Fitch Affirms Florida Govt Utility Auth (FGUA Lehigh), FL's Utility Revs at 'A'; Outlook Stable
Fitch Ratings has affirmed the outstanding ratings on the following Florida Governmental Utility Authority (FGUA Lehigh), FL (the system) revenue bonds.
--$64 million in outstanding utility revenue bonds at 'A'.
The Rating Outlook is Stable.
The bonds are payable from a senior lien pledge of the net revenues of the Lehigh water and sewer system, including connection fees.
KEY RATING DRIVERS
MODEST BUT STABLE FINANCES: Management responded to declining financial performance in fiscals 2009-2011 with multiple annual rate increases which have helped to stabilize finances. Debt service coverage (DSC) has since improved to over 1.4x in the past three fiscal years (2012-2014) from fairly low levels of around 1.1x. Financial projections show stable results continuing.
HIGH DEBT BURDEN: The system's high fixed cost structure will continue to pressure ratepayers and financial performance. However, no new debt is currently anticipated over the next five years.
HIGH USER CHARGES: Rates are high and exceed Fitch's threshold for affordability. However, liquidity is sound and capital needs are very manageable, which should limit future rate increases to levels sufficient to keep up with inflationary operating cost increases.
SUFFICIENT SYSTEM INFRASTRUCTURE: Treatment facilities have ample capacity, and current water supply is sufficient for the intermediate term. Additional future supply is expected to come from deeper aquifers, requiring more extensive treatment than is currently possible from existing facilities. However, additional resources are not expected to be needed in the next 10 years based on current growth estimates.
STABLE CUSTOMER BASE, IMPROVING ECONOMY: The system is located in southwest Florida (Lee County), an area of the country hit particularly hard by the housing crisis and economic downturn. Continued economic improvement has led to a decline in the unemployment rate and a stable customer base, which is small but mostly residential.
DECLINE IN FINANCIAL PERFORMANCE: Fitch expects the Florida Governmental Utility Authority - Lehigh system's financial profile will remain stable with limited capital needs. However, additional debt issuances or the need to fund unforeseen capital expenses could pressure rates and weaken financial flexibility.
LIMITED CUSTOMER BASE
The system provides retail water and sewer service to the Lehigh Acres community, located in Lee County (implied GO rating of 'AA'), 12 miles east of Fort Myers. The Lehigh system was acquired by FGUA in 2003 and is the second largest of the 11 systems currently owned and operated by the authority.
The customer base is stable; in fiscal 2014 the system served approximately 12,500 water customers and 10,200 sewer customers. The service area covers 60,000 acres of mostly residential property, but only roughly 20% of the area is built out. Despite the amount of developable land, customer growth is expected to be limited over the intermediate term.
STABLE FINANCIAL PERFORMANCE AND METRICS
Following the onset of the recession in fiscal 2008 the Lehigh system experienced years of declining margins and relied on the rate stabilization fund to meet DSC requirements. Rate increases have improved revenue performance and financial margins, albeit to still relatively modest levels. In 2012, net revenues from recurring customer payments (excluding connection fees) covered annual debt service (ADS) by 1.4x. This marked an improvement over DSC levels of 1.1x in fiscals 2011 and 2010. Coverage from recurring revenues was similar in fiscal 2013 before a slight rise in DSC to 1.5x in fiscal 2014.
Preliminary results for fiscal 2015 show a slight increase in DSC to 1.7x from recurring revenues due to a rise in operating revenues coupled with a decline in both operating expenses and ADS. The management-provided financial pro forma indicates DSC from recurring revenues will remain at 1.5x through 2019. The assumptions appear reasonable, including annual rate increases of less than 2%.
Liquidity has roughly doubled over the past several years to approximately $9 million (or 513 days cash on hand) including unrestricted cash and renewal and replacement fund balances in fiscal 2014. Working capital was also solid with current cash resources plus accounts receivable providing over 6x coverage of current liabilities.
