Fitch Upgrades Collier County, Florida Water & Sewer District Revenues to 'AAA'; Outlook Stable

NEW YORK--()--Fitch Ratings upgrades the rating on the following Collier County Water & Sewer District, Florida (the district):

--$77.4 million water and sewer refunding revenue bonds, Series 2006 to 'AAA' from 'AA+'.

In addition, the Rating Outlook is being revised to Stable from Positive.

SECURITY

The bonds are secured by a pledge and first lien on net revenues derived from the operation of the system, connection fees, and the proceeds from any and all assessments against property benefited by the system. The bonds are additionally secured by a cash-funded debt service reserve fund.

The Rating Outlook is Stable.

KEY RATING DRIVERS

COMBINED STRENGTHS SUPPORT 'AAA' RATING: The rating upgrade reflects years of strategic financial management and prudent debt limitations that have yielded a consistently strong overall credit profile. Management's ability to improve financial margins supported by competitive user charges while maintaining stable operations despite the pressures presented during and after the national economic downturn reflect superior qualities inherent to an 'AAA' credit.

IMPROVING DEBT BURDEN: The system's debt levels are expected to continue to decline and metrics should steadily improve. The utility plans to internally fund a five-year capital plan that is entirely dedicated to the renewal, replacement, and longevity of the system's relatively current infrastructure.

SUSTAINABLE CAPACITY AND OPERATIONS: The system's water supply and wastewater treatment capacity are abundant, providing significant flexibility to meet longer-term demand.

MUCH IMPROVED LOCAL ECONOMY: Recent economic indicators such as employment, housing values and housing starts show a strengthened recovery. Fitch expects sound long-term population and economic growth based on the county's very affluent tax base and recognition as a leading destination for tourism and leisure activity on Florida's Gulf Coast.

RATING SENSITIVITY

CONTINUED STRONG CREDIT FUNDAMENTALS: The rating is sensitive to shifts in various credit fundamentals. Persistent and sustainable financial, operational and economic growth merits the current upgrade and the Stable Outlook implies that these positive trends are likely to continue.

CREDIT SUMMARY

Collier County (implied general obligation rating of 'AA+' with a Stable Outlook by Fitch) is located along the Gulf of Mexico in southwestern Florida. The county encompasses a portion of the Everglades National Park and is home to popular destinations including the city of Naples and Marco Island. The water and sewer district serves over 54,000 mostly residential customer accounts and over 200,000 residents, both permanent and seasonal, in the unincorporated communities of Collier County.

STABILIZED ECONOMY

The county's population was 339,642 in 2013, approximately 3% above the 2012 level. Population is expected to grow at this rate over the five-year forecast period.

The unemployment rate continues to rank below the state and national averages, and declined to 5.5% in March 2014 compared to 6.6% in March 2013. Economic activity remains somewhat concentrated, centered on leisure and hospitality and retail trade. However the county is actively seeking to diversify local businesses and lay the infrastructure for supporting new companies. It is solidly emerging from the recession as indicated by upward trends in housing prices, tourist development tax collections and sales tax receipts. Further, there are multiple indicators of a strong recovery in the housing market: Zillow.com shows housing values are up 13.9% over prior year levels, Global Insights projects robust growth in 2014 housing starts, and the county reports permitting of several sizable (as large as 1,999 units) residential projects which are now in various stages of development. Fitch notes that the growth rate projected by the housing indicators appears to be at a more manageable pace than during the housing boom.

CONTINUED EXCELLENT FINANCIAL PERFORMANCE

The system's strong financial profile is evidenced by very high and continuously improving financial metrics. Unrestricted cash in fiscal 2013 was $153 million, a 7% increase from the prior year, and equated to over 800 days of operations. Liquidity has averaged over 780 days for the past five years, despite a primarily cash-funded capital program in each of those years. The system's operating margin has shown some decline over time as the system's operating expenses related to renewed focus on system repair and rehabilitation projects have increased; however, it remained healthy in 2013 at 34% ('AAA' median is 38%).

Net revenues available for annual debt service (ADS) yielded extremely high debt service coverage levels in fiscal 2013, with 4.7x on the senior lien, and 3.5x when excluding connection fees. Coverage was still very healthy at 2.6x for all debt service (2.0x excluding connection fees), including subordinate revolving fund loans. The utility has conservatively forecast for out-year expenditure growth to outpace recurring revenues; however, coverage is still forecast to exceed 3.5x for senior debt and approximate 2.0x for all-in coverage. Given prior years' results compared to forecasts, Fitch expects these projections to be exceeded.

