Fitch Ratings takes the following action on Polk County, Florida revenue bonds:
--Approximately $150.5 million outstanding utility system revenue bonds affirmed at 'AA-'.
The Rating Outlook is Stable.
The bonds are secured by a senior lien pledge of the net revenues of the county's water and sewer system (the system), including available system connection charges.
KEY RATING DRIVERS
STRONG FINANCES: System financial performance and liquidity has been strong historically. A decline in connection fees and investment income over the past several years has led to slightly lower, but still strong, debt service coverage margins. Expectations for additional debt may lower coverage margins further.
AVERAGE DEBT BURDEN: Debt is manageable; however, the system's large and comprehensive capital plan is expected to add to the debt burden. Amortization of existing debt is slow, which could result in an above-average debt burden for a prolonged period if significant debt is issued.
ABOVE-AVERAGE RATES: Rates have been on the rise over the past few years and are on the higher end relative to neighboring utilities. Additional approved rate increases through fiscal 2015 will raise rates another 15%, further diminishing rate affordability and limiting future rate raising and financial flexibility.
SOMEWHAT LIMITED LOCAL ECONOMY: Historically known for its citrus and phosphate mining industries, the county's economy has diversified into health care, light manufacturing and distribution. The unemployment rate remains elevated, and income levels are below average. However, the county's location along the I-4 corridor provides residents with access to employment centers in Tampa and Orlando. The customer base is stable and mostly residential.
WHAT COULD TRIGGER A RATING ACTION
SOLID FINANCIAL PERFORMANCE EXPECTED: The system's comprehensive capital plan will increase leverage and pressure financial performance. The county's failure to maintain the solid stewardship of system finances and liquidity levels could lead to negative rating action.
CENTRAL LOCATION WITH ACCESS TO INTERSTATE
Polk County (implied general obligation rating of 'AA' by Fitch) is located in central Florida along the Interstate-4 corridor, 25 miles east of the city of Tampa, and 35 miles southwest of the city of Orlando. The county covers a large geographic area and has a total estimated population of 580,000 in 2011. The economy is somewhat limited but diversifying, and proximity to larger employment centers in Orlando and Tampa are provided via access to the interstate. The county's unemployment rate remains elevated at 9.1% as of April 2012 and median household income levels remain below average (91% of the state and 84% of U.S. average).
SYSTEM COVERS A LARGE SERVICE AREA
The Polk County Utilities Division (PCUD) provides utility services to approximately 58,000 water, and 41,000 sewer customers (including reclaimed water customers) throughout Polk County's roughly 2,000 square mile service area. The service area population is estimated by the county to be 130,000. Given its large geographic area, the utility is divided into several separate regional service areas, some of which are very rural in nature. Each of the regional service areas is self-contained, with its own supply resources and treatment facilities. Given the size of the service area, and distance between the regions, interconnection is not feasible. Customer growth has been relatively strong historically; however, a much more tempered growth rate is expected going forward.
SOLID SYSTEM INFRASTRUCTURE AND SUPPLY
The water system consists of groundwater supply from the Floridan Aquifer, numerous water treatment facilities and distribution assets. Water supply wells are permitted through the South West Florida Water Management District with permitted supply of approximately 31 million gallons per day (average annual) comfortably in excess of average demand (14.5 mgd) in 2011. With limited customer growth projected for the near term, water supply should continue to meet the system's needs for the intermediate term.
However, alternative supplies are being explored due to potential regulatory mandates to curtail groundwater use over the next several years. The county is applying for a long-term permit to build a regional water supply facility that will tap the more brackish Lower Floridan Aquifer. The county is seeking funding from the water management district, and there is potential for other municipalities to share in the costs.
The sewer system also serves customers via regional service areas. There are a total of eight sewer treatment plants, each of which has sufficient uncommitted capacity as measured by the average flow for each plant versus the designed treatment capacity. Highly treated effluent is provided for sale to reuse customers.
STRONG FINANCIAL PROFILE EXPECTED TO WEAKEN SOMEWHAT WITH ADDITIONAL DEBT
Historical financial performance has been sound with strong customer growth leading to growth in operating revenues and the collection of substantial system connection charges. Connection fees began to drop in fiscal 2008; however, the system generated strong debt service coverage of 2.4x with all revenues, and 1.9x excluding connection fees.
Financial results for fiscal 2010 were solid despite a significant decline in connection fees. Debt service coverage increased due to greater operating revenues and slightly lower debt service for the year, producing strong 2.9x coverage from all revenues, and 2.8x excluding connection fees. In fiscal 2011, a rise in debt service from the series 2010 bonds caused a decline in coverage to 2.3x (and 2.2x excluding connection fees).
Liquidity remains very strong. As of fiscal year end 2011, the system had over $42 million in unrestricted cash and investments, which is equivalent to a well above-average 560 days of operations. When including the R&R fund balances (over $12 million in 2011), the system has over 660 days cash on hand.
Pro forma results provided by the county's rate consultant show a decline in debt service coverage over the next few years. For fiscal 2012, which conservatively assumes no growth in operating revenues despite a 5% rate increase, coverage declines to a still solid 1.9x, and 1.7x excluding connection fees. For fiscals 2013 through 2016 the projections show debt service coverage declining to below-average levels as new debt is added (annual debt service is projected to double by 2016). Fitch expects system finances will continue to be well maintained. Substantial erosion in various financial metrics could lead to downward rating pressure.
MODERATE DEBT BURDEN EXPECTED TO INCREASE
The system's debt profile is moderate; however, additional bonds are expected to be issued to fund the capital plan (approximately $150 million through 2017), which will raise system leverage to levels considered above average. Fitch estimates debt per customer will reach $2,500 by 2016 (after the additional bonds are issued), which will be above rating category medians. The additional leverage will pressure the system, although Fitch notes the county approved a four-year rate plan that will increase rates by 5% annually through fiscal 2015.
The average monthly combined customer bill is roughly $92 for 7,000 gallons of use, which is above average relative to neighboring systems and to the below-average median household income of the area. The approved rate increases will bring baseline revenue growth, but Fitch is concerned rate affordability and future rate-raising flexibility are becoming more limited.
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.
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.
Applicable Criteria and Related Research:
--'Revenue-Supported Rating Criteria', June 12, 2012;
--'U.S. Water and Sewer Revenue Bond Rating Criteria', Aug. 10, 2011.
--'2012 Water and Sewer Medians', Dec. 8, 2011.
--'2012 Sector Outlook: Water and Sewer', Dec. 8, 2011.
Applicable Criteria and Related Research:
2012 Outlook: Water and Sewer Sector
2012 Water and Sewer Medians
U.S. Water and Sewer Revenue Bond Rating Criteria
Revenue-Supported Rating Criteria
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