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New Issue:

MOODY'S ASSIGNS Aa3 RATING TO LEE COUNTY'S (FL) $73.6 MILLION WATER AND SEWER REFUNDING REVENUE BONDS, SERIES 2011

21 Mar 2011

Aa3 RATING AFFECTS $158.2 MILLION IN OUTSTANDING POST-SALE PARITY BONDS

Water/Sewer
FL

Moody's Rating

ISSUE

RATING

Water and Sewer Refunding Revenue Bonds, Series 2011

Aa3

  Sale Amount

$73,605,000

  Expected Sale Date

03/29/11

  Rating Description

Water and Sewer Revenue

 

Opinion

NEW YORK, Mar 21, 2011 -- Moody's Investors Service has assigned an Aa3 rating to Lee County (FL) $73.6 million Water and Sewer Revenue Bonds, Series 2011. The Aa3 rating affects $158.2 million in post-sale water and sewer revenue bonds. The bonds are secured by a senior lien on the net revenues and available connection fees of the county's water and sewer enterprise system.

The Series 2011 bond proceeds will be used to refund $70.3 million of Series 1999A bonds to achieve an estimated $3.1 million (4.36% of refunded par) net present value savings taken over the life of the issue without extension of final maturity. Legal covenants include a closed loop flow of funds, a rate covenant at 100% of annual debt service, and an additional bonds test at 100% of MADS, both on a net revenue basis (120% for each, including connection fees). Outstanding bonds have debt service reserve sureties with insurers rated below investment grade. There is no debt service reserve on the current offering. A $94.8 million parity bond issue is anticipated in fiscal 2012.

RATINGS RATIONALE

The Aa3 rating is based on the system's favorable financial operations, its stabilizing customer base, good water supply and treatment capacity, and adequate legal covenants. The rating also considers a significant amount of proposed borrowing in fiscal 2012 that is expected to be supported by identified rate increases.

STRENGTHS

- Large service area population with favorable growth prospects

- Competitive rate structure and debt ratio to accommodate expected debt issuance

- Solid liquidity position

CHALLENGES

- Severity of the local housing market correction

- Timely implementation of suggested rate increases to support debt and operations

DETAILED CREDIT DISCUSSION

WATER SUPPLY AND SYSTEM TREATMENT CAPACITY IS ADEQUATE; SYSTEM WELL-POSITIONED FOR POTENTIAL REGULATORY REQUIREMENTS

The county system has a 193 square mile water service area (149 square mile for sewer) with a service area population estimated at 313,138 (256,000 for sewer). The existing county system's water supply is diverse, coming from the Caloosahatchee River, Surficial (Water Table) and Sandstone Aquifers, and the Lower and Mid-Hawthorne Aquifers. The county currently has six water treatment plants and eight wastewater treatment plants (excluding contracted capacity with Fort Myers. Total combined water treatment capacity is presently 41.8 MGD in relation to fiscal 2010 usage of 23.88 MDG average and 37.62 MGD peak. Two plants are being expanded, the Green Meadows plant from 9 MGD to 10 MGD by 2015 and the North Lee County plant from 6 MGD to 10 MGD by 2011, which will continue to provide good system capacity. As a result of the varied water supply sources, the system is not affected by the Water Management District's minimum flow level (MFL) requirements. The water system has been operating under permanent water restrictions since about 2005.

The county's total combined wastewater treatment capacity is 21.822 MGD, although as per an Interlocal Agreement with the City of Ft. Myers, the county also has 11.5 MGD additional capacity at the two city's wastewater facilities, allowing for 33.322 total available capacity. Total capacity is comfortably in excess of fiscal 2010 average flow of 19.31 MGD (14.42 MGD to county facilities and 4.89 MGD treated at Ft. Myers facilities). The county utilizes about three-quarters of total effluent, with alternate disposal through deep well injection, ponds and RIBs, and to a lesser extent discharge to the Caloosahatchee River (being phased out). Due to primary disposal measures, the system's exposure to total maximum daily load (TMDL) is not material. EPA numeric nutrient removal regulations, expected to be issued later this year, are already being addressed with planned construction of a deep injection well to move all effluent off the river. The utility will likely have sufficient time to implement any other changes prior to permit approval. In addition, biosolid treatment (centrifuge) and disposal (compost material) is a long-term viable solution.

The existing county system is considered to be in satisfactory condition although it operates under one consent order, one pending consent order and two administrative (non-punitive) orders. The outstanding consent order is expected to be resolved by 2013 (at a cost of about $14 million) with the diversion of wastewater flows to an FGUA plant. The pending consent order relates to excessive THM limits; it is expected to be resolved in the next few years with the application and attainment of a mixing zone permit for the Fiesta Village wastewater plant at a cost of about $250,000. The administrative orders relate to two water plant ASR systems, and are expected to be resolved shortly at a cost of under one million dollars.

