OREANDA-NEWS. February 16, 2015. Fitch Ratings affirms the ratings on Leesburg, FL's (the city) approximately \\$60 million in outstanding utility system revenue bonds at 'AA-'.

The Rating Outlook is Stable.

SECURITY

The bonds are secured by a senior lien pledge of net revenues of the city's water, sewer, and gas systems (the system), as well as water and sewer capacity charges.

KEY RATING DRIVERS

STRONG FINANCES: Financial performance remains strong despite a decline in debt service coverage (DSC) and free cash flow (FCF) in fiscal 2013. Ample liquidity provides financial flexibility.

AFFORDABLE RATES: Rate increases have been consistent and modest and traditionally linked to an inflation index. Charges for combined water and sewer service are competitive and affordable at 1.8% of median household income (MHI). Residential natural gas rates are also competitive both in relation to other municipal systems and to regulated natural gas companies within the state.

LOW DEBT, MODEST CAPITAL NEEDS: The debt burden remains manageable with most ratios consistent with Fitch's 'AA' category medians. Pay-out is slow, but the city does not expect to issue additional bonds over the near term, allowing modest declines in the debt burden to continue.

COMMODITY COST RISK MITIGATED: The gas component of the monthly utility bill includes a purchased gas 'pass-through' which is automatically adjusted to pass along commodity cost increases to customers on a monthly basis and does not require approval by the city commission.

LIMITED, REBOUNDING ECONOMY: The local economy is rebounding from a severe recession with county-wide growth in jobs and a recovery of the housing market. Employment is limited and generally focused on agriculture, real estate, and health care.

RATING SENSITIVITIES

STRONG FINANCIAL MANAGEMENT: The rating is sensitive to shifts in fundamental credit characteristics, and in particular, Fitch's expectation that the system will continue to demonstrate a strong financial profile and solid liquidity.

CREDIT PROFILE

Leesburg (implied GOs rated 'AA-' by Fitch) is located in Lake County (the county) in central Florida, approximately 40 miles northwest of Orlando. The city owns and operates the combined utility system, consisting of natural gas delivery, water treatment and distribution, and wastewater collection, treatment, and disposal. Services are provided to residents of the city and areas nearby in unincorporated parts of the county.

Each utility is accounted for as a separate self-supporting enterprise fund of the city but are consolidated for bonding purposes. The water and wastewater utilities are the largest revenue contributors, accounting for approximately three-fourths of total operating revenues.

STRONG FINANCIAL MANAGEMENT SUSTAINS FINANCIAL PERFORMANCE

DSC has historically been strong. A systematic decline in coverage over the past five years is due mainly to a three-fold increase in annual debt service since fiscal 2007 and a decline in impact fees available for debt service. Nevertheless, coverage remains strong at roughly 2.5x in fiscal 2013.

However, the city's decision to increase the annual transfers out (mainly to the general fund) in fiscal 2013 is of some concern to Fitch. The increase nearly doubled the transfer to \\$4.3 million and lowered coverage of all fixed charges (including the transfers) to just 1.3x from 2.2x in fiscal 2012. FCF after transfers averaged 143% annually between fiscals 2008 and 2011 and was a solid 131% of depreciation in fiscal 2012. However, FCF was a much lower 35% of depreciation in fiscal 2013, a result of an increase in both operating expenses and transfers out for the year.

The transfers are formula-driven and capped at 10% of system charges. While the increased transfers are expected to be temporary, the amount of the annual transfer to the general fund will invariably be tied to improving economic conditions and taxable values going forward.

Pro forma financial results provided by the city's financial feasibility consultant show a continuation of strong performance. DSC is projected to remain above 2.6x through fiscal 2018. When including projected transfers out, which are estimated to decline to roughly \\$3 million by fiscal 2018, coverage is no less than a solid 1.6x through the forecast.

Cash reserves have steadily improved and are considered to be strong with a combined \\$23 million in unrestricted cash and renewal and replacement funds as of fiscal 2013. The combined cash balances are a healthy 522 days cash on hand (DCOH) compared to 163 DCOH in fiscal 2007, and provides the system with a great deal of financial flexibility. The accumulation of sizable cash balances over the past five fiscal years is attributed to improved financial margins and a slowdown in capital spending.

AFFORDABLE RATES

The city has independent rate-setting authority and has implemented consistent and modest rate increases tied to an inflation index. The automatic increases are viewed favorably by Fitch as they do not need further city commission approval and allow ratepayers to absorb smaller and more frequent rate adjustments over time.

Management has shown the flexibility to augment the inflation-adjusted increases when necessary and has implemented an additional 1% rate increase for 2013 to accommodate a temporary increase in the general fund transfer. Additional inflation-adjusted increases are expected to provide for baseline revenue growth that will allow the system to continue to maintain its strong margins.

Assuming 7,500 gallons of use per month, rates were a reasonable \\$51 for combined water and sewer service in fiscal 2014. Rates are comparable to neighboring systems and are considered affordable at 1.8% of MHI. Residential rates for natural gas (about \\$31 per month for the typical residential user) are also near or below rates charged by regulated and non-regulated gas distribution systems throughout the state.

LIMITED CAPITAL NEEDS, DEBT BURDEN TO DECLINE

The manageable debt burden has been on a slow and steady decline. In fiscal 2013, outstanding debt was 54% of net plant and \\$1,057 per customer, levels that are in line with or below Fitch's medians for similarly rated systems. In addition, debt carrying costs, at 15% of gross revenues in fiscal 2013 remain very manageable. Capacity in the system is strong, and the city estimates current water supplies will meet demand through 2030. As a result, capital needs are modest and focus on renewal and replacement of system assets. Capital projects through the forecast period are expected to be funded with internal sources. With no new debt planned, the debt burden should continue to steadily decline.