Fitch Ratings takes the following action on Lee County, Florida:
--Approximately $29 million water and sewer refunding revenue bonds, series 2012A, and series 2012B, rated 'AA-'.
The bonds are expected to sell during the week of Aug. 6 via negotiation.
Proceeds of the series 2012A and 2012B bonds will be used to refund the 1999A and 2003B bonds for interest savings.
In addition Fitch affirms the following ratings at 'AA-':
--Approximately $123 million in outstanding parity bonds.
The Rating Outlook is revised to Positive from Stable.
The bonds are secured by a senior lien pledge of the net revenues of the county's water and sewer system (the system), and available connection fees. The 2012 bonds will not be covered by a debt service reserve.
KEY RATING DRIVERS
STRONG FINANCIAL PROFILE: The Outlook is revised to Positive from Stable reflecting strong financial management and performance trends, as evidenced by above-average debt service coverage and ample liquidity levels, and the approval of multi-year rate increases.
MULTI-YEAR RATE PLAN ADOPTED: The county adopted a new rate plan that will raise rates by a combined 21% by 2014. Fitch views the new rate plan positively and believes the increased rates will allow the system to maintain solid financial results over the intermediate term. While rates are approaching Fitch's affordability threshold, the increases are manageable and rates are expected to remain competitive.
SOLID SYSTEM INFRASTRUCTURE: The operating profile is solid, with ample and diverse water resources, good remaining capacity utilization of treatment facilities (including purchased sewer capacity at nearby Fort Myers facilities), and low average age of plant.
AVERAGE DEBT BURDEN: Debt ratios are average and expected to remain close to rating category medians despite expected issuance of additional bonds. Manageable capital needs are expected to be funded with existing bond proceeds, pay-as-you-go sources, and a modest amount of additional bonds.
ECONOMIC STABILITY MATERIALIZING: The mostly residential customer base remains stable and the local economy and housing market, which was hit very hard by the downturn, appears to be stabilizing with a decrease in the unemployment rate and home foreclosure activity.
WHAT COULD TRIGGER A RATING ACTION?
CONTINUED STRONG FINANCIAL PERFORMANCE: The system's ability to maintain a strong financial profile and competitive rates while administering its manageable capital program would be viewed positively by Fitch.
STABLE RESIDENTIAL CUSTOMER BASE, IMPROVED ECONOMIC INDICATORS
Lee County ('AA' implied GO rating) is located on Florida's southwest coast, bordered by Charlotte County to the north and Collier County to the south. The county covers over 800 square miles and contains approximately 618,000 residents. The county includes the cities of Fort Myers ('AA-' implied GO rating), Cape Coral (utility system rated 'A' with a Stable outlook), and Sanibel.
The system covers a little more than half the county's total population, providing utility services to more than 76,000 water and almost 55,000 sewer customer accounts located within the unincorporated areas of the county. The customer base, which is about 90% residential, was relatively stable through the economic and housing downturn despite a significant decline in new residential construction and increased home foreclosures. Recent housing data provided by the county shows a significant decline in new home foreclosure filings in 2011 and 2012, but still modest building permit activity relative to the peak in activity in 2005-2007.
The local economy is also showing signs of improvement with a 2.3% gain in employment over the past 12 months (about 6,000 jobs); although the economy remains somewhat limited with ties to health care, higher education, tourism, government, and business and related services. The Cape Coral-Fort Myers MSA unemployment rate has improved over the past few years, and at 8.7% in May 2012 is lower than the May 2011 rate (10.8%), and well below the unemployment rate recorded in May 2010 (12.2%). Income indicators remain above the state average but are slightly below that of the nation.
DIVERSE & AMPLE WATER SUPPLY; SOLID OVERALL SYSTEM CAPACITY
The system derives its water from various groundwater sources and a raw water intake from the Caloosahatchee River. Water supply is fairly diverse (including five separate wellfields tapping three different aquifers), and the county believes current water resources are adequate to meet service area demand for another 20 years. At 23.5 mgd, average water demand remains well below available supply (about 54.5 mgd), as well as current treatment capacity of about 47 mgd in 2012.
The sewer utility consists of collection, treatment and disposal facilities. Wastewater is collected and treated at several county-owned facilities with a permitted capacity of 22 mgd. In addition, the county purchased an 11.5 mgd capacity entitlement in two city of Fort Myers treatment plants, and 1.25 mgd capacity from Florida Governmental Utility Authority's North Fort Myers system. Total treatment capacity from all sources of over 33 mgd is comfortably in excess of current average daily flows of about 15.5 mgd. The system maintains over 900 miles of collection and transmission gravity and force mains and 588 pump stations.