Average account growth for the last five years (fiscal 2006 to fiscal 2010) has averaged 0.4% for water and 0.8% for sewer with projections expecting continuation of current trends. Monthly water usage and sewer flow has declined at an annual average rate of 3.36% for water and 1.9% for sewer, with growth assumptions being marginally more positive. The service area has been severely affected by the housing market correction although the county has maintained an aggressive stance for collections and service turn-offs, and consumption levels appear to have stabilized.

MANAGEABLE DEBT AND CAPITAL POSITION; SIZABLE EXPECTED BORROWING IN FY 2012

The county utility system has a moderate debt position represented by a 27.8% debt ratio and payout of current bonds over a 19 year period. The moderate debt ratio, average payout and competitive area rate structure better position the system to accommodate the sizable $94.8 million issue anticipated in fiscal 2012. Although the expected borrowing will increase senior lien debt by over 37%, the debt ratio increases, on a pro forma basis, to a still-manageable 36.6% with the new issue. In addition to the $158.2 million post-sale senior lien bonds outstanding, the system also has $47.5 million in state revolving fund (SRF) loans outstanding with the expectation of another $15.7 million in SRF loans to expansion of a wastewater treatment plant. The five-year $230.9 million capital program is 63% ($145.7 million) for water and 34.4% ($79.4 million) for sewer purposes. The program is funded 37.6% ($86.9 million net proceeds) with debt, 37% ($85.4 million) from prior capital funds (including SRF loans), 13.4% ($31 million) with renewal and replacement funds, and 9.2% ($21.2 million) with connection fees. The majority of the bond financing ($54 million) in fiscal 2012 is to fund an expansion at the Green Meadows water treatment plant. The conservative debt structure includes no variable rate debt or derivative products. Debt service reserve sureties on outstanding bonds (Series 1999A and Series 2003 A&B) are provided by insurers with below investment grade ratings, which reportedly does not require funding in cash. The current offering does not have a debt service reserve.

FAVORABLE FINANCIAL PERFORMANCE WITH GOOD DEBT SERVICE COVERAGE AND LIQUIDITY

Recent financial results of the existing system reflect adequate coverage and operating ratios, with a solid cash position. Senior lien debt service coverage over the past five fiscal years has ranged from a high of 3.18 times in fiscal 2006 to a low of 2.36 times in fiscal 2010 (with total debt service coverage of 3.03 times to 1.56 times). Allowable impact fees, which accounted for 42% ($19 million) of pledged revenues in fiscal 2006, represented only 3.7% ($1.2 million) in fiscal 2010, reflecting declines in construction related to the economic dislocation. Other financial ratios are generally favorable, with an operating ratio of 65.3% and a debt ratio of 27.8% in fiscal 2010. In addition, residential customers represent over 90% of users for both systems, reducing the system's exposure to any single large, commercial customer (top 10 customers are 4% of gross system revenues in fiscal 2010).

Rates are evaluated on an annual basis, but the county does not utilize an automatic inflator. The last rate increase was effective for fiscal 2008 and was about 25% for both systems which helped increase gross revenues 20% in that fiscal year. A total 14.4% net revenue decline between fiscal 2008 and fiscal 2010 is reportedly related to the lack of additional rate increases in conjunction with deteriorated economic conditions. Additional rate increases have been proposed by feasibility consultants of 7% in each fiscal year 2012 and 2013 with smaller 3.5% increases in fiscal 2014 and 2015 to accommodate expected debt issuance and ongoing capital needs of the system. Projected senior lien debt service coverage, based on the system's reasonably conservative assumptions, is just below two times (1.93 times) by fiscal 2015 (1.56 times including SRF loans). Lee County's existing utility rates are below average in comparison to similar neighboring systems, with an average single family residential monthly water and sewer bill of $64.37 in relation to the $79.01 regional average, based on 5,000 gallons per month usage. The system has a very solid cash position currently, although cash utilization over the five years for the CIP is anticipated. At the end of FY 2011 the system had $79 million in unrestricted cash (although nearly $51 million was designated for capital) which equated to over 500 days cash. Officials target to maintain a 90-day working capital component (about $14.4 million) and, aside from designated capital, currently have about twice that amount. Expectations are that undesignated cash balances will remain fairly constant and above county target levels, allowing for favorable financial flexibility. Uncollected accounts receivable have increased marginally over the last five years due to economic softening although they still represent a very low percentage (0.4%) of system gross revenue. A renewal and replacement fund (funded at 5% of prior year gross revenues) is maintained (currently at $8.3 million). The county is making 100% of annual required pension contribution and funds GASB45 (OPEB) on a pay-as-you go basis.

