The Rating Outlook is Stable.
The bonds are secured by a senior lien on net operating revenues of the Pasco Aqua Utility system (the system). The bonds are also be secured by a cash funded debt service reserve.
KEY RATING DRIVERS
SATISFACTORY FINANCIAL FORECAST: Financial results for the initial six months of operations as an FGUA-owned system produced sound debt service coverage (DSC) in line with forecast. Financial projections of system operations appear reasonably conservative and provide adequate DSC and cash-funded ongoing capital costs. Liquidity is also adequate at over 200 days of cash on hand.
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 the 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:
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.
SERVICE AREA VULNERABILITIES: Given the small size of the individual sub-systems as well as the overall service area, economic shocks could have a drastic effect on operations. This area of
FGUA acquired the system, consisting of two water treatment plants and two wastewater treatment plants, in
INITIAL RESULTS CONSISTENT WITH FORECASTS
Financial forecasts through 2018 reflect satisfactory debt service coverage of 1.4x. Liquidity forecasts also appear adequate with days cash on hand equal to no less than 173 over the forecast period. The initial six months of audited results for fiscal year ended
FGUA's assumptions appear reasonable to Fitch and relatively conservative. Revenue estimates exclude connection fees and are based on existing rate schedules plus future increases are indexed and expected to range from 1.5% 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.
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
Fitch deems rates affordable if the average residential bill falls below 2% of median household income (MHI). The system's average bills based on the lower water consumption realized in the service area, are 2% or 2.9% of MHI. The 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 systems within and outside of the county. While only inflation rate adjustments 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 current acquisition of the system, the debt burden on users is high with current debt per customer totaling
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
FGUA-owned systems, including the recently acquired systems, are operated under a utility operations and billing and customer service agreement with U.S. Water Services/
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 7% as of
Additional information is available at 'www.fitchratings.com'.
In addition to the sources of information identified in Fitch's U.S. Municipal Revenue-Supported Rating Criteria, this action was additionally informed by information from Creditscope,
--'Revenue-Supported Rating Criteria' (
--'U.S. Water and Sewer Revenue Bond Rating Criteria' (
--'2014 Water and Sewer Medians' (
--'2014 Sector Outlook: Water and Sewer' (
Revenue-Supported Rating Criteria
U.S. Water and Sewer Revenue Bond Rating Criteria
2014 Water and Sewer Medians
2014 Outlook: Water and Sewer Sector
Source: Fitch Ratings
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