NEW YORK--(BUSINESS WIRE)--Fitch Ratings affirms the 'A-' rating on Florida Governmental Utility Authority (FGUA), consolidated utility system's (the system) approximately $20 million utility system revenue bonds, series 2012A and 2012B.
The Rating Outlook is Stable.
The bonds are secured by a senior lien pledge of the net operating revenues of the system, including connection fees.
KEY RATING DRIVERS
ELEVATED DEBT PROFILE: Additional bonding is not anticipated at this time. However, slow principal re-payment of existing debt ensures the system's high debt burden will remain a credit weakness for the foreseeable future.
COSTLY RATES: User charges are high, which could impair future rate-raising flexibility. Positively, rate-setting authority rests with FGUA and is fairly insulated from political interference due to the breadth of the governing board.
HEALTHY 2013 FINANCIAL RESULTS: Financial results for fiscal 2013, the first full year of operations for the combined system, were better than anticipated due to a combination of conservative expense forecasting and lower than expected annual debt service. Updated financial projections suggest strong results are likely to continue.
MANAGEABLE CAPITAL PLAN: Capital needs are limited given the satisfactory condition of the system's assets. In addition, free cash flow is projected to be roughly 2.0x annual depreciation, leaving sufficient cash flows to keep the system in a state of good repair.
SOLID TRACK RECORD: Operating uncertainties typically associated with system acquisitions are partially mitigated by the system's successful first full year of operations and FGUA's demonstrated track record of acquiring and maintaining viable utilities. Fitch expects operations will continue to be well-maintained.
CONSISTENTLY STRONG FINANCIALS: Financial results are projected to be sound despite an increase in annual debt service expense over the next few years. The rating could improve if the system is able to maintain financial metrics consistent with pro forma expectations.
LARGER THAN EXPECTED CAPITAL NEEDS: Conversely, a significant rise in capital needs beyond current expectations could pressure finances, lead to higher user rates and debt levels, and potentially place downward pressure on the rating.
ACQUISITION COMPLETED; SMALL BUT STABLE CUSTOMER BASE
FGUA acquired the Mad Hatter/Paradise Lakes (Mad Hatter) system with the proceeds of the 2012 bonds and merged it with a water system it already owned (the existing system). The newly consolidated system comprises two service areas; one that includes the six small stand-alone water utilities of the existing system plus the additional seven small water and sewer service areas of Mad Hatter for a total of 13.
The service area for the combined system remains small, encompassing largely residential portions of south-central Pasco County (Fitch rates Pasco County's water and sewer revenue bonds 'AA' with a Stable Outlook). The service area's location in southern Pasco County provides access to the broader economic base of the city of Tampa. In 2013, the system provided service to approximately 6,100 water customers and 3,100 wastewater customers. The customer base is mostly residential (94%) and stable, and there is no customer concentration. The systems have yet to be interconnected from an operations standpoint, although wholesale service connection to Pasco County provides adequate redundancy.
FGUA MANAGEMENT A STRENGTH
FGUA was formed in 1999 by an interlocal agreement to purchase several utility systems in Florida from a private developer. 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. Each utility owned by FGUA is accounted for as a separate enterprise fund and managed independently.
All FGUA-owned systems are operated under an operations, billing and customer service agreement with U.S. Water Services/Wade Trim, a contractor providing similar services throughout Florida. In addition, FGUA has retained Government Services Group, Inc. (GSG), a private contractor, for the overall management of FGUA pursuant to a contract that expires in September 2019. GSG has capably managed FGUA since its inception in 1999.
For the consolidated system, water is pumped locally from the Floridan Aquifer, or is purchased from Pasco County and the city of Tarpon Springs through wholesale contracts. Water supply and treatment capacity are sufficient for the next several years. FGUA plans to purchase additional finished water from Pasco County as demand warrants.
The system provides wastewater service to customers living within the Mad Hatter service area, with service provided by individual septic systems throughout the rest of the combined service area. FGUA will continue to utilize both its own treatment plant and the county's plant for wastewater treatment. The operating permit for the wastewater treatment facility is current (through mid-2015) and no material issues are present.
