OREANDA-NEWS. Fitch Ratings affirms the 'A-' ratings for the following Florida Governmental Utility Authority, Florida (FGUA) Lake Aqua Utility System (Lake Aqua or the system) bonds:

--Approximately $17.5 million utility revenue bonds, series 2013A;
--Approximately $595,000 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 Lake Aqua system, which includes 24 small water and wastewater systems in Lake County, Florida. The bonds are also secured by a cash funded debt service reserve.

KEY RATING DRIVERS

FINANCIAL RESULTS BELOW TARGET: Audited 2014 and unaudited 2015 debt service coverage (DSC) of 1.3x fell short of management's 1.4x target. Forecasts provided by management point to DSC increasing to 1.4x by fiscal 2017. Liquidity is adequate at $615,000, or the equivalent of 123 days of cash on hand (DCOH).

ELEVATED DEBT PROFILE: The above average leverage of the system due to acquisition costs should improve over time given limited future borrowing plans.

COSTLY RATES: User charges are high across most of Lake Aqua, which could impair future flexibility. Rates are forecast to automatically increase by very modest amounts based on consumer price index.

SMALL SERVICE AREA BASE: The underlying sub-service areas were those hit hard in central Florida during the housing crisis. Area wealth levels are slightly below average.

STRONG MANAGEMENT TRACK RECORD: The authority's experience in acquiring and managing other systems offsets the limited management track record with the system.

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 Lake County in central Florida, just west of Orlando, the Lake Aqua system is comprised of 24 individual utilities purchased by FGUA in 2013. There is limited interconnection between systems. Most of the utilities are very small in nature and represent individual neighborhoods/developments located in unincorporated areas of the county. FGUA now has full rate authority over the systems that were previously rate regulated by the Florida Public Service Commission. The combined Lake Aqua system provides service to a population of just over 10,000, which include approximately 5,100 water and 1,100 sewer customers. The majority of customers are residential accounts.

SMALL BUT STABLE UNDERLYING ECONOMIC BASE

The Lake County wealth level is on par with the state (96%) and just slightly lower than the nation (85%). Unemployment in Lake County was 5% in October 2015, a 1% improvement over the year prior, on par with the state (5%) and nation (4.8%). Management reports foreclosure activity is improving, and there is some modest development interest in the service territories.

INITIAL FINANCIAL MARGINS LOWER THAN EXPECTED

Audited 2014 financial and unaudited fiscal 2015 results registered DSC of 1.3x, falling below FGUA's 1.4x target. Actual results for fiscal 2014 fell short of budget due to lower than anticipated irrigation revenues as a result of higher precipitation. Fiscal 2015 results came in closer to budget as FGUA became more familiar with the system's operations.

Management forecasts point to improvement in DSC to 1.4x by fiscal 2017. Unrestricted cash and cash reserves are also projected to gradually rise. Fitch would be concerned if DSC were to not reach FGUA's target levels and if cash levels were to fall.

LIMITED RATE FLEXIBILITY

Most of 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 4,000 gallons varies from a low of $34 for water service only to a high of $123 for combined water and sewer service. 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 $2,863, 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 $1.9 million and will be funded from existing bond proceeds, an $840,000 million state revolving fund loan, system reserves and rate revenues.

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.