Fitch Rates Leesburg, FL Utility Sys Revs 'AA-'; Stable Outlook

AUSTIN, Texas--(BUSINESS WIRE)-- Fitch Ratings has assigned an 'AA-' rating to the following bonds issued by the city of Leesburg, FL (the city):

--Approximately $16.9 million utility system refunding revenue bonds, series 2016.

The bonds are scheduled to sell via negotiation the week of May 16. Proceeds will be used to refund all or a portion of the city's series 2007A bonds for interest savings and pay costs of issuance.

In addition, Fitch affirms its 'AA-' on the following bonds (pre-refunding):

--$20.4 million utility system revenue bonds, series 2007A and 2007B;

--$16.4 million utility system refunding revenue bonds, series 2013.

The Rating Outlook is Stable.

SECURITY

The bonds are payable from a senior lien pledge on the net revenues of the city's combined water, sewer and gas systems (the system) as well as water and sewer capacity charges.

KEY RATING DRIVERS

STRONG FINANCES: Financial performance remains strong and has improved over the last couple of years as transfers to the city's general fund have been scaled back. Solid financial results are expected throughout the five-year forecast period.

MANAGEABLE DEBT PROFILE: The debt burden is manageable, with most ratios consistent with 'AA' category medians. Pay-out is average, and with no additional borrowings planned over the foreseeable future debt ratios should show continued improvement.

MODEST CAPITAL NEEDS: Significant previous capital investment has left the system with plenty of capacity and moderate capital needs which are focused primarily on renewal and replacement of assets.

AFFORDABLE RATES: Rate increases have been consistent and modest and traditionally linked to an inflation index. Charges for combined water and sewer service are competitive and affordable at 1.8% of median household income (MHI). Residential natural gas rates are also competitive both in relation to other municipal systems and to regulated natural gas companies within the state.

COMMODITY COST RISK MITIGATED: The gas component of the monthly utility bill includes a purchased gas 'pass-through' which is automatically adjusted to pass along commodity cost increases to customers on a monthly basis and does not require approval by the city commission.

LIMITED, IMPROVING ECONOMY: The local economy continues to rebound from a severe recession with county-wide growth in jobs and a recovery of the housing market. Employment is limited and generally focused on agriculture, real estate, and health care. Also, wealth levels are below state and national averages.

RATING SENSITIVITIES

STRONG FINANCIAL MANAGEMENT EXPECTED: The rating is sensitive to shifts in fundamental credit characteristics, and in particular, Fitch's expectation that Leesburg, FL's combined utility system will continue to demonstrate a strong financial profile and solid liquidity.

CREDIT PROFILE

Leesburg (implied general obligations rated 'AA-' by Fitch) is located in Lake County (the county) in central Florida, approximately 40 miles northwest of Orlando. The city owns and operates the combined utility system, consisting of natural gas delivery, water treatment and distribution, and wastewater collection, treatment, and disposal, and provides services to residents of the city and areas nearby in unincorporated parts of the county. The water utility serves approximately 21,200 customers, while the sewer and gas utilities serve roughly 18,200 and 10,800 customers, respectively.

Each utility is accounted for as a separate self-supporting enterprise fund of the city but are nonetheless consolidated for bonding purposes. Operating revenues are split relatively evenly between the three funds, with the sewer utility typically accounting for a slightly larger amount (around 40% of revenues) and water and gas around 30% each.

STRONG FINANCIAL RESULTS EXPECTED TO CONTINUE

System financial performance has been strong over the last several years, producing solid debt service coverage (DSC), ample liquidity and favorable surplus cash relative to depreciation. Results have been sustained despite elevated transfers out to the general fund to offset soft local economic conditions.

For fiscal 2015, DSC rose to 3.2x excluding transfers and 2.2x net of transfers. For the year, transfers to the general fund equaled 14% of gross revenues, down from a peak of 17% in fiscal 2013. Transfers for fiscal 2016 and thereafter are expected to remain at the city's policy cap of 10%. Through the 2020 forecast, DSC is expected to remain strong and be at least 2.8x and 2.0x with and without the transfers, respectively, based on assumptions Fitch believes are reasonable.

In addition to favorable DSC, liquidity has steadily increased over the last five years and equaled nearly 750 days cash for fiscal 2015. Cash balances, in addition to ongoing surplus revenues, are expected to be used in support of the capital improvement program (CIP) but should remain well above the city's 25% annual operating budget for the water and sewer utilities and 90-day operating budget (net of purchased power costs) for the gas utility through the fiscal 2020 forecast period.

