Fitch Affirms Florida Govt. Utility Auth (Unified Aqua Utility) Utility Revs at 'A-'; Outlook Stable
--Approximately \$26 million utility revenue bonds series 2013A;
--Approximately \$1.26 million 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 Unified Aqua system, which includes 31 small retail water and wastewater systems located primarily in Central Florida. The bonds are also secured by a cash funded debt service reserve.
KEY RATING DRIVERS
SOUND FINANCIAL RESULTS: Unaudited debt service coverage (DSC) in fiscal 2014, the first full year of operations, is 1.5x, as projected. Management revised forecasts point to coverage at or above the 1.4x target policy through the forecast period. Improved results are expected as a result of increased inactive account fees.
DECLINING DEBT PROFILE: Debt levels are at a high point due to acquisition in 2013. Debt levels are expected to decline over time given the lack of additional borrowing plans.
COSTLY RATES: User charges are high across most of the Unified System, which could impair future flexibility. Rates are forecast to automatically increase by very modest amounts based on consumer price index.
SMALL SERVICE AREA: The combined service areas are spread across ten Florida counties with varying wealth levels. The systems are all quite small with predominantly residential customer bases.
STRONG MANAGEMENT TRACK RECORD: The authority's experience in acquiring and managing other utility 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. Management reports that the majority of the utility systems are built-out.
RATING SENSITIVITIES
SERVICE AREA VULNERABILITIES: Given the small size of the individual utilities and the geographic concentration of the utilities in central Florida, economic pressures or regulatory developments could have a significant effect on operations.
CREDIT PROFILE
The Unified system is made of 31 smaller utilities in 10 counties throughout central Florida serving a population of approximately 19,000, which consists of over 7,926 water connections and about 1,962 sewer connections. The 30 utilities were purchased in 2013 as part of a larger overall acquisition. FGUA took over operations in March 2013.
Twenty-nine of the 31 utilities are water systems, 18 are water only, 11 are combined water and sewer and two are sewer only. The systems are located across a large area and are not interconnected. The expectation is for each system to continue to run as stand-alone systems. Where FGUA can find efficiencies and cost savings, individual sub-systems may be connected. There is limited- to only-modest growth expected, as the overall service territories are reported to be essentially built-out.
DISPERSED ECONOMIC BASE
The counties cover a wide range of counties in central Florida, an area hit particularly hard by the housing crisis. Most of the systems are very small in nature and represent individual neighborhoods/developments located in unincorporated areas of the county. The majority of customers are residential accounts (98%), with wealth levels of the counties in the system generally falling below state and national levels. Three counties (Seminole, Orange and Lee) have wealth levels that are on par or slightly higher than the state and nation.
FINANCIAL RESULTS AS EXPECTED; IMPROVED REVENUES POSSIBLE
The initial six months of audited results for fiscal 2013 produced DSC better than projected at 2.3x as compared to the 1.9x forecast. Unaudited 2014 financial results were largely on target at 1.5x, which includes the first full year of debt service. Initial financial forecasts through 2018 reflected satisfactory debt service coverage of 1.5x. However, management has since revised the forecast, which now points to slightly improved DSC levels of 1.6x from fiscal years 2016 to 2019, following the implementation of FGUA's inactive account fee in fiscal year 2016, which is expected to generate an additional \$217,000 to \$229,000 annually through the forecast period. Unrestricted cash and cash reserves as of fiscal 2014 (unaudited) totals an adequate \$2 million and is expected to grow as the authority continues to implement additional policies relating to past due fees and inactive account fees.
FGUA's assumptions appear reasonable to Fitch. Revenue estimates exclude connection fees and are based on existing rate schedules plus future increases are indexed and expected to range from 1.65% 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.
LIMITED RATE FLEXIBILITY
Following the acquisition of the utilities by FGUA, the individual utilities rates are no longer subject to regulatory review by the Florida Public Service Commission. FGUA's Board of Directors has full authority over rates. 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 \$33 for water service only to a high of \$122 for combined water and sewer service. FGUA does not plan to consolidate the rates of the various individual utilities. While only inflation level 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 \$2,733, compared to the 'A' median of \$2,218. Amortization of debt is slow, with 51% 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 in 2013 for the acquisition, the system's assets are in good condition. The system's five-year capital program for fiscal years 2015-2019 totals \$4.5 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 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, 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 eleven 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 Aqua 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 2020.
Комментарии