OREANDA-NEWS. Fitch Ratings affirms the 'A-' ratings on the following Florida Governmental Utility Authority, Florida (FGUA or the authority) 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 FALL SHORT: Audited fiscal 2013 and unaudited fiscal 2014 debt service coverage (DSC) registered 1.7x and 1.3x, respectively, falling short of the projected DSC of 1.9x and 1.4x as a result of lower irrigation revenues. Management's revised financial forecasts point to maintenance of the weaker 1.4x coverage through the fiscal 2019 forecast period.

COSTLY RATES: User charges are high across most of the system, 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 utilities' areas were those hit hard in central Florida during the housing crisis. Area wealth levels are slightly below average.

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 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.

RATING SENSITIVITIES

SERVICE AREA VULNERABILITIES: Given the small size of the individual utilities and the geographic concentration, 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. 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 that includes approximately 5,100 water and 1,100 sewer customers. The Lake County wealth levels are on par with the state (96%) and just slightly lower than the nation (85%). November 2014 unemployment in the county was 5.8%, a 1% improvement over the year prior, but slightly above the state (5.6%) and nation (5.5%). Management reports foreclosure activity is improving and there is some modest development interest in the service territories.

SMALL BUT STABLE UNDERLYING ECONOMIC BASE
The system is made up of 24 individual utilities all located within the county. Most of the utilities are very small in nature and represent individual neighborhoods/developments located in unincorporated areas of the county. The majority of customers are residential accounts. Seven of the 24 systems are combined water and sewer systems, while 17 are water only. The utilities are located across the entire county and are not interconnected, with the exception of one interconnection. The expectation is for each to continue to run as stand-alone utilities. Where FGUA can find efficiencies and cost savings, systems may be connected. There is limited- to only-modest growth expected, as the systems are reportedly essentially built-out with only modest growth potential. FGUA acquired the system 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.

INITIAL FINANCIAL MARGINS LOWER THAN EXPECTED
The initial six months of audited results for fiscal year 2013 and unaudited results for fiscal 2014 came in somewhat less than projected at 1.7x and 1.3x, respectively. Initial financial forecasts through 2018 reflected satisfactory debt service coverage of 1.4x to 1.5x throughout the forecast period. However, management's recently revised forecasts now point to slightly reduced DSC of 1.3x to 1.4x, (FGUA DSC target policy), through fiscal 2019. Projections were revised to account for reduced demand from irrigation revenues. Unrestricted cash and cash reserves total an adequate \$791,000 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 DSC target.

LIMITED RATE FLEXIBILITY
Most of the individual utility rates 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 \$122 for combined water and sewer service. While only inflationary rate adjustments of are anticipated 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
Due to the acquisition of the system, the debt burden on users is high with current debt per customer totaling \$2,862. 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 \$1.1 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 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 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.