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
In additional, Fitch affirms approximately $70 million (pre-refunding) in
outstanding utility system revenue bonds (Lehigh System at 'A'.
The Rating Outlook is Stable.
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
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.
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
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
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.