STRONG FINANCIAL PERFORMANCE EXPECTED TO CONTINUE
The system's financial profile remains strong with senior lien debt service coverage at 2.6x in fiscal 2011, and well above average liquidity. Coverage of all debt service, including subordinate lien loans, was also solid at 1.9x in fiscal 2011, down slightly from the prior year but above average for the rating. Liquidity is exceptional and considered a credit strength. At the close of fiscal 2011, the system recorded $76 million in unrestricted cash, or a very strong 515 days of operations. Including renewal and replacement fund balances, liquidity increases to 580 days.
Strong cash flows are expected to continue. Pro forma financials provided by the county's feasibility consultant show annual financial margins exceeding $40 million annually by fiscal 2014, and annual debt service remains above 2.4x through the forecast period (1.9x all-in). A lower increase in annual debt service expense than previously expected, coupled with an adopted multi-year rate increases should keep the financial profile strong.
RATES TO INCREASE, BUT REMAIN COMPETITIVE
The county maintains independent rate setting authority and prudently implemented a large rate increase for fiscal 2008 (by roughly 25%), which allowed the system to maintain strong financial performance despite declining trends in both demand and new connections during that time. Rates were kept unchanged for the past few years until a 7% increase was implemented for fiscal 2012 as part of a multi-year rate plan adopted by the county that will increase rates by a combined 21% over four years (including 2012).
Residential rates for combined service assuming 6,000 gallons of use per month are approximately $76 in fiscal 2012, which is about average compared to other Florida systems but at 1.8% of median household income is nearing Fitch's affordability threshold (2%).
MANAGEABLE DEBT PROFILE AND CAPITAL PROGRAM
System debt is manageable and includes $160 million in outstanding senior lien bonds and $58 million in subordinate lien state of Florida revolving fund loans. Leverage ratios are average; debt to net plant was 36% in 2011 and debt per customer was $1,670, both ratios are near the 'AA' rating category medians.
Issuance of additional bonds is projected to increase ratios only modestly. Annual debt service is projected to decline slightly in fiscal 2012 to $11.7 million, then increase to $12.9 million annually, where it will be essentially level through maturity in 2029. Principal amortization is average over the next 10 years with 46% of outstanding bonds retired over that time. However, amortization accelerates with 100% of all bonds retired in 20 years.
The system's updated five-year capital improvement program (CIP) totals a manageable $180 million through 2016. Approximately 30% of the plan is expected to be funded with additional bonds (a $56 million issuance within the next two years), which is expected to increase debt ratios only modestly. The remainder of the program will be funded with existing unspent bond proceeds, and pay as you go sources including existing cash, future cash flows, and connection fees. The CIP will fund treatment facility upgrades and expansion projects, wellfield improvements, and fund renewal and replacement initiatives.
WEAK LEGAL PROVISIONS
Legal provisions are considered weak. The county covenants to maintain rates and charges in each fiscal year sufficient to produce net revenues equal to at least 100% of annual debt service and any required deposits to certain funds and accounts of the resolution, and net revenues, together with connection fees, must be at least equal to 120% of annual debt service.
The ABT is similar to the rate covenant requiring 100% debt service coverage of maximum annual debt service (MADS) from adjusted net revenues, and 120% coverage of MADS when including connection fees. The test period is 12 consecutive of the previous 24 calendar months, or the most recent fiscal year. The series 2011 and series 2012 bonds do not have a debt service reserve fund.
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 Fitch's 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', dated June 12, 2012;
--'Water and Sewer Revenue Bond Rating Guidelines', dated Aug. 10, 2011;
--'2012 Water and Sewer Medians', dated Dec. 8, 2011;
--'2012 Sector Outlook: Water and Sewer', dated Dec. 8, 2011.
For information on Build America Bonds, visit www.fitchratings.com/BABs.
Applicable Criteria and Related Research:
Revenue-Supported Rating Criteria
U.S. Water and Sewer Revenue Bond Rating Criteria
2012 Water and Sewer Medians
2012 Outlook: Water and Sewer Sector
Andrew DeStefano, +1-212-908-0284
One State Street Plaza
New York, NY 10004
Christopher Hessenthaler, +1-212-908-0773
Adrienne Booker, +1-312-368-5471
Elizabeth Fogerty, New York, +1-212-908-0526