by a surety at an amount equal to MADS, although there is no requirement for the system to cash fund the DSRF in the event of a downgrade of the insurer.

Additional information is available at ' www.fitchratings.com : cts.businesswire.com/ct/CT?id=smartlink&url=http%3A%2F%2Fwww .. '

In addition to the sources of information identified in the U.S.

Municipal Revenue-Supported Rating Criteria, this action was additionally informed by information from Creditscope, University Financial Associates, LoanPerformance, Inc., IHS Global Insight, and Bond Counsel.

Applicable Criteria and Related Research.

--'Revenue-Supported Rating Criteria', dated Oct. 8, 2010;

--'Water and Sewer Revenue Bond Rating Guidelines', dated Aug. 6, 2008;

--'2011 Water and Wastewater Medians', dated Jan. 18, 2011;

--'2011 Outlook: Water and Wastewater Sector', dated Jan. 18, 2011.

Applicable Criteria and Related Research.

Revenue-Supported Rating Criteria

www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id= .. : cts.businesswire.com/ct/CT?id=smartlink&url=http%3A%2F%2Fwww ..

Water and Sewer Revenue Bond Rating Guidelines

www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id= .. : cts.businesswire.com/ct/CT?id=smartlink&url=http%3A%2F%2Fwww ..

2011 Water and Wastewater Medians

www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id= .. : cts.businesswire.com/ct/CT?id=smartlink&url=http%3A%2F%2Fwww ..

2011 Outlook: Water and Wastewater Sector

www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id= .. : cts.businesswire.com/ct/CT?id=smartlink&url=http%3A%2F%2Fwww ..

ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: FITCHRATINGS.COM/UNDERSTANDINGCREDITRATINGS : cts.businesswire.com/ct/CT?id=smartlink&url=HTTP%3A%2F%2FFIT .. .
IN ADDITION, RATING DEFINITIONS AND THE TERMS OF USE OF SUCH RATINGS ARE AVAILABLE ON THE AGENCY'S PUBLIC WEBSITE ' WWW.FITCHRATINGS.COM : cts.businesswire.com/ct/CT?id=smartlink&url=http%3A%2F%2FWWW .. '.
PUBLISHED RATINGS, CRITERIA AND METHODOLOGIES ARE AVAILABLE FROM THIS SITE AT ALL TIMES. FITCH'S CODE OF CONDUCT, CONFIDENTIALITY, CONFLICTS OF INTEREST, AFFILIATE FIREWALL, COMPLIANCE AND OTHER RELEVANT POLICIES AND PROCEDURES ARE ALSO AVAILABLE FROM THE 'CODE OF CONDUCT' SECTION OF THIS SITE.

" title="http://cts.businesswire.com/ct/CT?id=bwnews&sty=20110209006712r1&sid=16929&distro=ftp\"/>" target="_blank">cts.businesswire.com/ct/CT?id=bwnews&sty=20110209006712r1&am ..

Fitch, Inc.Primary AnalystBarbara Ruth Rosenberg,

+1-212-908-0731DirectorOne State Street PlazaNew York
NY 10004orSecondary AnalystKelly McGary,

+1-813-224-0492Senior DirectororCommittee ChairpersonDouglas
Scott, +1-512-215-3725Managing DirectororMedia
RelationsCindy Stoller, +1-212-908-0526 cindy.stoller@fitchratings.com : mailto:cindy.stoller@fitchratings.com