TEXT-Fitch affirms Leesburg, Fla. electric system revs at 'A+'
Feb 1 - Fitch Ratings affirms the 'A+' rating on the following Leesburg, FL bonds: --$36.3 million electric system revenue bonds, series 2004, 2007A and 2007B. The Rating Outlook is Stable. SECURITY: The bonds are secured by a lien on and a pledge of net revenues derived by the city from the operation of its electric system. RATING RATIONALE: SMALL SYSTEM: The city of Leesburg owns and operates a small distribution-only electric system (the system) serving approximately 22,500 customers. The system's service territory includes a diverse and stable customer base with no meaningful concentration among users. Employment and wealth indicators are subpar, but write-offs continue to be negligible. SUFFICENT POWER SUPPLY: The system's participation in Florida Municipal Power Agency's (FMPA) All-Requirements Power Supply Project (rated 'A+' with a Stable Outlook by Fitch) and St. Lucie Project (rated 'A' with a Stable Outlook) ensures the city a reliable power supply sufficient to meet future needs. SOUND FINANCIAL METRICS: The system continues to generate healthy operating margins resulting in financial metrics consistent with the 'A+' rating category medians. Debt service coverage (DSC) of 4.4x in fiscal 2012 compared favorably to the rating category median of 2.5x, and coverage of full obligations, while weaker at 1.1x due to above average transfers to the city's general fund, is acceptable for the rating level. Good cost recovery has helped build equity levels to almost 65% of capitalization, and cash on hand has doubled since 2007 to 144 days cash in fiscal 2012. AVERAGE RATES: Historically above-average rates have declined to more affordable levels in recent years due to lower fuel costs under the system's contract with the FMPA and successful demand side management efforts. LIMITED CAPITAL NEEDS: Capital needs total a modest $17 million over the next five years and are not expected to require additional leverage. Consequently, Fitch expects the system's debt profile to steadily improve over the next several years. CREDIT SUMMARY: SOUND FINANCIALS The electric utility's operating performance continues to yield sound financial metrics well in-line with 'A+' rating category medians. Fitch-calculated DSC based on unaudited, preliminary financial results remained high in fiscal 2012, despite declining for the fifth consecutive year due to rising but still modest annual debt service obligations. DSC was nearly 4.5x, almost twice the rating category median of 2.5x. Coverage of full obligations, including transfers to the general fund and purchased power costs, was weak but acceptable in fiscal 2012 at close to 1.1x. Annual transfers to the city's general fund are considered by Fitch to be somewhat high, but the city's ordinance limiting transfers to no more than 10% of budgeted operating revenues somewhat mitigates any concern regarding escalating amounts beyond current levels. The system's liquidity position has grown steadily over the years following the near depletion of reserves in fiscal 2006 due to historically large annual transfers to the city's general fund and pay-go funding for capital projects. Improvement in liquidity has since been guided by what Fitch believes is a prudent cash reserve policy of at least 120 days of operating expenses less the cost of purchased power and transfers to the city's general fund. NO MEANINGFUL CHANGE EXPECTED IN FINANCIAL PERFORMANCE No additional plans for new money debt issuance are currently anticipated and debt amortization going forward is level, which should ensure DSC remains at a healthy level. Management has stated that detailed financial projections will be made available later this year to coincide with a planned revenue bond refunding and the consultation of a rate consultant. Fitch does not expect future financial performance to deviate materially from more recent results. AFFORDABLE RATES The utility's electric rates are slightly above the state-wide average for municipally owned systems, although management has demonstrated an ongoing commitment to raising rates by employing an automatic annual inflationary adjustment to its base rate that does not require the approval of the commission. Fitch views the automatic annual adjustment favorably. The city's rate structure also includes a fixed customer charge as well as a monthly bulk power cost adjustment (BPCA) to recover purchased power costs, which accounted for three-fourths of operating expenses in fiscal 2012. The system's retail rate increased in fiscal 2013 to 12.35 cents/kWh versus the state average of 11.86 cents. Management is currently considering altering its current rate structure, although any change will reportedly be revenue neutral and leave in place the annual inflationary adjustment as well as the BPCA. AMPLE POWER SUPPLY The city is a participant in FMPA's All-Requirements Project (rated 'A+' with a Stable Outlook by Fitch), which supplies most of the electric system's power needs. The evergreen contract with FMPA has a minimum 30 year term that resets automatically each Oct. 1. Leesburg also maintains a 0.8244% ownership interest in the 838-MW Crystal River nuclear unit No. 3, which has been out of service since September 2009 and is principally owned and operated by Progress Energy Florida (PEF). Although PEF expects to return the unit to service in 2014, the long-term availability of the resource, whose operating license expires in 2016, remains uncertain. However, the effect on Leesburg of the extended outage has been limited as the utility has received replacement power from PEF at no additional cost. The longer term uncertainty of the unit's operation should also be manageable for the city given its access to alternative resources. An agreement for 1.716 MW of capacity from FMPA's St. Lucie Nuclear Project (rated 'A' with a Stable Outlook by Fitch) provides the remainder of the system's power supply. STABLE SERVICE TERRITORY The utility's customer base is diverse, made up primarily of residential users with no meaningful concentration in sales or revenue. Residential customers represented 83% of total accounts in fiscal 2012 and accounted for about 44% of total revenue. Approximately 45% of total revenue is derived from commercial users, which make up 16% of the system's overall customer base. Leesburg Regional Medical Center is the system's largest user, accounting for approximately 6% of total revenue in fiscal 2011. The balance of the system's 10 largest customers represent a stable mix of municipal and private employers composing a modest 15% of system revenue. Leesburg is located in Lake County, approximately 40 miles northwest of Orlando. Fitch currently rates the city's implied general obligations 'AA-' and utility system revenue bonds related to its combined water, wastewater and gas system 'A+', both with a Stable Outlook. The stability of the system's service area is somewhat offset by its continued weak demographics. Income levels are subpar with per capita and median household income equal to just 76% and 68%, respectively of the national figures. In addition, the city's November 2012 unemployment rate of 8.4% remains elevated relative to the state and nation, despite a meaningful decline from 10.6% one year prior. Nevertheless, management adheres to a sound policy of reserving 20% of 30-60 days past due accounts, 50% of 61-60, and 100% of over 90, resulting in write-offs that are consistently below 1% of annual billings. Additional information is available at 'www.fitchratings.com'. The ratings above were solicited by, or on behalf of, the issuer, and therefore, Fitch has been compensated for the provision of the ratings. This action was informed by information identified in Fitch's Revenue-Supported Rating Criteria and U.S. Public Power Rating Criteria. Applicable Criteria and Related Research: --'U.S. Public Power Rating Criteria', Dec. 18, 2012; --'Revenue-Supported Rating Criteria', June 20, 2011. Applicable Criteria and Related Research: U.S. Public Power Rating Criteria Revenue-Supported Rating Criteria