Fitch Ratings affirms the ratings on the following Lake County, Illinois (the county) revenue bonds:
--$61 million senior lien water and sewer system revenue bonds at 'AAA';
--$2.5 million subordinate lien water and sewer system revenue bonds at 'AA+'.
The Rating Outlook is Stable.
SECURITY
Outstanding senior lien bonds are secured by a first lien on net revenues of the county's combined water and sewer system (the system) while outstanding subordinate lien bonds are backed by a junior lien on net revenues.
KEY RATING DRIVERS
SOLID FINANCIAL PERFORMANCE: Total debt service coverage (DSC) remained strong in fiscal 2011, despite a decline in operating margins that prompted all-in coverage to fall to a still good 2.2x. Based on the system's financial projections, Fitch expects DSC will improve to historical norms over the next five years. Liquidity is also forecast to remain favorable.
MANAGEABLE CAPITAL NEEDS: Capital needs are modest; projects are primarily for system improvements, rehabilitation and repair and are primarily (70%) anticipated to be funded from operations.
FAVORABLE DEBT PROFILE: Leverage ratios are very low and are projected to remain low for the foreseeable future. In addition, debt amortization is rapid with principal payout at 70% and 80% in 10 and 20 years, respectively.
AUTOMATIC ADJUSTMENT OF RATES: Fitch views positively the county's policy requiring an automatic adjustment of rates to ensure full cost recovery of purchased water and wastewater treatment expenses.
LARGE AND DIVERSE ECONOMY: The county's utility system serves a large, economically diverse service area with high wealth levels and an estimated population of about 705,000 residents.
CREDIT PROFILE
FINANCIAL PROFILE PROJECTED TO REMAIN SOLID
Senior lien and subordinate lien debt service coverage declined in fiscal 2011 to 2.3x and 2.2x, respectively, excluding connection charges. The decrease in coverage was due primarily to a 71% decline in connection fees from a lack of residential and commercial development and a 24% decline in interest earnings related to lower interest rates. Nevertheless, financial performance remains satisfactory for the rating category and coverage is projected to gradually ramp up to historical norms by fiscal 2015. Fitch believes the county forecast is achievable.
Fiscal 2011 ended with unrestricted cash and investments at $25.6 million, equal to a five-year high of 325 days' cash on hand. Days' working capital was slightly higher at 429. Fitch notes that the liquidity amounts do not include an additional $43 million in restricted reserves held exclusively for system depreciation, extension, improvement, and construction costs.
MANAGEABLE CAPITAL PLAN AND LOW DEBT LEVELS
The five-year capital program is at a very manageable $62 million and is expected to be 32% debt-funded with the remainder to be funded from cash. The bulk of the projects are for renovation and replacement, providing flexibility in management of capital projects. Leverage ratios for the system are very low, with outstanding debt per capita at just $92 and debt-to-plant assets at 30%. Including proposed debt issuances, projected debt per capita is forecast to remain almost unchanged at $96 by 2016.
SOUND MANAGEMENT PRACTICES
Management practices for the system are sound as marked by comprehensive long-term financial and capital planning. In addition, a depreciation, extension, and improvement account is maintained into which minimum quarterly deposits in the amount of $150,000 are made. The reserves are kept to meet debt service payments if needed, make up reserve fund deficiencies, or to make improvements, extensions and acquisitions for the system.
SYSTEM AND SERVICE AREA
The widely dispersed system provides sewer and/or water services to approximately 100,000 customer equivalents throughout the county. These services are primarily provided through numerous wholesale contracts in incorporated and unincorporated communities. With long-term, exclusive-use wholesale contracts and a county ordinance providing for mandatory sewer connections of all occupied premises, the system's revenue base is expected to remain strong.
The county is located in the northeast corner of Illinois and is home to about 70 companies, the largest of which include Abbott Laboratories, Baxter International Inc., Coleman Cable, Inc., W.W. Grainger, Inc., Walgreen Company, and Takeda Pharmaceuticals International, Inc. The county's May 2012 unemployment rate of 7.8% ranks below the state average (8.4%) and is on par with the national average (7.9%). Wealth levels are high, equaling roughly 140% and 150% above state and national levels, respectively.
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 Revenue-Supported Rating Criteria, this action was 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. 3, 2012);
--'2012 Water and Sewer Medians' (Dec. 8, 2011);
--'2012 Outlook: Water and Sewer Sector' (Dec. 8, 2011).
Applicable Criteria and Related Research:
2012 Outlook: Water and Sewer Sector
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=657110
2012 Water and Sewer Medians
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=657111
U.S. Water and Sewer Revenue Bond Rating Criteria
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=684901
Revenue-Supported Rating Criteria
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=681015
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