Fitch Rates Sarasota County, Florida's $48.08MM Utility System Revs 'AA-'; Outlook Stable.

NEW YORK -- Fitch Ratings assigns an 'AA-' rating to Sarasota County (the county), Florida's $48.08 million utility system (the system) revenue bonds, series 2007. The bonds are scheduled to price April 4, 2007 through competitive sale. Public Financial Management, Inc. serves as the county's financial advisor. Bond proceeds will fund various water and wastewater capacity expansion and improvement projects to the county's utility system facilities. At this time, Fitch also assigns an underlying 'AA-' rating to approximately $156 million in outstanding parity debt. The bonds are secured by a senior lien on net revenues and legally available impact fees. This is Fitch's initial rating for the county's utility system. The Rating Outlook is Stable.

The 'AA-' rating is based on the county's proactive approach to ensuring sufficient, long-term water supply, a stable service area with high resident wealth indicators, and sound financial management leading to healthy financial operations, ample liquidity, and solid debt service coverage. The rating also considers the system's above average debt burden, high rates, a projected decline in debt service coverage and the risk associated with an aggressive plan to convert a significant number of septic tanks users in the service area to the county's wastewater system.

Sarasota County (GO bonds rated 'AA+' by Fitch) is located along the Gulf of Mexico in central Florida. While the county's proximity to the coast has made it a popular winter destination for wealthy retirees and tourists, the local economy has diversified in recent years with an increase of health care and professional and business service related employment. Since 1988, management has been aggressive in acquiring franchised private water and wastewater systems as well as publicly owned facilities in an effort to consolidate the provision of service within the county. Population in utility system's service area, which is comprised of the unincorporated areas of the county, totals approximately 205,000 residents, slightly more than half of the county's 2005 estimated population of 366,256. The county's very low unemployment rate, at 2.4% through December 2006, is considerably lower than the state and nation, and income levels exceed the state and national average by all measures.

The county's water system maintains sufficient treatment and withdrawal capacity and serves approximately 70,000 customers. Three county-owned water treatment facilities coupled with bulk water agreements with neighboring Manatee County and the Peace River/Manasota Regional Water Supply Authority (the Authority) provided treatment capacity of 29.4 millions of gallons per day (mgd) versus an average daily demand of 19.8 mgd in fiscal 2006. The contracted reserve quantity available from Manatee County is scheduled to decline incrementally throughout the life of the bulk agreement, which expires in 2025. The agreement with the Authority ensures scheduled annual increases in water supply between fiscal years 2007 and fiscal 2011 to offset the decline in supply from Manatee County. The county is in the process of obtaining a combined water use permit (WUP) for each of its wellfields from the Southwest Florida Water Management District (SWFWMD) to replace its three existing individual permits. The combined WUP is expected to allow for greater efficiency and flexibility in managing groundwater resources.

The wastewater system provides service to about 55,000 customers and maintains ample treatment capacity of 25.9 mgd versus an average daily flow of 10.9 mgd in fiscal 2006. The county currently owns and operates nine wastewater treatment facilities and maintains an interlocal agreement with the city of Venice that reserves 3.0 mgd in additional treatment capacity. The county plans to remove from service four of the existing facilities over the next several years and to expand the remaining facilities to ensure long-term treatment capacity. The county is also undertaking a large scale conversion of individual septic tanks to county wastewater facilities for residents in a designated area within the system's service area; about half of such customers have already converted and complete conversion is expected by within the next five years.

Financial operations are sound, generating healthy debt service coverage and good liquidity. The system finished fiscal 2006 with 641 days cash on hand, and net revenues together with legally available impact fees covered annual debt service on parity debt by a strong 2.6 times (x). Excluding impact fees, debt service coverage was still solid at 1.9x and is projected to stay within a range of 1.7x to 2.0x through fiscal 2011. The system's rate structure is high relative to area competitors, though no increase is planed for fiscal 2007 and future increases of 2% annually in fiscal years 2008 through 2011 are minimal. Capital financing, totaling $274 million over the next five years, is needed primarily to address expansion efforts and the continuation of a septic tank replacement program. Dedicated CIP funding sources include the current bond offering, along with additional borrowings of $45 million in parity debt planned for fiscal 2009 and a total of $49 million from the state revolving fund. Remaining funding sources will be derived from impact fees, sales surtax and excess operating revenue.

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