AFFORDABLE RATES WITH AUTOMATIC ADJUSTMENTS

Rate adjustments have been consistent and modest. Pursuant to city code, utility rates are adjusted automatically each year based on an inflationary index without requiring further approval by the city commission. In addition, purchased gas costs are adjusted monthly and passed on directly to gas customers. These automatic adjustments, coupled with a sizeable level of charges recovered through the base rate, help to provide a great deal of predictability of system revenues from year to year.

Overall, rates are affordable and competitive to other regional providers. Combined water and sewer charges based on 7,500 gallons per month for residential users totals a reasonable $52 or 1.8% of MHI, below Fitch's 2% affordability benchmark. Typical residential gas charges are also relatively modest at around $21 per month. The relatively low cost of service is a positive given the city's below-average MHI, which is just 72% and 63% of the state and national amounts, respectively, and individual poverty rates that are 30%-40% higher than the state and nation.

MANAGEABLE DEBT BURDEN AND CAPITAL NEEDS

After making significant capital expansion investment in the systems in the last couple of decades, capital focus is now predominantly geared to renewal and replacement of system assets. The current five-year fiscal 2016-2020 CIP totals a moderate $20 million with the majority of costs attributable to the water (44% of total CIP costs) and sewer (41%) utilities.

All capital expenditures are currently expected to be funded through surplus annual revenues as well as existing cash balances, which will allow the system's existing moderate debt levels to improve over the next five years. For fiscal 2015, debt per customer of around $960 compared favorably to the 'AA'-category median of $2,050 while debt per capita ($760) and debt to net plant (52%) were slightly above the 'AA'-category medians of $577 and 47%, respectively.

While capital needs through fiscal 2020 are manageable, costs could increase somewhat by the end of the CIP to address expansion needs and/or a change in wastewater treatment disposal. Currently, the city estimates as much as $8 million may be needed around fiscal 2021 to meet future customer growth needs, although such costs, if realized, are expected to be borne by developers. In regards to treated wastewater disposal, the sewer utility currently utilizes spray fields for part of its disposal but is in the early stages of evaluating deep-well injection to allow the city to sell properties where spray fields exists. Such evaluation will include input from regulatory officials as to potential additional discharge requirements that may be necessary before the city makes a final determination on moving forward with future land sales where spray fields exist.

Additional information is available at 'www.fitchratings.com'.

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

Revenue-Supported Rating Criteria (pub. 16 Jun 2014)

https://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=750012

U.S. Water and Sewer Revenue Bond Rating Criteria (pub. 03 Sep 2015)

https://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=869223

Additional Disclosures

Dodd-Frank Rating Information Disclosure Form

https://www.fitchratings.com/creditdesk/press_releases/content/ridf_frame.cfm?pr_id=1004196

Solicitation Status

https://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=1004196

Endorsement Policy

https://www.fitchratings.com/jsp/creditdesk/PolicyRegulation.faces?context=2&detail=31

ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: HTTP://FITCHRATINGS.COM/UNDERSTANDINGCREDITRATINGS. IN ADDITION, RATING DEFINITIONS AND THE TERMS OF USE OF SUCH RATINGS ARE AVAILABLE ON THE AGENCY'S PUBLIC WEBSITE 'WWW.FITCHRATINGS.COM'. PUBLISHED RATINGS, CRITERIA AND METHODOLOGIES ARE AVAILABLE FROM THIS SITE AT ALL TIMES. FITCH'S CODE OF CONDUCT, CONFIDENTIALITY, CONFLICTS OF INTEREST, AFFILIATE FIREWALL, COMPLIANCE AND OTHER RELEVANT POLICIES AND PROCEDURES ARE ALSO AVAILABLE FROM THE 'CODE OF CONDUCT' SECTION OF THIS SITE. FITCH MAY HAVE PROVIDED ANOTHER PERMISSIBLE SERVICE TO THE RATED ENTITY OR ITS RELATED THIRD PARTIES. DETAILS OF THIS SERVICE FOR RATINGS FOR WHICH THE LEAD ANALYST IS BASED IN AN EU-REGISTERED ENTITY CAN BE FOUND ON THE ENTITY SUMMARY PAGE FOR THIS ISSUER ON THE FITCH WEBSITE.

View source version on businesswire.com: http://www.businesswire.com/news/home/20160509006267/en/

Fitch Ratings
Primary Analyst
Doug Scott
Managing Director
+1-512-215-3725
Fitch, Inc.
111 Congress, Suite 2010
Austin, TX 78701
or
Secondary Analyst
Christopher Hessenthaler
Senior Director
+1-212-908-0773
or
Committee Chairperson
Dennis Pidherny
Managing Director
+1-212-908-0738
or
Media Relations
Elizabeth Fogerty, +1 212-908-0526
[email protected]

Source: Fitch Ratings

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