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Summary:

Lee County Industrial Development Authority Bonita Springs Utilities, Florida; Water/Sewer
Primary Credit Analyst: Joseph J Pezzimenti, New York (1) 212-438-2038; joseph.pezzimenti@standardandpoors.com Secondary Contact: Paula E Costa, New York (1) 212-438-4754; paula.costa@standardandpoors.com

Table Of Contents
Rationale Outlook Related Criteria And Research

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Summary:

Lee County Industrial Development Authority Bonita Springs Utilities, Florida; Water/Sewer
Credit Profile
Lee Cnty Indl Dev Auth, Florida Bonita Springs Util, Florida Lee Cnty Indl Dev Auth (Bonita Springs Util) util Long Term Rating AA/Stable Upgraded

Rationale
Standard & Poor's Ratings Services raised its underlying rating (SPUR) on Lee County Industrial Development Authority, Fla.'s utility system revenue debt, issued for Bonita Springs Utilities (BSU) to 'AA' from 'AA-'. The outlook is stable. The upgrade reflects the utility's consistently strong financial performance characterized by strong debt service coverage (DSC) and liquidity that we expect to continue. The rating reflects our opinion of the utility's: Service area economy, centering on services and tourism with good population growth, strong wealth levels, and below-average unemployment rates; Diverse and relatively stable customer base, which we expect to remain so; Historically strong DSC that we expect to continue; and Historically strong liquidity position that we expect to remain strong but lower than recent levels as a result of BSU's debt reduction plan; Partially offsetting these strengths is an $18 million future borrowing in 2017 or 2018, which could increase the utility's debt burden, which we presently view as moderate. Payments to Lee County Industrial Development Authority from BSU under a loan agreement secure the bonds. A first-lien pledge on the mortgaged property, which consists of the land on which the sewer treatment facilities are located and all of the buildings on the property, provides additional security. Pledged revenues consist of net revenues and aid to new construction fees. BSU provides water and sewer services to residential and commercial customers in Bonita Springs, Fla., as well as portions of the surrounding unincorporated area in southwest Lee County. The 60-square-mile service area has approximately 44,300 residents. Bonita Springs participates in the Fort Myers-Cape Coral metropolitan statistical area, and the area economy includes significant service sector and tourism components. The city has experienced good population growth. From 2007-2012 its population grew 9.9%, outpacing state and national growth rates of 4.3% and 4.0%, respectively. Bonita Springs' income levels also remain, in our opinion, strong, with median household effective

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Summary: Lee County Industrial Development Authority Bonita Springs Utilities, Florida; Water/Sewer

buying income (EBI) at approximately 112% of national levels. The city's unemployment rate stood at 5.5% as of November 2013, below the state's 6.4% rate and the county's 6.2% rate. We consider BSU's customer base relatively stable and very diverse, and we expect it to remain so. The utility serves approximately 41,000 water customers and 38,000 sewer customers, the majority of which are residential. The utility's 10 leading customers account for just 3.7% of fiscal 2012 revenues, which we consider very diverse. Most of BSU's top 10 customers are condo associations. BSU's water and sewer systems, in our view, have adequate capacity with no regulatory or compliance issues at this time. BSU's water treatment capacity is 15.52 million gallons per day (mgd) compared with average daily demand of 7.68 mgd and peak daily demand of 10.48 mgd for fiscal 2012. BSU's wastewater treatment capacity is 9.75 mgd compared with average daily flows of 4.11 mgd and a peak monthly average flow of 5.03 mgd for fiscal 2012. The combined facility capacity for BSU's two water reclamation facilities is 11.0 mgd per their design, but the facilities are permitted to produce up to 9.749 mgd of reclaimed water. BSU regularly sells all of its treated wastewater for irrigation purposes. By 2016 or 2017, management anticipates it will need to start preparing for the Phase 2 expansion of BSU's reverse osmosis water treatment plant for ground water. Most of the planning is done. The exact timing of Phase 2 is based on consumption. The water system facilities currently rely on ground water derived from the Upper Floridan and the Lower Tamiami aquifers. Raw water supply is currently pumped from the three wellfields to two water treatment processes, which provide specific levels of treatment based on the incoming supply quality from the individual wellfields. The Upper Floridan Aquifer requires a moderate level of treatment to remove total dissolved solids from the brackish source water,while the Lower Tamiami Aquifer is a surficial water source, and the primary constituents of concern are sulfide and tannic acid. Raw water withdrawals for the water system are currently regulated by the South Florida Water Management District. In 2012, BSU closed on the acquisition of the utility assets within the subdivisions of Fountain Lakes and Marsh Landings that are contiguous gated communities built by the same developer, which developed a package sewer plant that was run by AQUA. BSU will operate the package plant until it can connect it to its sewer system. It already serves these customers water. As a result of the acquisition, BSU added more than 1,170 equivalent residential customers to its sewer customer base. It did an in-house study to estimate the cost of the acquisition and required work. BSU is covering the cost via a special service charge to the customers of Fountain Lakes and Marsh Landings. The utility paid $2.5 million for the package plant supporting infrastructure out of available cash. BSU is not planning to acquire other smaller utilities at this time. Based on 8,000 gallons of monthly consumption, combined water and wastewater rates total $101.09, which is affordable relative to service area wealth levels (at 2.6% of the 2012 median household EBI). Although water and sewer rates have remained unchanged since the last increase of 2.4% in 2010 and management has no plans to increase rates in fiscal 2014, management has demonstrated a willingness to adjust rates. Between 2004 and 2013, management raised water rates six times in 2004-2008 and in 2010. The increases ranged from 2.4% to 9.2%. During the same period, management also raised sewer rates six times in 2004-2008 and in 2010. These increases ranged from 2.4% to 10.0%. Management implemented these increases to keep pace with rising operational costs and capital needs, then to