HIGH DEBT BURDEN
Debt levels have been high since the system's inception in 2003 when FGUA issued the series 2003 and 2005 bonds to purchase the system and make capital improvements. Debt levels increased slightly again with the issuance of the 2010 bonds and have remained high. Debt-to-net-plant in fiscal 2014 (reflecting the net result of the 2012 refunding of the 2003 bonds) was an elevated 93%. Debt-per-customer was also high at $3,044. The medians for 'A'-rated water and sewer systems in 2015 for these metrics were 67% and $2,351, respectively. Debt carrying costs are a somewhat high but manageable 35% of gross revenues.
Debt is back-loaded and amortization is slow; 33% of principal is expected to be amortized over the next 10 years, and 77% will be paid off in 20 years. No new debt is planned over the intermediate term, resulting in a slight improvement in debt ratios over time. The current CIP totals a manageable $8.4 million and will be funded by a combination of existing bond proceeds, R&R funds, and other internal sources.
HIGH RATES POSE CHALLENGES
The system's rate structure consists of a 30% base charge and a tiered inclining block structure. The high base charges lend stability to the revenue stream, while the tiered rate structure serves to promote water conservation. Rates have been raised over the past several years and going forward management expects rates will be adjusted annually at 75% of the consumer price index (1.7% increase presumed for 2017).
The average residential customer consumes about 4,000 gallons of water per month (gpm). In 2015, the average bill assuming 4,000 gallons was $95, or a somewhat high 2.5% of median household income (MHI). When the system's rates are applied to a national average of 7,500 gpm of water and 6,000 (max) gpm of sewer use, the charges are closer to $130 in fiscal 2015 and equate to 3.7% of MHI. Fitch remains concerned that the system's high rates could limit future rate-raising flexibility and may pose a challenge to future financial performance.
SYSTEM INFRASTRUCTURE IS SOLID
The system is currently served by one water treatment facility with 3.1 million gallons per day (mgd) of design capacity. A second treatment facility has been turned into a pump station until such time as growth necessitates a need for additional capacity. The second plant will need to undergo treatment upgrades to include reverse osmosis technology in order to successfully treat the more brackish water associated with groundwater wells that feed the plant.
An interconnection with the city of Fort Myers' water system provides redundancy and an emergency back-up source of an additional 2.0 mgd. Raw water consists of groundwater from the Sandstone Aquifer and continues to meet average daily demand requirements of about 2.0 mgd. The water system is regulated via a recently extended consumptive use permit (CUP) from the South Florida Water Management District through 2035.
The wastewater system includes a single treatment facility with a rated capacity of 3.5 mgd, which is well in excess of average daily flows of 1.7 mgd. The plant is designed for expansion of up to 5 mgd should future demand require greater capacity. Wastewater effluent is discharged into deep injection wells and the system is in full compliance with the regulations applicable to this method of disposal.
SOMEWHAT LIMITED BUT IMPROVING ECONOMY
Lee County's economic profile appears to be steadily strengthening, with employment growth over the past several years (11.4% aggregate employment growth from October 2012 through the same month in 2015) helping to offset steep declines during the past recession. The unemployment rate has improved from 8.4% in October 2012 to a five-year low of 4.8% in October 2015, below the rate of the state of Florida.
The Lehigh Acres area is an inland subset of the county and does not enjoy the wealth levels of most of Lee County's coastal communities. However, despite having relatively lower average median household income and higher unemployment levels than the county, Fitch expects that Lehigh Acres' economic profile will improve as overall county indicators progress.
Additional information is available at 'www.fitchratings.com'.
In addition to the sources of information identified in Fitch's Revenue-Supported Rating Criteria, this action was additionally informed by information from Creditscope.
Revenue-Supported Rating Criteria (pub. 16 Jun 2014)
U.S. Water and Sewer Revenue Bond Rating Criteria (pub. 03 Sep 2015)
Dodd-Frank Rating Information Disclosure Form
Fitch Ratings, Inc.
33 Whitehall Street
New York, NY 10004
Teri Wenck, CPA
Elizabeth Fogerty, +1-212-908-0526