AUSTIN, Texas--(BUSINESS WIRE)--Fitch Ratings affirms the ratings on the following Lake County, Illinois (the county) revenue bonds:
--$40.3 million senior lien water and sewer system revenue bonds at 'AAA'; and
--$2.2 million subordinate lien water and sewer system revenue bonds at 'AA+'.
The Rating Outlook is Stable.
SECURITY
Outstanding senior lien bonds are secured by a first lien on net revenues of the county's combined water and sewer system (the system), while outstanding subordinate lien bonds are backed by a junior lien on net revenues.
KEY RATING DRIVERS
SOLID FINANCIAL PERFORMANCE: Both senior and all-in debt service coverage (DSC) and liquidity levels remained strong in fiscal 2013. The county's conservative financial projections indicate that operations will post comparably favorable results over the next five years.
MANAGEABLE CAPITAL NEEDS: The system's capital improvement plan (CIP) remains moderate despite the addition of projects to upgrade the county's largest water reclamation facility (WRF).
FAVORABLE DEBT PROFILE: Leverage ratios are very low and are projected to remain low for the foreseeable future despite the expected issuance of additional subordinate lien debt to fund the WRF upgrades. However, the majority of the five-year CIP will be funded by existing restricted reserves and recurring revenues.
AUTOMATIC RATE ADJUSTMENT: Fitch views positively the county's policy requiring a periodic adjustment of rates to ensure full cost recovery of purchased water and wastewater treatment expenses.
LARGE AND DIVERSE ECONOMY: The county's utility system serves a large, economically diverse service area in northeast Illinois with high wealth levels and an estimated population of about 705,000 residents.
RATING SENSITIVITIES
MAINTENANCE OF STRONG CREDIT PROFILE: The rating is sensitive to shifts in fundamental credit characteristics including the county system's strong financial, debt, and operational management. The Stable Outlook reflects Fitch's expectation that such shifts are unlikely.
CREDIT PROFILE
SOUND FINANCIAL PROFILE
The county's financial metrics remained strong in fiscal 2013. Net revenues available for debt service yielded solid DSC of both senior and subordinate lien debt, ending the year with 2.1x and 2.0x coverage when excluding connection charges, respectively. Debt carrying costs are very reasonable, as total annual debt service comprised a modest 12% of gross revenues, well below 'AAA' median averages. Liquidity is also very strong, with unrestricted cash and investments totaling $29.3 million in fiscal 2013 and equating to a five-year high of 357 days' cash on hand.
The county restricts an additional $34.9 million for system depreciation, extension and improvement (DEI), reserves that are dedicated to capital construction funding and further enhance the system's ample unrestricted cash balance. Conservative county financial projections show that both DSC and liquidity will remain consistent with the rating category despite anticipated slight declines in customer consumption levels.
LARGE CUSTOMER BASE, AFFORDABLE RATES
The widely dispersed system provides potable water service for about 25,000 directly-billed retail customers and approximately 100,000 wholesale customer equivalents throughout Lake County. Sewer service is provided on both a retail and wholesale basis to roughly 100,000 customers (more than 40% of the county's population) in the southeast part of the county.
The majority of sewer services are provided by a number of long-term, exclusive-use wholesale contracts in incorporated areas of the county, and the remainder of services are provided on a retail basis to unincorporated communities. The system's revenue base is bolstered by the county's strict bulk contract terms and a county ordinance that mandates sewer connections of all occupied residences where sewers are available.
The system's direct combined water and sewer retail customer charges represent approximately 1.4% of median household income (MHI), less than the 2% benchmark that Fitch considers affordable. The county obtains roughly 80% of its water from Lake Michigan via the Central Lake County Joint Action Water Agency (CLCJAWA), and purchases roughly 55% of sewer treatment services from a number of regional treatment providers. The county prudently passes through every rate increase from each of its bulk service providers directly to individual county retail customers. Rates are typically adjusted annually.
MANAGEABLE CAPITAL PLAN
The system's five-year CIP through fiscal 2018 totals $91.8 million, an increase over the most recently reviewed CIP due to the addition of a multi-phase upgrade of the Des Plaines River WRF, the system's largest wastewater treatment plant. This project will complete facility modifications that will ensure compliance with more stringent nutrient reduction regulations currently under consideration by the Illinois Environmental Protection Agency (IEPA), as well as facilitate the WRF's permit renewal; the project will be funded by a $30 million a low-interest state revolving fund loan from the IEPA.
An additional $6 million IEPA loan will fund improvements to the Round Lake Sanitary District lagoons. The balance of the CIP will focus on routine system renovation and replacement, lending management significant capital planning flexibility. These projects will be funded by the system's ample restricted DEI reserves, which management expects will fund nearly 80% of fiscal 2014's budgeted capital spending.
LOW DEBT LEVELS
Fitch projects that currently strong debt metrics will remain well below the 'AAA' category medians even with the addition of the combined IEPA subordinate loans. Leverage ratios for the system in fiscal 2013 were very low, with outstanding debt per capita at just $61 and debt-to-plant assets at 19%. Including proposed debt issuances, projected debt per capita is forecast to remain almost unchanged at $82 by 2018. The system's financial forecasts incorporate the additional debt issuances and predict that debt metrics stay below the 'AAA' medians over the next five years.
SOUND MANAGEMENT PRACTICES
Management practices are sound--marked by frequently updated and comprehensive long-term financial and capital planning, as well as a commitment to maintaining strong liquidity levels. Unrestricted cash reserves continue to grow as the system's DEI fund is replenished annually, well in excess of covenanted minimum quarterly $150,000 deposits. The DEI reserves are set aside and restricted for capital improvements to the system, but are available to meet debt service payments or make up reserve fund deficiencies if needed.
SYSTEM AND SERVICE AREA
The county is located in the northeast corner of Illinois and is home to about 70 companies, the largest of which include Abbott Laboratories, Baxter International Inc., Coleman Cable, Inc., W.W. Grainger, Inc., Walgreen Company, and Takeda Pharmaceuticals International, Inc. The unemployment rate at 6.7% as of May 2014 was below the state (7.1%) but higher than the national (6.1%) average for the month. Wealth levels are high, equaling roughly 141% and 151% above state and national levels, respectively.
Additional information is available at 'www.fitchratings.com'.
In addition to the sources of information identified in Fitch's Revenue-Supported Rating Criteria, this action was additionally informed by information from Creditscope.
Applicable Criteria and Related Research:
--'Revenue-Supported Rating Criteria' (June 2013);
--'U.S. Water and Sewer Revenue Bond Rating Criteria' (July 2012);
--'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=842395
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