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Summary: Lee County Industrial Development Authority Bonita Springs Utilities, Florida; Water/Sewer

offset declining revenues. In our view, BSU's financial performance historically has been strong, and we expect this to continue. In 2010, management prudently adopted a formal policy to maintain at least 1.5x DSC excluding aid to new construction fees. It implemented this measure to address BSU's lower aid to new construction fees, which declined to only $1.8 million (5% of total revenues) in fiscal 2009 from a high of $10.2 million (about 26% to total revenues) in 2005. Aid to new construction fees increased to $2.3 million in 2012 and to an estimated $4.7 million in 2013. From 2010-2012, DSC based on audited results improved to 2.2x from about 1.8x with aid to new construction fees and to 2.0x from about 1.6x without, which we consider strong and expect will remain so. Management projects DSC for 2013 to be about 2.4x and 2.0x with and without aid to new-construction fees, respectively. Based on budgeted figures, DSC for 2014 is near 2.1x and 1.6x with and without aid to new construction fees, respectively. In our opinion, the utility has historically maintained a strong liquidity position. From 2010-2012, BSU's audited fiscal year ending unrestricted cash and investments balance ranged from $32.4 million to $39.1 million, providing no less than 734 days' cash on hand. As of Nov. 30, 2013, management reported an unaudited unrestricted cash and investments balance of $41.7 million. Management, however, plans to draw down these reserves to fund capital improvements. As a result, BSU's budgeted year ending unrestricted cash balance for fiscal 2014 is $16.5 million, a level we still consider strong, providing enough cash to cover one year's worth of operating expenses and well over BSU's formal liquidity policy, amended and adopted in 2012, which requires that the utility maintain an unrestricted cash balance no less than 180 days of operating and debt service expenses. The formal policy and the expectation of management maintaining a strong liquidity position offset the lack of debt service reserves for some of BSU's bonds outstanding. We consider BSU's debt burden moderate, with a debt-to-plant ratio below 50%. The utility has approximately $116 million in debt outstanding. It has no subordinate debt, variable-rate debt, or swaps outstanding. It does, however, have two direct purchase obligations outstanding (the $5.0 million series 2012A and $16.9 million series 2012B) with a subsidiary of Bank of America, the Bank of America Public Capital Corp. In August 2013 it also current-refunded the series 2003 bonds with a direct placement bank loan (series 2013). A portion of the 2003 bonds were defeased with cash on hand. The amount of the bank loan is approximately $7.3 million. None of these have a funded debt service reserve. Each is on parity with the bonds we rate. We consider the contingent liability risk low, based on our review of the bond provisions related to these obligations. If bank loan rates remain the lowest cost of borrowing option, BSU could do a similar transaction later this year to current-refund its series 2004A bonds, paying down a portion with cash on hand and refinancing the balance with a bank loan. After that, the next refunding could occur in 2016 for the utility's 2006 bonds, if rates are attractive. We consider BSU's capital needs manageable, with a five-year capital improvement plan that totals $46.2 million. Anticipated funding sources include cash from operations, aid to new construction fees, renewal and replacements funds, revenue fund surplus, and approximately $18 million from bonds issued in 2017 or 2018. We consider the bond provisions credit neutral. The rate covenant requires net revenues, including aid to new construction fees, be at least 1.10x maximum annual debt service requirements or 1.05x annual debt service requirements on net revenues excluding aid to new construction fees and 1.20x on all net revenues including aid to

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Summary: Lee County Industrial Development Authority Bonita Springs Utilities, Florida; Water/Sewer

new construction fees. The utility can also meet the rate covenant if net revenues, excluding aid to new construction fees, equal 1.05x annual debt service requirements.

Outlook
The stable outlook reflects Standard & Poor's expectation that management will adjust rates as needed to maintain strong DSC and a strong liquidity position. We don't anticipate the rating will change within the two-year outlook period as a result of our expectation of stable financial performance due to BSU's debt reduction plan providing debt capacity for its future borrowing plans.

Related Criteria And Research


Related Criteria
USPF Criteria: Key Water And Sewer Utility Credit Ratio Ranges, Sept. 15, 2008 USPF Criteria: Standard & Poors Revises Criteria For Rating Water, Sewer, And Drainage Utility Revenue Bonds, Sept. 15, 2008 USPF Criteria: Contingent Liquidity Risks, March 5, 2012 Ratings Detail (As Of February 21, 2014)
Lee Cnty Indl Dev Auth, Florida Bonita Springs Util, Florida Lee Cnty Indl Dev Auth (Bonita Springs Util Inc. Proj) util sys rev Unenhanced Rating AA(SPUR)/Stable Upgraded

Lee Cnty Indl Dev Auth (Bonita Springs Util Inc Proj) util sys rev Unenhanced Rating AA(SPUR)/Stable Upgraded

Lee Cnty Indl Dev Auth (Bonita Springs Util) util sys rev Unenhanced Rating
Many issues are enhanced by bond insurance.

AA(SPUR)/Stable

Upgraded

Complete ratings information is available to subscribers of RatingsDirect at www.globalcreditportal.com. All ratings affected by this rating action can be found on Standard & Poor's public Web site at www.standardandpoors.com. Use the Ratings search box located in the left column.

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