Fitch Rates Hernando County, FL's Water and Sewer Revs 'AA-'; Outlook Stable

NEW YORK--(BUSINESS WIRE)--

Fitch Ratings assigns an 'AA-' rating to the following Hernando County, FL (the county) revenue bonds:

--Approximately $38 million water and sewer refunding revenue bonds, series 2013A.

Bond proceeds will be used to refund the outstanding series 2003 and series 2004 bonds for interest savings, fund a deposit to the debt service reserve and pay issuance costs.

The bonds are scheduled for a negotiated sale the week of June 3.

In addition, Fitch affirms the following ratings:

--Approximately $39 million in outstanding water and sewer revenue bonds at 'AA-'.

The Rating Outlook is Stable.

SECURITY

The bonds are secured by a senior lien pledge of the net revenues of the county's water and sewer system (the system), and legally available connection fees.

KEY RATING DRIVERS

IMPROVED FINANCIAL PROFILE: Rate increases implemented over the past few years improved financial margins and led to strong debt service coverage (DSC) in fiscal 2012. Fitch expects further improvement in financial metrics in fiscals 2013 and 2014 as the rate plan is fully implemented.

LOW DEBT BURDEN: Total outstanding long-term debt is a moderate 33% of net plant and just $816 per customer in fiscal 2012. The capital plan calls for additional long-term debt (mostly subordinate state revolving fund loans). However, Fitch projects debt ratios will remain close to the medians for the rating category.

RATES EXPECTED TO REMAIN AFFORDABLE: The combined monthly residential bill of roughly $49 is affordable at 1.4% of median household income, providing the system with financial flexibility. Future planned rate increases (necessary to meet proposed additional debt requirements), should maintain the system's sound financial profile while remaining affordable.

MANAGEABLE CAPITAL NEEDS: After a period of strong capital spending over the past five years, the system's medium-range capital needs are manageable and focused on sewer plant expansion and various additional infrastructure improvements.

LIMITED, IMPROVING LOCAL ECONOMY: The economy remains somewhat limited with ties to agriculture, manufacturing/mining, and distribution; however, commuting distance to the city of Tampa provides residents with additional employment options.

RATING SENSITIVITIES

SOLID FINANCIAL PERFORMANCE EXPECTED: The rating is sensitive to shifts in various credit factors including financial and operating performance, and rate and capital management in light of expected additional debt. The Stable Outlook reflects Fitch's expectation that such shifts are unlikely.

CREDIT PROFILE

IMPROVED FINANCIAL METRICS KEY TO RATING STABILITY

Financial performance began to improve in fiscal 2011 after coming under some pressure in fiscals 2009 and 2010, a result of softening economic conditions and a decline in connection fees. A combination of rate increases and a decline in operating expenses helped improved financial margins and DSC. In fiscal 2011, the system generated $6.7 million in net revenues available for debt service, a $1.2 million increase from the prior year, and coverage of senior lien bonds was a fairly healthy 1.9x.

In fiscal 2012, net available revenues increased further, providing 2.6x DSC on the senior bonds, including one-time impact/connection fees, and 2.5x without such fees. Coverage of all debt, including subordinate state revolving fund loans, was 2.3x in fiscal 2012, and 2.1x excluding impact fees. System free cash flow also improved but remains below average at 68% of depreciation in fiscal 2012, indicating the system is unable to adequately fund routine system upkeep and renewal from its existing rates.

The county is in the process of updating its capital plan and financial forecast with its rate consultant. Fitch expects the forecast will include additional rate increases to fund the capital program, although such increases are expected to be manageable given the size of the expected borrowings, and that system financial results will remain solid.

Liquidity is strong, and coupled with the system's affordable rates provides financial flexibility. The system ended fiscal 2012 with $11 million in unrestricted cash and investments, which combined with renewal and replacement (R&R) fund balances was equivalent to 341 days cash on hand.

MANAGEABLE CAPITAL PLAN, MOSTLY DEBT-FUNDED

Mostly debt funded capital spending for the system has been strong, averaging 192% of depreciation over the past five years. The county expects to spend roughly $65 million over the next several years on various system-wide improvements, including water supply and transmission projects, sewer collection and treatment plant upgrades and expansion, and additional reclaimed water projects. The largest single project is the expansion of the Airport Road wastewater plant (about $36 million).

Funding for the majority of the CIP will come from a combination of state revolving fund loans and additional parity bonds, resulting in an increased debt burden. However, Fitch notes the current debt burden is low and projections that include the SRF loans show the debt burden will remain in line with similarly-rated systems.

FLEXIBLE AND AFFORDABLE RATES

Rates are structured with a base charge and inclining block consumption charges designed to promote conservation. The base rate is roughly 38% of the total bill, which is viewed favorably as the system is somewhat less dependent upon flows. Rates are very affordable and compare favorably to other systems. At roughly $46 for combined service in fiscal 2013, the average monthly bill assuming 8,000 gallons of water use is just 1.3% of median household income (MHI), indicating significant additional rate raising flexibility.

Water rates were increased by 4% in fiscal 2013, and will be increased by another 5% in fiscal 2014. As part of the same multi-year rate plan approved by the county in 2010, sewer rates were increased by 8% for 2013, and are approved for an additional 10% increase for fiscal 2014. Going forward, management projects additional rate increases will be implemented, possibly as part of another multi-year rate resolution. While additional rate increases will push rates higher, the monthly bill is expected to remain competitive and affordable.

ACCESS TO TAMPA MSA PROVIDES ECONOMIC STABILITY

Hernando County is located in west central Florida, along the Gulf of Mexico, approximately 50 miles north of the city of Tampa (Fitch implied GO rating of 'AA').

The system provides service to approximately 57,000 water and 27,000 sewer accounts located within the unincorporated areas of the county. The customer base is predominantly residential and there is no customer concentration.

The county experienced rapid population growth of nearly 30% from 2000 to 2010, and has a current estimated population of 173,000. Growth was driven by proximity to employment opportunities and commercial air service in Tampa, affordable housing, coastal access and recreational activities. Some residents commute to the Tampa metropolitan area, which serves as the economic anchor of Florida's Gulf Coast.

Local employment options remain somewhat limited with major industries including limestone mining, cement production, dairy and cattle production, construction, and manufacturing. The county also has an active tourism and retiree base. Employment growth over the past few years has helped lower the county's previously very high unemployment rate to a still elevated 8.4% in March 2013.

Additional information is available at 'www.fitchratings.com'.

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 Outlook: Water and Sewer Sector' (Dec. 5, 2012).

Applicable Criteria and Related Research:

Revenue-Supported Rating Criteria

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=681015

U.S. Water and Sewer Revenue Bond Rating Criteria

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=684901

2013 Water and Sewer Medians

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

2013 Outlook: Water and Sewer Sector

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

Additional Disclosure

Solicitation Status

http://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=791604

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