OREANDA-NEWS. Fitch Ratings affirms the 'BBB+' ratings on the following Florida Governmental Utility Authority, Florida (FGUA or the authority) Pasco Aqua Utility System (Pasco Aqua or the system) bonds:

--Approximately \$19.67 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 bonds are also secured by a cash-funded debt service reserve.

KEY RATING DRIVERS

SOUND FINANCIAL RESULTS: The unaudited financial results for the first full year of operations (fiscal 2014) came in slightly above projections, with debt service coverage (DSC) of 1.5x, compared to the 1.4x forecast, and unrestricted cash and reserves at a sound \$900,000, or the equivalent of over 200 days cash on hand (DCOH). Management's financial forecasts point to improved coverage following the implementation of additional inactive account fees.

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 also.

ELEVATED DEBT PROFILE: The above-average leveraging of the system due to acquisition costs should improve over time given the lack of additional borrowing plans.

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

MANAGEABLE CAPITAL PLAN: Capital needs are limited given the satisfactory condition of the system's assets as assessed by an engineering consultant.

BELOW-AVERAGE LEGAL PROVISIONS: Fitch views the rate covenant and additional bonds test as below average.

RATING SENSITIVITIES

SERVICE AREA VULNERABILITIES: Given the small size of the individual utilities as well as the overall service area, economic shocks could have a drastic 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 approximately 2,900 water and 2,700 sewer customers in 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 (rated 'AA' with a Stable Outlook by Fitch). FGUA acquired the Pasco Aqua system, consisting of two water treatment plants and two wastewater treatment plants, in March 2013 with proceeds of the series 2013 bonds. The acquisition was part of a larger debt-financed purchase from Aqua Utilities Florida, Inc., a private company.

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 unemployment rate of 6.5% as of November 2014 is only slightly elevated compared to the state (5.6%) and nation (5.5%), but much improved compared to the highs of 13% in 2010. Unemployment has improved and foreclosures appear to be lessening. Zillow data reports average homes prices of \$83,600 in Zephyrhills and \$66,300 in Port Richey, both communities within the area. This area of the state was hit particularly hard during the housing collapse. The small service area makes the system vulnerable to economic shocks.

INITIAL RESULTS ON TARGET
The initial six months of audited results for fiscal year ended Sept. 30, 2013 and the fiscal 2014 unaudited results came in slightly better than projected at 1.9x and 1.5x, respectively. Initial financial forecasts through 2018 reflected satisfactory debt service coverage of 1.4x. Management has since revised the forecast, which now points to slightly improved DSC levels of 1.7x from fiscals 2016 to 2019, following the implementation of FGUA's inactive account fee, which is expected to generate an additional \$290,000 to \$309,000 annually through the forecast period. Also, there has been a marked improvement in account collections with an 88% collection rate for fiscal 2014 compared to 65% the year prior. This is largely due to FGUA's more stringent 5% late fee, compared to the \$5 late fee charged by Aqua.

FGUA's assumptions appear reasonable to Fitch. Revenue estimates exclude connection fees and are based on existing rate schedules plus future increases which 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 DSC target.

RATES EXCEED FITCH'S AFFORDABILITY THRESHOLD
FGUA inherited two different rate bands within the system's service area which vary widely. Average monthly bills are \$78 for rate band I and \$105 for rate band II, based on 3,000 gallons of water consumption. The FGUA board has approved annual indexed rate adjustments of no more than 2% annually through 2019. 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.

Fitch measures rate affordability at 2% of MHI. The average bills based on the lower water consumption realized in the service area are 2.2% or 2.9% of MHI, above the threshold. The service area is reported to have an above-average number of retirees and elderly living on fixed incomes. Furthermore, user charges are relatively high compared to most other utilities within and outside of the county. While only inflation-level rate adjustments have been approved for implementation over the next five years, Fitch remains concerned that the system's high fixed costs and limited rate-raising flexibility may pose a challenge to future financial performance.

HIGH DEBT BURDEN BUT LIMITED FUTURE CAPITAL NEEDS
As a result of the acquisition of the Pasco Aqua system, the debt burden on users is high with current debt per customer totaling \$3,372. Amortization of debt is slow, with 48% 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 2013 report prepared for the acquisition, the system's assets are in good condition. The system's five-year capital program for fiscals 2015-2019 totals \$2.3 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 DSC 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 OFFSETS OPERATING UNCERTAINTY
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 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, 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.