OREANDA-NEWS. Fitch Ratings has affirmed the following ratings on Florida Governmental Utility Authority (FGUA Consolidated), FL's Consolidated Utility System (the system) revenue bonds:

--$21 million in outstanding utility revenue bonds at 'A-'.

The Rating Outlook is Stable.

SECURITY

The bonds are payable from a senior lien pledge of the net operating revenues of 13 small water and sewer systems, including connection fees.

KEY RATING DRIVERS

THIRTEEN SMALL SYSTEMS: FGUA's consolidated system consists of five small water and eight water and sewer systems that service two service areas. The 13 individual utilities are residential and commercial areas located in and around unincorporated Pasco County, FL.

HIGH DEBT BURDEN: 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, although rate setting authority rests with the FGUA and is fairly insulated from political interference due to the breadth of the governing board.

SOUND FINANCIAL RESULTS: Financial results for fiscal 2014 were strong, following a better than anticipated fiscal 2013 (the first full year of operations for the combined system). Financial projections provided by management indicate slightly lower, but still solid financial margins are likely to continue.

MANAGEABLE CAPITAL PLAN: Capital needs total just $5.5 million through 2020. In addition, free cash flow is projected to be roughly 2x annual depreciation, leaving sufficient cash flow resources 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 two years of operations and FGUA's demonstrated track record of acquiring and maintaining viable utilities. Fitch expects operations will continue to be well-maintained.

RATING SENSITIVITIES

CONSISTENTLY STRONG FINANCIALS: Financial results for Florida Governmental Utility Authority's consolidated system are projected to be sound despite a rise in annual debt service over the next few years (mostly due to subordinate lien sinking fund payments). 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 rates and debt levels, and potentially place downward pressure on the rating.

CREDIT PROFILE

COLLECTION OF SMALL SERVICE AREAS

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 is comprised of two primary 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.

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 2014, the system provided service to approximately 6,300 water customers and 3,300 wastewater customers. The customer base is mostly residential 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 for wholesale 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 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. Each system 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 2018. GSG has capably managed the 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 2020) and no material issues are present.

HIGH RATES POTENTIALLY LIMIT FUTURE RATE RAISING 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 $100 for 7,500 gallons of water use. At this level, user charges are 2.8% 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, future rates increases beyond the forecast period could prove difficult to implement given the consolidated system's costly rate structure.

STRONG 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 debt service coverage (DSC) and excess cash flows equivalent to roughly 350% of depreciation. Actual results for fiscal 2013 were much better than previously forecasted due to a positive operations and maintenance expense variance and lower than projected annual debt service.

Fiscal 2014 results were also strong characterized by healthy free cash flow and high DSC over 2.0x from recurring revenues; although metrics were slightly lower than the previous years'. Estimated results for fiscal 2015 are lower than fiscal 2014, but still solid and better than previous estimates. Audited results are not expected to be available for at least several more months.

Financial projections through 2020 demonstrate a continuing trend of very healthy margins and DSC and significant annual free cash flow. Beginning in fiscal 2016, DSC on the 2012 bonds is projected to range between 2.7x-3.2x, which is slightly better than previous estimates provided to Fitch. On an all-in basis DSC is expected to be no less than 1.7x from recurring revenues throughout the forecast. The forecast incorporates reasonable assumptions including nominal customer growth, minimal reliance on connection fees, flat demand, reasonable additional rate hikes, and sinking fund payments related to a $5 million seller-financed subordinate loan that was agreed to as part of the acquisition.

Strong margins and cash flows over the past two years, coupled with a working capital reserve and rate stabilization account funded from bond proceeds, and limited capital needs have led to a favorable liquidity position. The system recorded unrestricted cash and investments of approximately $4 million, which is equivalent to a healthy 500 days cash on hand at the end of fiscal 2014.

DEBT LEVELS ARE HIGH, CAPITAL NEEDS LIMITED

In 2014, debt was 138% of net plant, which is roughly 2.0x the median for utility systems rated in the 'A' category, and $2,713 per customer. The debt burden will remain elevated despite the limited capital needs with slow amortization of existing debt (only 27% retired over the next 10 years). In addition, annual debt service through the forecast period consumes a somewhat high 29% of gross revenues when including the subordinate lien sinking fund payments.

Estimated capital needs through fiscal 2020 total about $5.5 million, which is very manageable. About one-third will be funded from remaining 2012 bond proceeds 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.