Fitch Rates Leesburg, Florida's 2007 Utility System Revs 'A-'; Outlook to Stable

Business Wire, July 13, 2007

NEW YORK -- Fitch Ratings has assigned an 'A-' rating to the following issues for Leesburg, Florida (the city):

--$22.9 utility system revenue bonds, series 2007A;

--$1.1 million utility system revenue bonds, series 2007B (taxable).

The bonds, expected to be insured at closing, are scheduled to sell the week of July 30 via negotiation led by Citigroup. D.A. Davidson & Co. serves as the city's financial advisor. The series 2007A bond proceeds will finance various capital improvements to the utility system and refund an outstanding bond anticipation note, while proceeds from the series 2007B bonds will replenish the combined utility system's operating reserve for the wastewater utility. The bonds are secured by a pledge of net revenues of the water, sewer, and gas systems, as well as water and sewer customer capacity charges. Fitch has also affirmed the 'A-' rating on the city's approximately $22.9 million of outstanding utility system revenue bonds and revised the Rating Outlook to Stable from Negative.

The 'A-' rating is based on the city's solid operating margins and strong projected debt service coverage, low water and wastewater rates relative to surrounding utilities, and manageable capital needs. The rating also reflects the system's below average liquidity position following the recent depletion of cash reserves, weak amortization rates, below-average resident wealth levels, and the general government's reliance on cash transfers from the combined system. The Outlook revision to Stable reflects the partial restoration of operating reserves provided primarily by the current taxable bond issue, as well as management's commitment to build unrestricted cash reserves going forward and adhere to policies. Fitch believes maintenance of adequate liquidity and continued adherence to policies will be key credit drivers and could position the system for positive rating action in the coming years.

The system operates five water treatment plants with a combined treatment capacity of 19 million gallons daily (mgd) and maintains sufficient water supply drawn from 20 Floridan aquifer wells, which requires minimal treatment. The system operates under an existing consumptive use permit (CUP) granted by the St. John's Water Management District, with a revised permit application in process. Treatment capacity at the city's two wastewater treatment plants (WWTPs) is conservatively projected to be adequate through 2012. Both facilities are operating under current permits. The water and wastewater systems serve approximately 20,799 and 15,888 customers, respectively. In addition, the city operates a natural gas distribution system, and purchases natural gas on a wholesale basis monthly from the Florida Gas Utility. The city has a contract with Florida Gas Transmission Company to transport gas to the city's two gate stations. The cost to purchase gas is passed through to the customer base with monthly rate adjustments that do not require approval by the city commission.

In fiscal 2000, the city adopted several policies to mitigate concern regarding utility system transfers to the general fund. As a result, operating transfers to the general fund were not to exceed 10% of each utility fund's budget or result in a net loss to the fund at fiscal year end, and each utility fund was required to maintain a reserve equal to at least 25% of current year budget. Fiscal 2005 results showed the city to be out of compliance with its financial policies, as transfers out of the gas and water utility funds resulted in a decrease in net assets and reserves in the utility funds fell below the 25% threshold required by policy for three consecutive fiscal years. In addition, the reduction in reserves attributable to the cash defeasance of previously outstanding utility system revenue bonds and transfers out for unplanned capital projects led to Fitch downgrading the rating to 'A-' from 'A' and revising the Rating Outlook to Negative in January 2007.

Solid operating margins in fiscal 2006 helped partially restore the system's cash position to an adequate level equal to 95 cash on hand, though still slightly below the 25% of current year's budget required by policy. Debt service coverage by net revenues together with legally available impact fees is projected to stay comfortably above 3.0 times (x) through fiscal 2012. Excluding impact fees, debt service coverage is expected to still remain within a range of 2.9x to 3.9x. The strong debt service coverage is tempered by the system's slow amortization rate, which shows only 18% of debt retired in 10 years, including the current financing. The system's rate structure is low relative to area competitors, with only inflationary increases to water and wastewater rates planned though 2012. Capital financing, totaling $64.7 million over the next five years, is needed primarily for routine maintenance and improvement of existing infrastructure and to implement the system's reclaimed water program. Dedicated CIP funding sources include a portion of the current bond offering, along with additional bond proceeds of approximately . $6.6 million from an expected parity debt issuance planned for fiscal 2009. Remaining funding sources will be derived from impact fees, excess operating revenue and grants.