Fitch Rates Cape Coral, Florida's $72.9MM Utility Assessment Bonds 'A-'.

NEW YORK -- Fitch Ratings assigns an underlying 'A-' rating to Cape Coral (the city), FL's $72.9 million utility improvement assessment bonds (Southwest 4 Area), series 2007. The bonds, expected to be insured, are scheduled to price March 27 via negotiation with a syndicate led by UBS Financial Services, Inc. RBC Capital Markets serves as the city's financial advisor. Proceeds will refund commercial paper notes issued to fund utility system expansion projects and to finance certain utility capital improvements. In addition, Fitch affirms the 'A-' rating on approximately $73.8 million in outstanding utility improvement assessment bonds. The Rating Outlook is Stable.

The 'A-' rating on the series 2007 utility improvement assessment bonds reflects adequate coverage by special assessments levied on residential and commercial properties that benefit from the expansion projects funded by the debt, as well as a net revenue pledge of subordinate water and sewer system revenues (Fitch rates senior lien water and wastewater revenue bonds 'A'). The city has covenanted to annually levy special assessments to pay debt service on the bonds. Special assessments are included as a line item on the property tax bill, and nonpayment results in a property lien on parity with those related to ad valorem tax delinquencies.

Coverage of debt service by special assessments is about 1.1 times (x), which provides for a small cushion for non-collection. The city has a strong trend of annual property tax collection, averaging 99% over the last 10 fiscal years. The bonds are also secured by a net revenue pledge of the water and sewer system that represents a third lien on system revenues, subordinate to senior lien and state revolving fund loan debt service. The city estimates it will need to issue an additional $474 million in special assessment debt through fiscal 2011, which will have the same back-up pledge of subordinate water and sewer system revenues. Additionally, the city has covenanted to budget and appropriate non-ad valorem revenue in the event that pledged assessments proceeds and net revenues of the system are insufficient to meet debt service obligations on special assessment bonds. There is currently outstanding approximately $116 million in special assessment debt that has a parity lien on system net revenues. Additional security for bond holders is provided by the utility system's rate covenant, which requires maintenance of rates, fees and other charges adequate to pay at least 100% of annual debt service on all outstanding senior lien bonds as well as any subordinated indebtedness.

Cape Coral is mainly a residential community located on the southwestern coast of Florida. The city's population continues to grow rapidly, increasing 37% since the 2000 census. An estimated 40% of the city's geographic area currently has access to water and sewer utility service. Based on current system projections, utility customer growth is estimated to be approximately 8% for both water and wastewater service through 2010. The city currently operates two wastewater treatment plants and one reverse osmosis (RO) water treatment plant. While treatment capacity on both systems is currently adequate, future anticipated growth will necessitate significant capital expansion, including the expansion of both wastewater treatment plants and the construction of an additional RO plant, all of which are included in the system's current capital improvement plan (CIP) and currently underway. The system has adequate water supply to meet expansion demands.

Following significant rate increases in fiscal years 2005 and 2006 needed to meet debt service requirements on planned senior lien debt issuance, additional rate increases of 7% for the water system through 2010 and 10% for the wastewater system in fiscal 2008 and 9% in fiscal years 2009 and 2010 were recently approved by the city council. Despite the recent rate increases, the system's combined rates remain well below average for area systems. The system's fiscal 2007-2011 CIP totals $471 million, not including special assessment debt. The system is healthy financially with adequate reserves and sufficient liquidity levels.

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