HIGH RATES POTENTIALLY LIMIT FUTURE FLEXIBILITY
FGUA has raised rates for the existing water system by over 20% since its acquisition in 2009. Upon the 2012 Mad Hatter acquisition, FGUA adopted a much larger rate hike for Mad Hatter customers as well as additional increases for both service areas through 2016. Rates are high, with charges for combined monthly service (Mad Hatter only) above $94 for 7,500 gallons of use. At this level, user charges are 2.6% of median household income (MHI) for customers receiving water and sewer service, which is above Fitch's affordability benchmark. However, Fitch notes the average customer of the consolidated system uses closer to 5,000 gallons per month.
Fitch views FGUA's sole rate-setting authority and demonstrated willingness to increase user charges favorably. However, despite the board's ability to apply rate hikes free of oversight, Fitch notes that future rate increases beyond the forecast period could prove difficult to implement given the consolidated system's costly rate structure.
SOLID 2013 FINANCIAL PERFORMANCE
The system ended fiscal 2013, its first full year of operations as a consolidated entity, with strong results including a nearly 50% operating margin, more than 3.5x coverage of debt service, and excess cash flows equivalent to roughly 350% of depreciation. Actual results for fiscal 2013 were much better than previously forecast due to a positive operations and maintenance expense variance and lower than projected annual debt service. Fitch views the better-than-expected results favorably.
Financial projections through 2018 demonstrate a continuing trend of very healthy margins and debt service coverage (DSC) in excess of previous estimates. Beginning in fiscal 2014, coverage on the 2012 bonds is projected to range between 2.3x-2.5x, which is lower than fiscal 2013 but reflects a fully amortized debt service payment. On an all-in basis, coverage is expected to be no less than 1.9x in fiscal 2014, and rise slightly throughout the forecast period. The forecast incorporates reasonable assumptions including nominal customer growth, minimal reliance on connection fees, flat demand and reasonable additional rate hikes.
The very strong coverage ratios do not take into account subordinate lien principal payments related to a $5 million seller-financed loan that was agreed to as part of the acquisition. The subordinate loan pays interest only until 2020 when the first of five $1 million principal payments are due (through 2024). To smooth the impact on financial margins, the system will begin making sinking fund payments for this loan in fiscal 2015. If the sinking fund payments are included in the coverage analysis, all-in DSC ranges between 1.5x-1.6x through the forecast, which Fitch still considers solid.
Strong margins and cash flows in fiscal 2013, coupled with a working capital reserve and rate stabilization account funded from bond proceeds, have led to a favorable liquidity position. The system recorded unrestricted cash and investments of approximately $2 million, which is equivalent to a healthy 322 days cash on hand at the end of fiscal 2013.
DEBT LEVELS ARE HIGH, CAPITAL NEEDS LIMITED
In fiscal 2013 debt was 139% of net plant, which is roughly 3.0x the median for utility systems rated in the 'A' category, and $2,877 per customer. The debt burden will remain elevated despite the limited capital needs with slow amortization of existing debt (only 23% retired over the next 10 years). In addition, annual debt service through the forecast period consumes a somewhat high 30% of gross revenues (when including the subordinate lien sinking fund payments).
Estimated capital needs through fiscal 2018 total about $4 million, which is very manageable. About two-thirds will be funded from the 2012 bonds while the balance will be addressed through excess operating revenues and reserves. Capital projects will be focused on expanding the existing wastewater treatment system, interconnecting the water systems with Pasco County, and relining the system to guard against inflow and infiltration. The system is not facing any regulatory issues.
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 2013);
--'2014 Water and Sewer Medians' (Dec. 2013);
--'2014 Outlook: Water and Sewer Sector' (Dec. 2013).
Applicable Criteria and Related Research:
2014 Outlook: Water and Sewer Sector
2014 Water and Sewer Medians
U.S. Water and Sewer Revenue Bond Rating Criteria
Revenue-Supported Rating Criteria