OREANDA-NEWS. Fitch Ratings has affirmed the 'AA+' rating for the following Lakeland, FL (the city) revenue bonds:

--Approximately $41.5 million in outstanding water and wastewater system revenue bonds series 2002, 2012A & B.

The Rating Outlook is Stable.

SECURITY

The bonds are payable from a senior lien pledge of the net revenues of the city's water and wastewater system (the system).

KEY RATING DRIVERS

CONTINUED STRONG FINANCIAL PERFORMANCE: The system continues to yield very strong financial operations and debt service coverage (DSC) levels. Total DSC was 4.7x in fiscal 2014. Out-year projections remain strong even when incorporating additional debt. Rates, while considered by Fitch to be on the higher end, are comparable to regional peers.

HEALTHY CASH POSITION: The system's liquid resources including renewal and replacement (R&R) funds provided more than a years' worth of operating expenses on hand in fiscal 2014.

MANAGEABLE DEBT BURDEN: Debt ratios are low and afford management ample capacity to absorb a currently estimated $30 million in new subordinate lien debt expected to be issued over the next five years.

AMPLE SYSTEM CAPACITY: Water supply sources remain ample and treatment facilities provide the system with strong excess capacity to meet future demand.

PROGRESSING ECONOMIC RECOVERY: The city's favorable location and economic diversity is producing growth in the health care and higher education sectors. Local unemployment levels have moderated although wealth and education levels are below the state and national averages.

RATING SENSITIVITIES

FINANCIAL STABILITY EXPECTED: The system's ability to continue to yield strong financial margins and maintain low debt levels while sustaining annual general fund transfers rates should sustain strong credit fundamentals.

CREDIT PROFILE

The city of Lakeland is located in central Florida in Polk County (Fitch rates the county's implied unlimited tax general obligations 'AA' with a Stable Outlook). The system's service area is primarily residential and extends into unincorporated portions of Polk County, covering 90 square miles. The total service territory population is approximately 190,000.

IMPROVEMENT OF ALREADY STRONG FINANCIAL MARGINS

Financial performance has historically yielded strong operating margins and very positive DSC levels. Annual operating margins have averaged 45% over the past five fiscal years, and free cash flow to depreciation has been positive at near or over 100%, demonstrating the system's ability to generate enough annual cash flow to replace depreciating assets.

Fiscal 2014 results improved on these margins even further, with net revenues yielding strong senior lien and all-in DSC levels of 8.2x and 3.8x, respectively. In addition, the system ended fiscal 2014 with $20.5 million in unrestricted cash, equivalent to 260 days cash. When including the system's significant R&R fund balances, system liquidity covers over a year's worth of operating expenses.

The system makes substantial annual transfers, nearly all to the city's general fund (GF), that effectively function as payments in lieu of taxes. These transfers have historically been incorporated and budgeted for in management's financial planning and rate setting process. In fiscal 2014 transfers totaled $8.3 million and equated to 16% of operating revenues, consistent with prior years. When adding the GF transfers to the system's operating expense budget, as these costs are effectively fixed operating costs, DSC of both senior and subordinate debt drops but remains a healthy 7.2x and 3.5x respectively.

SOUND CAPITAL PROGRAM

The utility's five-year, fiscal 2016 - 2020 capital improvement program (CIP) totals a manageable $112.8 million. Roughly 60% of funds will support wastewater utility projects primarily related to R&R of the sewer conveyance and collection system. The remaining 40% of water-related projects will fund similar water transmission and distribution system upgrades. Notable projects include the renovation of the system's administration building, several energy efficiency projects, and the extension of the English Oaks service area to provide utility connections to an estimated 4,000 new homes. Nearly 30% of the CIP will be debt-funded, the remaining paid for with cash.

LOW DEBT BURDEN

The utility's current debt burden is well below average for the rating, affording management significant capacity to absorb an anticipated additional $30 million in subordinate lien debt to fund the aforementioned projects. The total debt burden equated to $950 per customer and $470 per capita in fiscal 2014, well below the 'AA' medians of $1,934 and $521, respectively. Debt to net plant was only 34% for the same year, also favorable compared to the 'AA' median average of 50%. Debt ratios are expected to stay low despite the minimal and flexible future debt issuance plans, as well as from a fairly rapid amortization of existing debt with 100% paid off in 20 years.

AMPLE CAPACITY

The water system consists of two water treatment plants with a combined treatment capacity of 59 million gallons per day (mgd), nearly three times the average demand realized in fiscal 2014 of about 20 mgd. Water supply is drawn from the Floridan Aquifer pursuant to a long-term consumptive use permit issued by the Southwest Florida Water Management District (SWFWMD) that allows the system to withdraw up to 35 mgd.

The wastewater system consists of two treatment facilities with a combined treatment capacity of 21.7 mgd, roughly 36% capacity above the average 14 mgd flow in fiscal 2014. A small re-use plant provides additional treatment capacity. The system currently disposes of treated effluent into an artificial wetlands system and sends excess flows via an outfall ditch to the Alafia River.

The city has concluded negotiations with the Florida Department of Environmental Protection, SWFWMD, and the Tampa Electric Company (TECO) Polk Power Station to divert and fully reuse flows to serve as a cooling source for the plant. The project was funded by TECO and the SWFWMD and involved the construction of a 14-mile transmission pipeline. The pipeline construction is now complete and will become operational later this year. This project will virtually eliminate the city's need to invest significant funding towards additional upgrades to its wastewater facilities to meet more stringent effluent discharge requirements.

MODERATE RATES, SOME RAISING FLEXIBILITY

Utility rates are set locally by city council and were raised by 5.5% in fiscals 2011 and 2012 but stayed flat in fiscals 2013 - 2015. The average residential customer paid $63 in fiscal 2014 for combined water and sewer service for roughly 4,500 gallons consumed in a month (gpm). This equates to about 1.9% of city-wide median household income (MHI), approaching Fitch's affordability threshold of 2% of MHI. When compared to a national average of closer to 7,500 gpm the charge well exceeds the 2% affordability threshold.

The city's approved five-year annual rate increases will continue to yield strong financial margins but may pressure future rate raising flexibility if the affordability threshold is further encroached. Positively, the system's rates compare very favorably relative to peer systems on a dollar basis.

IMPROVING ECONOMY

The city benefits from its location along Interstate 4, midway between two of the state's largest cities, Orlando and Tampa. Due to its location the city is the wholesale and retail trade center for the area, with a large distribution, production, health care and education presence. Located within the city are the headquarters and primary production facility for the supermarket chain Publix as well as Lakeland Regional Medical Center, the fourth largest hospital in the state.

Management indicates that several partnerships are developing to combine and expand the city's medical and educational facilities, resulting in diverse and increased employment opportunities. While unemployment has continued to improve, lowering to 5.9% as of March 2015, wealth levels continue to lag, with MHI representing only 84% of the state and 74% of the nation.