Fitch Affirms Florida Gov Utility Auth (Pasco Aqua Utility) Utility Revs at 'BBB+'; Outlook Stable

AUSTIN, Texas--()--Fitch Ratings affirms the 'BBB+' ratings to the following Florida Governmental Utility Authority, Florida (FGUA) Pasco Aqua Utility System (the system) bonds:

--Approximately $19.53 million utility revenue bonds, series 2013A;

--Approximately $460,000 taxable utility revenue bonds, series 2013B.

The Rating Outlook is Stable.

SECURITY

The bonds are secured by a senior lien on net operating revenues of the Pasco Aqua Utility system (the system). The bonds are also be secured by a cash funded debt service reserve.

KEY RATING DRIVERS

SATISFACTORY FINANCIAL FORECAST: Financial results for the initial six months of operations as an FGUA-owned system produced sound debt service coverage (DSC) in line with forecast. Financial projections of system operations appear reasonably conservative and provide adequate DSC and cash-funded ongoing capital costs. Liquidity is also adequate at over 200 days of cash on hand.

LACK OF RATE FLEXIBILITY: User charges are high and offer very limited flexibility, with average monthly combined utility bills that exceed Fitch's affordability threshold of 2% of median household income (MHI). These charges are also higher the comparable rates in the area.

LIMITED SERVICE AREA ECONOMY: Wealth levels within the small and somewhat rural service area are below the state and national averages unemployment in the county is routinely higher than the state and nation also.

ELEVATED DEBT PROFILE: The above average leveraging of the system due to acquisition costs should improve over time given the lack of additional borrowing plans.

STRONG MANAGEMENT TRACK RECORD: The Florida Governmental Utility Authority (FGUA or the authority) experience in acquiring and managing other systems offsets the limited management track record with the system.

MANAGEABLE CAPITAL PLAN: Capital needs are limited given the satisfactory condition of the system's assets as assessed by an engineering consultant.

BELOW AVERAGE LEGAL PROVISIONS: Fitch views the rate covenant and additional bonds test as below average.

RATING SENSITIVITIES

SERVICE AREA VULNERABILITIES: Given the small size of the individual sub-systems as well as the overall service area, economic shocks could have a drastic effect on operations. This area of Florida was severally hit by the housing crisis, although the housing market in the related counties has shown some improvement in recent months. Collection rates are high with over 30% of accounts 30 day or more past due.

CREDIT PROFILE

FGUA acquired the system, consisting of two water treatment plants and two wastewater treatment plants, in March 2013 with proceeds of the series 2013 offering. The acquisition was part of a larger debt-financed purchase from Aqua Utilities Florida, Inc., a private company. Located in Pasco county on Florida's west coast, approximately 35 miles north of Tampa, the system provides service to approximately 2,900 water and 2,700 sewer customers in three distinct service areas within the county, none of which are interconnected. One of the service areas receives water from an interconnection with Pasco County (rated 'AA' with a Stable Outlook by Fitch Ratings).

INITIAL RESULTS CONSISTENT WITH FORECASTS

Financial forecasts through 2018 reflect satisfactory debt service coverage of 1.4x. Liquidity forecasts also appear adequate with days cash on hand equal to no less than 173 over the forecast period. The initial six months of audited results for fiscal year ended Sept. 30, 2013, registered healthy coverage of 2x, slightly ahead of the 1.9x coverage forecast for the inaugural year of acquisition. Liquidity of 266 days of operations was also in line with forecasts.

FGUA's assumptions appear reasonable to Fitch and relatively conservative. Revenue estimates exclude connection fees and are based on existing rate schedules plus future increases are indexed and expected to range from 1.5% to 2.0% during the forecast period. Operating expenses are projected to have modest annual increases at a rate equal to general inflation ranging from 1.8% to 2.3%. These projections are consistent with FGUA's assumption that service area and system usage are expected to remain flat. Nevertheless, any unanticipated increases in the system's fixed costs could put pressure on FGUA's 1.4x debt service coverage target.

RATES EXCEED FITCH'S AFFORDABILITY THRESHOLD

FGUA inherited two different rate bands within the system's service area which vary widely. Average monthly bills are $71.75 for rate band I and $105.67 for rate band II, based on 3,600 gallons on water consumption. They are even higher at $88.66 and $136.43, respectively, when calculated using the industry average of 7,500 gallons. The FGUA board has approved annual indexed rate adjustments of no more than 2% annually through 2018.

