AUSTIN, Texas--(BUSINESS WIRE)--Fitch Ratings affirms an 'A+' rating on the following city of Fort Myers, FL (the city) bonds:
--$122.4 million utility system refunding revenue bonds, series 2012, 2011 and 2006.
The Rating Outlook is Stable.
SECURITY:
The bonds are secured by a pledge of a first lien on net revenues of the water and sewer system (the system), including legally available system development fees. Debt service reserve fund requirements are funded through the use of surety policies.
KEY RATING DRIVERS:
HIGHLY LEVERAGED SYSTEM: The system's debt levels are very high and Fitch expects them to remain elevated based on future capital needs. The system's combined debt per customer of $6,771 (both senior and subordinate lien state revolving fund loans) is 3.5x higher than the $1,963 'A' category median.
ADEQUATE COVERAGE, HEALTHY LIQUIDITY: Financial performance has remained adequate in light of the growing debt burden. The system posted solid senior lien debt service coverage (DSC) of 1.9x and all-in DSC 1.4x in fiscal 2013. Liquidity is healthy with over 385 days of cash on hand, inclusive of the system repair and renewal reserves.
DIMINISHED RATE FLEXIBILITY: Future rate setting flexibility may be hindered by very high rates coupled with below average wealth levels. Continued rate escalation over previous years will continue to pressure the rate base.
AMPLE SUPPLY/SYSTEM CAPACITY: The system has ample water supply and treatment capacities and is in compliance with all applicable regulations.
STRAINED ECONOMIC CONDITIONS IMPROVING: The city continues to face challenges as a result of the housing crisis. Aspects of the economy are showing signs of improvement with population increasing and unemployment figures dropping to below the national average.
RATING SENSITIVITIES
FINANCIAL STABILITY: Failure to maintain adequate debt service coverage levels for the rating and sound liquidity could cause downward pressure on the rating.
FURTHER LEVERAGING: Additional debt beyond what is currently anticipated, including the $100 million planned for a new water reclamation facility, could further pressure the rating.
CREDIT PROFILE:
The city (implied general obligation rating 'AA-'; Negative Outlook by Fitch) is located in Lee County, on the western coast of Florida with an estimate 2013 population of approximately 68,000, a gain of 9% since the 2010 census. The system provides retail service to over 20,000 water and 18,400 wastewater accounts and a limited number of reclaimed water users within the city and portions of unincorporated Lee County. The city has an interlocal agreement with Lee County that allocates wastewater capacity to an unincorporated portion of the county.
AMPLE WATER SUPPLY AND TREATMENT CAPACITY
The water supply system is operating under permit from the South Florida Water Management District (SFWMD). The permit expires in March 2020 and allows withdrawal of up to 16 million gallons daily (mgd), which is well in excess of present demand of 6 mgd. The water treatment capacity is more than adequate with 60% of capacity remaining.
GROWTH & AGING FACILITIES FUELED HEAVY DEBT BURDEN
Debt levels for the system are elevated and well above the debt per capita median for similarly rated credits. Amortization is above average with 7%-8% of the debt rolling off each year. Historically all capital improvements were financed through debt issuance, both senior lien debt and subordinate lien state revolving loans. Capital needs focused on expanding infrastructure to address area growth as well as on the replacement of aging facilities.
Long-term debt outstanding for fiscal 2013 totals $265 million, or $6,771 per customer, which is more than three times the 'A' category median. Combined debt service consumed a high 43% of fiscal 2013 gross revenues. Future capital needs, which are expected to be primarily debt financed, will continue to challenge the system's debt profile.
RETURN OF GROWTH COULD PRESSURE CAPITAL PLANS
Capital needs which declined due to recessionary pressures resulted in the deferment of capital projects. Current capital needs (2015-2019) are estimated at $115 million or $2,943 per customer, for the next five years. As has historically been the practice, the system plans to finance at least 40% of the capital improvement plan (CIP) with bonds in the form of two separate $25 million issuances within the 2015-2017 timeframe. The city plans to monitor its capital plan based on needs and revenue sufficiency, and modify its spending accordingly.
Capacity of the wastewater system is at 35%. When 25% of system capacity remains additional treatment capacity in the form of a new East Water Reclamation Plant (WRP) will be necessary. The plant has an estimated cost of $100 million and is currently planned just outside of the five year CIP in approximately 2020 or 2021. The East WRP would be largely debt financed; adding to the system's already highly leveraged debt position.
If growth continues to rebound at a more rapid pace, pressuring wastewater system capacity, the $100 million East WRP timeline would be accelerated. However, despite growth in the number of customer connection over the last three years, wastewater flows have grown at a slower pace.
STABLE FINANCIAL PERFORMANCE
Financial metrics have remained adequate as debt burden increased. DSC on senior lien debt has remained healthy at 1.9x for the past two fiscal years, while the Fitch calculated all-in DSC registers a weaker 1.3x and 1.4x for fiscal 2012 and 2013, respectively. Unrestricted cash and investments for fiscal 2013 registered a strong 385 days of cash on hand. Given the city's policy of debt financing capital needs, liquidity levels should remain strong. Planned rate increases of 4% for 2014 and annual 5% increases through 2018 should keep revenues sufficient to maintain DSC levels in line with historical norms.
REDUCED RATE FLEXIBILITY
An average monthly residential water and sewer bill (based on a relatively low consumption of 4,000 gallons) totals $90 or 2.9% of MHI, which Fitch considers very high. Planned annual rate increases will further strain affordability. The city reports no major protests to the rate increases. System rates had registered among the highest in the region, but more recently other surrounding communities have had to raise rates and now the city's rates compare more favorably. Fitch believes the high cost presently charged for service has the potential to influence future decisions regarding rates and hinders revenue raising flexibility.
Prior to Jan. 1, 2014, it was the city's policy to waive impact fees in an effort to spur development. This policy of waiving impact fees has contributed to the city's high rates, placing more of the burden on current rate payers to finance growth projects. As of January 2014, the city has reinstituted the collection of impact fees and to date has collected approximately $1 million. Collection of impact fees could off-set future rate increases needed to fund the construction of the East WRP.
HOUSING MARKET & ECONOMY SHOWING IMPROVEMENT
The economy is concentrated in health care, higher education, tourism and, until lately, real estate and construction. The housing market correction and recession have had a magnified effect on the area and its economy. During the recession, the area saw a high number of foreclosures, population decline and taxable assessed values dropped approximately 49% from fiscal 2008-2013. However, there are signs up economic improvement with the taxable assessed value for 2014 up 9% from 2013.
Employment growth is also rebounding after three years of decline, with employment growing 3%-5% annually from 2012 to 2014. As a result, the May 2014 unemployment figure is down to 5.8% compared to 6.8% the year prior and is well below the 11.6% peak in 2011. The city's poverty rate remains high at 25%, compared to the 14.9% national average. Wealth levels remain low with MHI equal to 79% and 70% of the state and national averages, respectively.
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, Zillow and Burton & Associates (Rate Consultants).
Applicable Criteria and Related Research:
--'Revenue-Supported Rating Criteria' (June 2014);
--'U.S. Water and Sewer Revenue Bond Rating Criteria' (July 2013);
--'2014 Water and Sewer Medians' (December 2013);
--'2014 Outlook: Water and Sewer Sector' (December 2013).
Applicable Criteria and Related Research:
Revenue-Supported Rating Criteria
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=750012
U.S. Water and Sewer Revenue Bond Rating Criteria
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=715275
2014 Water and Sewer Medians
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=724358
2014 Outlook: Water and Sewer Sector
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=724357
Additional Disclosure
Solicitation Status
http://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=840894
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