ECONOMY STILL STRUGGLING

Lee County (Issuer Rating Aa1), once considered "ground zero" for the housing market correction nationwide, initially benefitted from a period of high growth during which it used excess revenues to build reserves and step up its capital program. The county, located on the Gulf Coast of Florida, experienced rapid growth in the earlier part of the decade, with population increasing by nearly 40% from 2000 to 615,124 residents in 2009. Similarly, the county's tax base more than tripled in size from 2001 to a significant $96.5 billion in 2008. The county's housing market has fallen dramatically since then, however, with the tax base decreasing to just $55.7 billion in fiscal 2011. This tax base reduction has translated into a 42.4% drop in property tax revenues (a loss of $142 million) over the last three years. The foreclosure rate, while still significant (1 in every 203 housing units received a foreclosure notice in November 2010), has slowed more recently, and single family home building permits are up by approximately 38% for the first six months of 2010 vs. the same period last year. County unemployment of 12.5% in December 2010, is off the high of 14.2% in January 2010. According to Moody's Economy.com (November 2010), the Cape Coral-Fort Myers recovery will sputter along for the next several months. Housing remains a serious weight on the economy, and CCF suffers from one of the highest foreclosure rates nationwide. Although the metro area will lag the nation during the recovery, its longer-run outlook is much more favorable. Job growth will outpace the national average, as the desirable coastal location attracts migrants.

What Could Make the Rating go UP:

- Significant economic recovery and renewed system growth

- Outperforming anticipated projections of lower coverage and cash position related to capital needs

What Could Make the Rating go DOWN:

- Continuing and/or deepening economic stagnation

- Significant erosion of cash and/or debt service coverage

KEY STATISTICS

Security: System net revenues and available connection fees.

Post-Sale Bonds Outstanding: $158.2 million

Expected Borrowing: $94.8 million (fiscal 2012)

Bond Payout,

10 years: 41.4%

19 years: 100%

Average Monthly Residential Water and Sewer Bill (based on 5,000 gals./month),

Lee County: $64.37

Regional Average: $79.01

FY 2010 Operations,

Operating Ratio: 65.3%

Debt Ratio: 27.8%

Debt Service Coverage,

Senior Lien: 2.36 times

All Debt: 1.88 times

Water System:

Customers: 74,129 (313,138 service area population)

Treatment Capacity: 41.8 MGD

Usage: 23.88 MGD (average) / 37.62 MGD (peak)

Sewer System:

Customers: 54,162 (256,000 service area population)

Treatment Capacity: 33.32 MGD

Usage: 15.33 MGD (average)

PRINCIPAL METHODOLOGY

The principal methodology used in this rating was Analytical Framework For Water And Sewer System Ratings published in August 1999.

REGULATORY DISCLOSURES

Information sources used to prepare the credit rating are the following: parties involved in the ratings, public information, confidential and proprietary Moody's Investors Service information, and confidential and proprietary Moody's Analytics information.

Moody's Investors Service considers the quality of information available on the credit satisfactory for the purposes of assigning a credit rating.

Moody's adopts all necessary measures so that the information it uses in assigning a credit rating is of sufficient quality and from sources Moody's considers to be reliable including, when appropriate, independent third-party sources. However, Moody's is not an auditor and cannot in every instance independently verify or validate information received in the rating process.

Please see ratings tab on the issuer/entity page on Moodys.com for the last rating action and the rating history.

The date on which some Credit Ratings were first released goes back to a time before Moody's Investors Service's Credit Ratings were fully digitized and accurate data may not be available. Consequently, Moody's Investors Service provides a date that it believes is the most reliable and accurate based on the information that is available to it. Please see the ratings disclosure page on our website www.moodys.com for further information.

Please see the Credit Policy page on Moodys.com for the methodologies used in determining ratings, further information on the meaning of each rating category and the definition of default and recovery.

Analysts

John Incorvaia
Analyst
Public Finance Group
Moody's Investors Service

Susan Kendall
Backup Analyst
Public Finance Group
Moody's Investors Service

Julie Beglin
Senior Credit Officer
Public Finance Group
Moody's Investors Service

Contacts

Journalists: (212) 553-0376
Research Clients: (212) 553-1653


Moody's Investors Service
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New York, NY 10007
USA

MOODY'S ASSIGNS Aa3 RATING TO LEE COUNTY'S (FL) $73.6 MILLION WATER AND SEWER REFUNDING REVENUE BONDS, SERIES 2011
No Related Data.
© 2019 Moody’s Corporation, Moody’s Investors Service, Inc., Moody’s Analytics, Inc. and/or their licensors and affiliates (collectively, “MOODY’S”). All rights reserved.

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