AUSTIN, Texas--(BUSINESS WIRE)--Fitch Ratings affirms the 'BBB+' ratings for the following Florida Governmental Utility Authority, Florida (FGUA) Pasco Aqua Utility System (Pasco Aqua or the system) bonds:
--Approximately $19.7 million utility revenue bonds, series 2013A;
--Approximately $465,000 taxable utility revenue bonds, series 2013B.
The Rating Outlook is Stable.
SECURITY
The bonds are payable from a first lien pledge on the net operating revenues of the Pasco Aqua system, which includes three small retail combined water and wastewater utilities located in Pasco County (the county). The bonds are also secured by a cash funded debt service reserve.
KEY RATING DRIVERS
SOUND FINANCIAL RESULTS: Audited 2014 and unaudited 2015 debt service coverage (DSC) registered a solid 1.5x and 1.6x, respectively, slightly outpacing projections. Unrestricted cash and reserves were also sound at $900,000, or the equivalent of over 200 days cash on hand (DCOH).
ELEVATED DEBT PROFILE: The above-average leveraging of the system related to acquisition costs should improve over time given the lack of additional borrowing plans.
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 than 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.
STRONG MANAGEMENT TRACK RECORD: The authority's experience in acquiring and managing other utility systems offsets the system's limited management track record.
RATING SENSITIVITIES
SERVICE AREA VULNERABILITIES: Given the small size of the individual utilities economic pressures or regulatory developments could have a significant effect on operations.
CREDIT PROFILE
Located in Pasco County on Florida's west coast, approximately 35 miles north of Tampa, the Pasco Aqua system provides service to a population of about 6,500, consisting of 3,200 water and 2,600 sewer connections. The system is comprised of three distinct service areas within the county, none of which are interconnected. Two of the service areas receive water from an interconnection with Pasco County (implied unlimited tax general obligation rated 'AA' with a Stable Outlook). FGUA took over operations in March 2013. FGUA now has full rate authority over the systems that were previously rate regulated by the Florida Public Service Commission.
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 October 2015 unemployment was 5.4%, down from 6.3% the prior year, but is only slightly elevated compared to the state (5.1%) and nation (4.8%). The current unemployment levels are improved compared to the highs of 12% in 2010. This area of the state was hit particularly hard during the housing collapse. The small service area makes the system vulnerable to economic shocks.
HEALTHY FINANCIAL RESULTS
Audited fiscal 2014 and unaudited fiscal 2015 financial results outpaced projections with DSC registering at 1.5x and 1.6x, respectively, in excess of FGUA's 1.4x target. For the same periods, DCOH was good at 329 and 265 days. Management forecasts point to DSC improving to 1.8x by fiscal 2017, with continued improvement in the cash position.
LIMITED RATE FLEXIBILITY
The system rates for the individual retail utilities are considered high and register above Fitch's affordability threshold as well as above peer systems in the region. The average monthly bill for a residential customer using 3,000 gallons ranges from $80 to $107. While only inflationary rate adjustments have been approved for implementation over the next five years, Fitch remains concerned that the 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 recent acquisition of the system, the debt burden on users is elevated, with current debt per customer totaling $3,372, compared to the 'A' median of $2,351. Amortization of debt is slow, with 52% of principal maturing in 20 years. However, the system's debt profile is expected to improve over time as there is only limited borrowing anticipated. The fiscal 2016-2020 capital improvement plan totals a reasonable $2.9 million and will be funded from existing bond proceeds, system reserves and rate revenue.
STRONG MANAGEMENT TRACK RECORD
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, and Marion 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 11 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 are operated under a utility operations and 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., a private contractor, for the overall management of FGUA pursuant to a contract that expires in 2020.
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
Revenue-Supported Rating Criteria (pub. 16 Jun 2014)
https://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=750012
U.S. Water and Sewer Revenue Bond Rating Criteria (pub. 03 Sep 2015)
https://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=869223
Additional Disclosures
Dodd-Frank Rating Information Disclosure Form
https://www.fitchratings.com/creditdesk/press_releases/content/ridf_frame.cfm?pr_id=998411
Solicitation Status
https://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=998411
Endorsement Policy
https://www.fitchratings.com/jsp/creditdesk/PolicyRegulation.faces?context=2&detail=31
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