Fitch Affirms Citrus County, FL Water and Wastewater System Revs at 'AA-'; Outlook Stable

NEW YORK--(BUSINESS WIRE)--

Fitch Ratings takes the following rating action on Citrus County, Florida's bonds:

-Approximately $48 million outstanding water and wastewater system revenue bonds affirmed at 'AA-'.

The Rating Outlook is Stable.

SECURITY

The bonds are secured by a senior lien pledge on the water and wastewater system's net revenues, and connection fees.

KEY RATING DRIVERS

STRONG FINANCIAL MANAGEMENT: Financial performance remains strong with high margins and strong debt service coverage and liquidity. Cash is expected to decline with pay-go capital funding requirements over the next several years and system transfers to the county's general fund beginning in fiscal 2013.

DECLINING DEBT BURDEN: The system's debt burden approximates the medians for 'AA'-rated systems, and has been on the decline for several years. A manageable capital program expected to be mostly pay-go funded should allow debt ratios to continue trending downward.

WELL-MANAGED SYSTEM OPERATIONS: Water supply and treatment capacity are solid, allowing for additional customer growth with limited long-term capital investment needs. The system remains well-managed, alleviating concerns of potential inefficiencies that can arise due to the geographically dispersed nature of the system.

SOMEWHAT LIMITED LOCAL ECONOMY: Citrus is located about 70 miles north of Tampa along the Gulf Coast. The local economy remains limited with below-average economic indicators and significant concentration in Progress Energy, the top taxpayer and largest private employer.

HIGH USER CHARGES: Rates for most customers are high, although the system's strong financial margins and liquidity and manageable capital program limit the need for additional rate increases.

WHAT COULD TRIGGER A RATING ACTION

CONTINUED STRONG FINANCIAL MANAGEMENT AND DECLINING DEBT PROFILE: If the system continues to demonstrate strong financial results (and liquidity) and a declining debt burden while administering its capital program, positive rating action could result.

CREDIT PROFILE

STABLE BUT LIMITED SERVICE AREA ECONOMY

Citrus County (implied GO rating of 'AA-' with a Stable Outlook by Fitch) is located on Florida's Gulf Coast, approximately 70 miles north of the city of Tampa. The county provides water and sewer utility services to a predominantly residential customer base of 24,000 water and about 12,000 sewer customers in 2012. The total population served in 2012 is approximately 80,000. The service area is fairly large and dispersed throughout most of the 584 square mile geographic area of the county.

The local economy serves the area's large retiree community and remains somewhat limited with concentration in the energy sector and a large agricultural presence. Progress Energy (long-term Issuer Default Rating of 'BBB' with a Stable Outlook) is a significant private employer providing 1,000 jobs in 2011. Leading customers, which do not include Progress, are a diverse 2.6% of total system revenues. The county's unemployment rate has declined over the past several years but remains elevated at 9.2% in October 2012.

WELL-MANAGED OPERATING AND FINANCIAL PROFILE A CREDIT STRENGTH

Water supply is ample and consists of minimally treated groundwater from the Floridan Aquifer via county-owned wells and water purchases from the Withlacoochee Water Supply Authority (WWSA) through long-term contract. Management believes the county's current permitted allocation and WWSA purchases are sufficient to meet demand for about another 15 years. Subsequent supply needs are expected to come from increased allocation from the aquifer through an updated water use permit from the Southwest Florida Water Management District.

Total water system treatment capacity of 29 million gallons per day (mgd) is more than sufficient to cover average demand of about 9 mgd. Sewer treatment capacity is also solid at more than 2x the average daily flow.

Sewer treatment facilities are interspersed throughout the service area, which can lead to inefficiencies. However, Fitch notes the system is generally well-run and financial performance has been a primary rating driver and credit strength for the system. The county is in the process of expanding one of its sewer plants and will look to consolidate some of the smaller facilities in the future. However, a full-scale consolidation is not expected at this time. Effluent is sold to reclaimed water customers for irrigation, or is disposed of into rapid infiltration basins or sprayfields. The system has no surface water discharge.

System finances remain very strong, evidenced by high financial margins, strong excess cash flows and debt service coverage, and the accumulation of very high liquidity. For fiscal 2012, which is preliminary and unaudited, the system extends the recent trend of financial margins above 50%, provides 3.0x coverage of senior lien debt (2.7x coverage of all debt including subordinate state revolving fund loans) from net revenues, and excess cash flow of roughly $6 million. The county expects the system will end fiscal 2012 with over $24 million in unrestricted cash and investments, and another $2.3 million in renewal and replacement funds, which combined is equivalent to over 1,200 days cash on hand.

The strong historical financial margins are expected to continue. However, Fitch expects liquidity will decline but remain solid as the system spends roughly $22 million on capital needs from pay-go sources over the next three years. In addition, the system is expected to make a one-time $2 million (approximately) cash contribution to the general fund in fiscal 2013, as well as begin making ongoing annual transfers to the general fund based on a percentage of annual gross system revenues (15% or about $2.4 million based on current year budgeted revenue). Fitch believes the system will be able to maintain its strong financial profile despite the transfers and projects fiscal 2013 coverage of debt service and transfers will remain above 2.0x based on the fiscal 2013 budget.

DECLINING DEBT BURDEN, MANAGEABLE PAY-GO FUNDED CAPITAL PLAN

The system's debt profile has generally improved over the past six years. Debt-to-net fixed assets is 54% in 2012, which is slightly above the median of 49% for 'AA' category systems, but well below the 89% recorded in fiscal 2007. Debt per customer of $1,380 is comfortably below the median for similarly rated systems ($1,828) and is expected to decline further, as the system is not projecting to issue additional bonds for its capital program.

The five-year capital improvement plan through 2017 totals a very manageable $50 million. Major projects include a new force main to divert flows from an older treatment plant to the newer Meadowcrest treatment facility, upgrade and expand the Sugarmill Woods plant, a meter replacement program, miscellaneous renewal and replacement of system infrastructure, master lift station improvements, and sewer system expansion to un-served portions of the county.

HIGH USER CHARGES, BUT LARGE-SCALE RATE HIKES APPEAR UNNECESSARY

Rates are set independently by the county commission and have been raised fairly significantly over the years. Rates prudently consist of a base fee for service and an inclining block rate tied to consumption. For most customers, water rates are reasonable at about $21 for 7,000 gallons. However, the sewer rates are somewhat high at $72, making the combined monthly bill for a typical residential customer total approximately $93, which represents a high 3% of median household income. Given the strong annual financial margins, high system cash balances, and manageable capital program, Fitch does not expect the system will need additional rate increases for the foreseeable future.

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', June 12, 2012;

--'U.S. Water and Sewer Revenue Bond Rating Criteria', Aug. 3, 2012;

--'2013 Water and Sewer Medians', Dec. 5, 2012;

--'2013 Sector Outlook: Water and Sewer', Dec. 5, 2012.

Applicable Criteria and Related Research:

2013 Outlook: Water and Sewer Sector

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=695755

2013 Water and Sewer Medians

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=695756

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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