MODERATE USER CHARGES

The combined cost of water and sewer in the district, based on the average residential consumption of 6,000 gallons per month of both potable water and sewer, represents 1.5% of median household income (MHI), falling comfortably below Fitch's 2.0% of MHI affordability threshold. The utility reviews rates annually, recommending increases to the county commission as needed. Rates were not changed for fiscal years 2011 - 2014, and a rate study is currently being conducted to be presented to the board of county commissioners for adoption to determine rates for 2015 - 2019. The district's user rates rank favorably compared to adjacent utilities, and management retains ample flexibility to levy rate increases in the future.

IMPROVING DEBT PROFILE

The system's debt profile also shows continued improvement, as demonstrated by steadily lower annual debt carrying costs. Debt-to-net-plant was only 27% in 2013 and debt as a percentage of gross revenues fell to 19% compared to the 'AAA' median averages of 47% and 18%, respectively. Debt amortization is also favorable, with 56% of principal amortizing over 10 years and 86% over 20 years. The total debt carrying cost on a per-customer basis was somewhat high at $1,916 in fiscal 2013 ('AAA' median average is $1,165); however, this amount is expected to decline by 25% in five years to $1,452 and decline thereafter. As no further new debt issuances are planned in the next five years, fixed costs should continue to decline and ratios should show further improvement, approaching medians closer to the 'AAA' category.

INTERNALLY SUPPORTED CAPITAL PLAN

The system's fiscal 2014 - 2018 capital improvement plan (CIP) totals over $243 million and will be funded entirely by user rates. Major capital upgrades were completed in 2005 and since then most capital spending has been dedicated to maintaining the system in a state of good repair. CIP projects will continue this trend, providing mostly renewal and replacement of the system's assets and limited utility-funded growth-related projects. Residential and commercial development, funded entirely by connection fees, is projected to continue at its current vigorous pace, with $13.5 million collected in 2013, $8.8 million expected in 2014, and $12.0 million anticipated annually for fiscals 2015-2018.

STRONG OPERATING PROFILE

The system has ample raw water supply and water and sewer treatment capacity to meet expected demand for the foreseeable future. Water supply is regulated by the South Florida Water Management District under a consumptive use permit that expires in 2026. The county has a total permitted groundwater allocation of 56.1 million gallons per day (mgd), and a treatment capacity of 52 mgd, both of which compare favorably to average daily demand of only 22 mgd in fiscal 2013. Wastewater is treated by both the North and South county-owned and operated wastewater treatment plants. Overall wastewater treatment capacity of 40 mgd is sustainable, as demand in 2013 was 16.9 mgd, or 42% of capacity. A large portion of treated effluent is resold for irrigation purposes. The utility also has contracts in place to handle and dispose of biosolids that are a byproduct of both potable water and wastewater treatment. The county's available water supply, wastewater treatment capacity, and reclaimed water production are expected to be sufficient to accommodate new housing developments already under construction, which are already accounted for in the utility's consumption forecast.

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 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 Outlook: Water and Sewer Sector' (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=715275

Revenue-Supported Rating Criteria

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=709499

Additional Disclosure

Solicitation Status

http://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=833008

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Contacts

Fitch Ratings
Primary Analyst
Eva Rippeteau
Associate Director
+1-212-908-9105
Fitch Ratings, Inc.
33 Whitehall St.
New York, NY 10004
or
Secondary Analyst
Andrew DeStefano
Director
+1-212-908-0284
or
Committee Chairperson
Amy Laskey
Managing Director
+1-212-908-0568
or
Media Relations
Elizabeth Fogerty, +1-212-908-0526
elizabeth.fogerty@fitchratings.com

Sharing

Contacts

Fitch Ratings
Primary Analyst
Eva Rippeteau
Associate Director
+1-212-908-9105
Fitch Ratings, Inc.
33 Whitehall St.
New York, NY 10004
or
Secondary Analyst
Andrew DeStefano
Director
+1-212-908-0284
or
Committee Chairperson
Amy Laskey
Managing Director
+1-212-908-0568
or
Media Relations
Elizabeth Fogerty, +1-212-908-0526
elizabeth.fogerty@fitchratings.com