Fitch deems rates affordable if the average residential bill falls below 2% of median household income (MHI). The system's average bills based on the lower water consumption realized in the service area, are 2% or 2.9% of MHI. The area is reported to have an above average number of retirees and elderly living on fixed incomes. Furthermore, user charges are relatively high compared to most other systems within and outside of the county. While only inflation rate adjustments are anticipated over the next five years, Fitch remains concerned that the system's high fixed costs and limited rate raising flexibility may pose a challenge to future financial performance.

HIGH DEBT BURDEN BUT LIMITED FUTURE CAPITAL NEEDS

Due to the current acquisition of the system, the debt burden on users is high with current debt per customer totaling $3,572. Amortization of debt is somewhat slow, with 48% of principal maturing in 20 years. However, the system's debt profile is expected to improve over time as there is no additional borrowing anticipated. According to a consulting engineer's report prepared for the acquisition, the system's assets are in good condition. The system's five-year capital program for fiscal years 2014-2018 totals $1.4 million and is expected to be funded from previously issued bond proceeds and cash reserves from the renewal and replacement fund.

LEGAL PROVISIONS ARE RELATIVELY WEAK

Fitch considers the legal provisions to be below average with a rate covenant that requires either 1.1x debt service coverage from net operating revenues or 1.2x coverage including connection fees. The additional bonds test mirrors the rate covenant, requiring similar coverage on maximum annual debt service. The required debt service reserve is cash funded.

STRONG MANAGEMENT OFFSETS OPERATING UNCERTAINTY

FGUA was formed in 1999 by an inter-local agreement to purchase a number of water systems in Florida from a private utility company. Current membership includes Lee, Polk, Citrus, Pasco, Hendry, Marion,and DeSoto counties. FGUA is managed by a governing board whose members include one representative of each county. FGUA has no employees; all services are provided on a contractual basis. FGUA's ten systems are stand-alone and have closed loops. System management, operations and financing structures for each system are similar. This structural consistency provides stability in FGUA's management of utility systems.

FGUA-owned systems, including the recently acquired systems, are operated under a utility operations and billing and customer service agreement with U.S. Water Services/Wade Trim (USWWT), a contractor providing similar services throughout Florida. In addition, FGUA has retained Government Services Group, Inc., a private contractor, for the overall management of FGUA pursuant to a contract that expires in September 2019.

FRAGILE SERVICE AREA ECONOMY

The significant number of retirees and a largely agricultural-based economy contribute to the county's' below average wealth levels. The county's unemployment rate of 7% as of November 2013 is only slightly elevated compared to the state (6.2%) and nation (6.6%), but much improved compared to the highs of 13% in 2010. Unemployment has improved and foreclosures appear to be lessening. Zillow data reports average homes prices of $77,000 in Zephyrhills and $59,800 in Port Richey, both communities within the area. This area of the state was hit particularly hard during the housing collapse. The small service area makes the system vulnerable to economic shocks.

Additional information is available at 'www.fitchratings.com'.

In addition to the sources of information identified in Fitch's U.S. Municipal Revenue-Supported Rating Criteria, this action was additionally informed by information from Creditscope, Wade Trim, Inc. (Engineering firm), S&P/Case-Shiller Home Price Index, IHS Global Insight, National Association of Realtors and Public Resources Management Group (Rate, Financial and Management Consultant).

Applicable Criteria and Related Research:

--'Revenue-Supported Rating Criteria' (June 2013);

--'U.S. Water and Sewer Revenue Bond Rating Criteria' (July 2013);

--'2014 Water and Sewer Medians' (December 2013);

--'2014 Sector Outlook: Water and Sewer' (December 2013).

Applicable Criteria and Related Research:

Revenue-Supported Rating Criteria

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=709499

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=820664

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Contacts

Fitch Ratings
Primary Analyst
Teri Wenck
Associate Director
+1-512-215-3742
Fitch Ratings, Inc.
111 Congress Avenue,
Austin, TX 78701
or
Secondary Analyst
Adrienne Booker
Senior Director
+1-312-368-5471
or
Committee Chairperson
Amy Laskey
Managing Director
+1-212-908-0568
or
Media Relations:
Elizabeth Fogerty, +1-212-908-0526 (New York)
elizabeth.fogerty@fitchratings.com

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Contacts

Fitch Ratings
Primary Analyst
Teri Wenck
Associate Director
+1-512-215-3742
Fitch Ratings, Inc.
111 Congress Avenue,
Austin, TX 78701
or
Secondary Analyst
Adrienne Booker
Senior Director
+1-312-368-5471
or
Committee Chairperson
Amy Laskey
Managing Director
+1-212-908-0568
or
Media Relations:
Elizabeth Fogerty, +1-212-908-0526 (New York)
elizabeth.fogerty@fitchratings.com