OREANDA-NEWS. March 10, 2015. Fitch Ratings assigns an 'AA-' rating to the following Florida Keys Aqueduct Authority, Florida (the authority) bonds:

--Approximately \\$30.9 million water system revenue refunding bonds, series 2015A.

The bonds will be sold via negotiation the week of March 16. Proceeds will be used to fund refunding portions of the authority's 2007 bonds and cost of issuance. The bonds do not include a debt service reserve fund.

Fitch also affirms the 'AA-' rating on the following:

--\\$7.48 million water system revenue bonds, series 2013B.
--\\$102.23 million water system revenue bonds, series 2007 (pre-refunding) and 2008.

The Rating Outlook is Stable.

SECURITY

The series 2015 and the outstanding bonds are payable from a first lien pledge on the net revenues of the water system (the system). The series 2007 and 2008 bonds are additionally secured by impact fees.

KEY RATING DRIVERS

HEALTHY COVERAGE, ADEQUATE LIQUIDITY: Healthy financial operations are characterized by historically sound coverage levels and adequate liquidity levels for the rating category.

HIGH DEBT BURDEN: The system's debt burden is high compared to similarly rated credits but should decline given the authority's lack of additional borrowing plans.

SUFFICIENT SUPPLY: Due to a decline in water demand, the system's water supply is deemed adequate for the 15 to 20 year horizon.

STABLE BUT LIMITED ECONOMIC BASE: The service area is concentrated in tourism; however, area unemployment levels are among the lowest in the state. Area wealth levels are above average. The built out nature of the system also adds stability to operations.

RATING SENSITIVITIES

STABILITY EXPECTED: The rating is sensitive to shifts in fundamental credit characteristics, including maintenance of adequate debt service coverage and liquidity levels. The Stable Outlook reflects Fitch's belief that such shifts are unlikely.

CREDIT PROFILE

The authority provides potable water to a service area that includes a small portion of southern Miami-Dade County and the majority of Monroe County, including the Florida Keys and a portion of the Everglades National Park. Growth in customer accounts has been minimal, increasing by less than 1% annually over the last decade to slightly more than 49,000 in fiscal 2014. Monroe County's population, while on the decline over the last decade, has averaged 1% annual growth since 2010.

DECLINING DEMAND ASSURES FUTURE SUPPLY
The authority recorded unusually high demand in 2006, but drought conditions followed in 2007 coupled with the economic recession. Water demand in 2009 and 2010 fell to 10 year lows and have remained relatively flat with only a 1% uptick in the last year. Given the reduced demand, management believes current water supplies are adequate to meet the needs of the service area for the next 15 to 20 years.

The authority maintains a 20 year consumptive use permit issued by the South Florida Water Management District (SFWMD) which expires in 2028. The permit allows the authority to draw up to 21 million gallons daily (mgd), with a limit of 17 mgd in the dry season (December - April). Under the permit, the authority is allowed to draw 16.9 mgd from the Biscayne Aquifer and 8 mgd from the Floridan Aquifer. The authority's primary water supply is derived from the Biscayne Aquifer through 10 wells located near the Everglades National Park.

The system includes a 23.8 mgd water treatment plant as well as a 6 mgd reverse osmosis (RO) plant. The addition of the authority's RO plant has allowed for a supplementary water source. The RO plant draws brackish water under the SFWMD permit from the Floridan aquifer.

SOUND FINANCIAL PERFORMANCE
Financial operations are good generating sufficient liquidity and solid debt service coverage. The system finished fiscal 2014 with approximately \\$33 million in unrestricted cash (equal to over 300 days cash on hand). Officials expect to continue maintaining cash reserves well above the \\$9 million minimum required by policy.

Net revenues for fiscal 2014 covered all-in annual debt service (senior and subordinate lien) by a solid margin of over 1.8 times (x). Healthy operating margins are supported by approximately 1.5% annual rate increases adopted automatically and determined according to consumer price index (CPI). Management does not expect to implement rate increases outside of the annual indexing adjustments during the next 5 years.

The authority forecasts point to all-in coverage ranging from 1.4x to 1.6x through 2019. Forecasts assumptions include annual CPI adjustments of approximately 1.5% and relatively flat water sales due to declining consumption figures. The authority budgets for at least 1.5x coverage and Fitch believe the forecast assumptions are reasonable.

ELEVATED RATES, MODEST FUTURE INCREASES PLANNED
The system's future rate flexibility is limited due to user charges that are well above neighboring communities and equal 1.3% of median household income (MHI) for residential customers, higher than Fitch's affordability benchmark of 1% MHI. However, capital needs are well defined and a portion of the 5% rate hike in 2009 was identified to fund planned capital projects, alleviating the need for any additional large scale borrowings and rate increases. Consequently, given the small, automatic annual rate adjustments, Fitch does not believe that the limited rate flexibility will adversely impact the system's financial or capital funding capacity.

MANAGEABLE CAPITAL NEEDS
The system's fiscal 2015-2018 capital improvement plan (CIP) totals approximately \\$34 million with funding from rate revenues on a pay-go basis. The current plan is notably less than the \\$125 million CIP from fiscal 2009-2013. Thirty-seven percent of planned CIP spending is for projects that management deems as ongoing and critical, with another 43% deemed as priority, but non-critical. The remaining CIP includes improvements and upgrades at the U.S. Naval Air Station at Boca Chica.

DEBT BURDEN TO TREND LOWER OVER TIME
The system's debt burden is high. For fiscal 2014, debt per customer was \\$3,375, 1.7x Fitch's 'AA' rating median of \\$1,934. The authority currently does not have plans for additional debt, so Fitch expects to these ratios to decline in the future. Projected debt per customer in year 5 registers a lower \\$2,380, much closer to the 'AA' median of \\$2,049.

The current offering will refund the series 2007 bonds for a savings of over \\$4 million. The refunding will release reserve funds associated with the series 2007 that will be used for capital improvement. The authority's debt profile includes the variable rate series 2008 bonds which have been synthetically fixed with a swap agreement. Also in January 2014, the authority entered into a private placement loan with TD Bank, N.A. for approximately \\$2 million with proceeds being used to fund system improvements.

Legal provisions are adequate, with the additional bonds test requiring 1.10x coverage of maximum annual debt service without impact fees. The rate covenant requires 1.10x of annual parity debt service, without impact fees and 1.20x taking impact fees into account. The series 2013B and 2015 bonds are secured by net revenues of the water system, but do not include a pledge of impact fees as the projects are not expansion related. Further, the series 2015 bonds are being issued without a debt service reserve fund.

TOURISM CONCENTRATED ECONOMY
The Florida Keys is a unique destination and includes the popular vacation cities of Key Largo and Key West. The economy is largely tourism based with a high seasonal population of approximately 140,000 drawn to the Florida Keys annually. The area employment base benefits from the presence of the military, local government agencies and health care services. Area unemployment has trended well below the state for the last decade. December 2014 figures continue this trend registering at 3.1%, well below the average for the state (5.4%) and nation (5.4%). Area wealth levels are above average compared to the state (115%) and the nation (101%).