TEXT - Fitch rates Florida Governmental Utility Auth bonds
Nov 27 - Fitch Ratings has assigned an 'A' rating to the following Florida Governmental Utility Authority (FGUA), Florida bonds: --Approximately $31.84 million utility system refunding revenue bonds (Lehigh Utility System), series 2012. The bonds are expected to price via negotiation the week of Dec. 3, 2012. Proceeds will be used to advance refund the FGUA (Lehigh Utility system) series 2003 utility revenue bonds, fund a debt service reserve account and pay costs of issuance. In additional, Fitch affirms approximately $70 million (pre-refunding) in outstanding utility system revenue bonds (Lehigh System at 'A'. The Rating Outlook is Stable. SECURITY The bonds are secured by a senior lien pledge of the net revenues of the Lehigh water and sewer system (the system), including connection fees. KEY RATING DRIVERS SLIM BUT STABLE FINANCES: Management responded to declining financial performance in recent years with rate increases which have helped to stabilize finances. Debt service coverage (DSC) remained thin at 1.2x in fiscal 2011, with management forecasts showing slight improvement to 1.3x in fiscal 2012. HIGH DEBT BURDEN: The system's high fixed cost structure will continue to pressure financial performance. HIGH USER CHARGES: Rates remain high, limiting the system's financial flexibility. However, liquidity is sound and capital needs are very manageable, which should limit future rate increases to levels sufficient to keep up with inflation. SOLID SYSTEM INFRASTRUCTURE: Treatment facilities have ample capacity, and current water supply is solid for the intermediate term. Additional supply is expected to come from deeper aquifers, requiring more extensive treatment than is currently possible from existing facilities. However, additional resources are not expected to be needed for a number of years. STABLE RESIDENTIAL CUSTOMER BASE: The system is located in southwest Florida, an area of the country hit particularly hard by the housing crisis and economic downturn. However, signs of economic recovery are evident in employment gains over the past two years and a significant decline in foreclosure activity. The customer base is small, but mostly residential and stable. WHAT COULD TRIGGER A RATING ACTION DECLINE IN FINANCIAL PERFORMANCE: Fitch expects the system will maintain a stable financial profile. Declining demand and/or an increase in capital needs, while not anticipated, could pressure rates and lead to lower overall financial flexibility. A decline in debt service coverage or liquidity could put downward pressure on the rating. CREDIT PROFILE SMALL BUT STABLE CUSTOMER BASE The system is a retail water and sewer service provider located in Lee County (implied GO rating of 'AA' by Fitch), 12 miles east of Fort Myers (implied GO rating of 'AA-'). The system was acquired by FGUA in 2003 and is the second largest of the seven systems currently owned and operated by the authority. The system served roughly 12,000 water customers and 10,500 sewer customers in 2011. The service area covers 60,000 acres of mostly residential property, although the area is less than 20% developed. Intermediate-term customer growth is expected to be minimal, as the area continues to recover from the economic recession and a severe housing market decline. SYSTEM INFRASTRUCTURE IS SOLID The system is currently served by two water treatment facilities with a combined 4.1 million gallons per day (mgd) of design capacity. There are near-term plans to convert one plant to a pumping station at which time the system will be served by one water treatment plant with 3.1 million gallons per day (mgd) of design capacity. Raw water consists of groundwater from the Sandstone Aquifer and continues to meet average daily demand requirements of about 2.2 mgd. The water system is regulated via a consumptive use permit from the South Florida Water Management District through 2014. Management anticipates an extension to the current water use permit, although the eventual increase in demand will likely require additional supply. Future resources are expected to come from wells in the Floridan Aquifer, which is a deeper, more brackish source that will require reverse osmosis treatment not currently available with existing facilities. A new plant will likely be costly; however, the need for new supply is not expected anytime soon. An interconnection with the City of Fort Myers' water system provides redundancy and an emergency back-up source of up to 2 mgd. The wastewater system includes a single treatment facility with a rated capacity of 3.5 mgd, which is well in excess of average daily flows of 1.4 mgd. FINANCES ARE STABLE, BUT MARGINS REMAIN SLIM Financial performance was favorable through fiscal 2007. However, a combination of wet weather and the economic downturn contributed to a drop in demand and connection fees. The system generated just 1.3x debt service coverage, including connection fees, in fiscal 2008, but only 1.1x without such fees. Weaker results were recorded for fiscal 2009, and use of rate stabilization funds was necessary to provide additional cushion. FGUA responded with rate increases for fiscal 2010 (6%) and fiscal 2011 (9%), which have helped stabilize financial performance. Debt service coverage remained thin in fiscal 2011 at 1.2x, with another $500,000 transfer from the rate stabilization fund required. Results are expected to improve slightly in fiscal 2012, with a projected 1.3x coverage of debt service from operating revenues only. A November 2012 rate study commissioned by management projects modest improvement in DSC, growing to 1.5x by 2017. Despite the weak coverage, liquidity remains solid. At fiscal 2011 year-end, the system had nearly $4 million in unrestricted cash, which provides roughly 250 days of operating expenses. Working capital is also solid with current cash resources plus accounts receivable providing 3.6x coverage of current liabilities. HIGH DEBT BURDEN, HIGH RATES POSE CHALLENGES The current refunding issue provides level savings of approximately $240,000 a year through 2034; however, system debt levels remain high. Debt per capita is high at $1,719, double the 'A' median level of $728. At 95%, debt to net plant is also above those of similarly rated water and sewer utilities; however, a manageable capital plan should allow debt ratios to moderate over time. The current CIP totals just $9 million and will be funded by a combination of existing bond proceeds, R&R funds, and other sources. The average monthly bill for a residential customer using 6,000 gallons is high at $120 for fiscal 2013, or 3.1% of median household income (MHI). This average bill is well above Fitch's affordability threshold (2% of MHI) and above peer systems in the region. Fitch remains concerned that the system's high fixed costs and limited rate raising flexibility will continue to challenge financial performance. EMPLOYMENT GAINS AND IMPROVING HOUSING MARKET Lee County's economic profile appears to be strengthening, with steady employment growth over the past two years helping to offset steep declines during the past recession. The unemployment rate has improved from the 11.3% in September 2011 to a still elevated 9.1% in September2012. Foreclosure activity, once among the highest in the nation, has declined considerably since 2008, and median home prices have stabilized. Wealth levels for the county as a whole are above average; however, for Lehigh Acres, which is situated inland, wealth and income levels are below average.
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