NEW YORK--()--Fitch Ratings takes the following action on Tohopekaliga Water Authority, Florida (Toho):
-- Approximately $93 million utility system revenue bonds upgraded to 'AA+' from 'AA'.
The Rating Outlook is Stable.
The bonds are secured by a senior lien pledge of the net revenues of the water and sewer system (the system), together with system development charges, limited to the amount used for expansion-related debt service.
KEY RATING DRIVERS
STRONG SYSTEM MANAGEMENT DRIVES UPGRADE: The rating upgrade reflects continued strong financial performance and flexibility, which is supported by consistently solid financial margins and historical debt service coverage, an above average liquidity position, and affordable rates. In addition, modest, cash-funded capital needs will allow an already manageable debt burden to further improve over time.
SOUND OPERATIONS AND CAPITAL PLANNING: Treatment capacity remains strong on a combined basis, and long-term water supply will improve with the development of new and recently permitted groundwater wells, which are expected to increase supply by nearly 30% or 12 million gallons per day (MGD). Plant operating permits are current, and the system is not facing any regulatory issues.
FAVORABLE DEBT POSITION: The system's debt burden is low compared to similarly rated systems, and the overall profile has improved somewhat with the refunding of the series 2007 variable rate bonds in 2011; the system no longer has any variable rate debt or swaps outstanding.
CASH-FUNDED CAPITAL PROGRAM: A $108 million five-year capital improvement plan (CIP) is manageable and will focus mainly on system maintenance and upgrades. The entire program is expected to be funded from annual cash flow and other pay-go sources with no new debt projected over the intermediate term.
STABLE SERVICE AREA: Toho is a large regional service provider located in the greater City of Orlando metropolitan statistical area (MSA). The economy and customer base are relatively stable, although local employment continues to be tied to economically sensitive tourism and services.
LARGE INDEPENDENT SERVICE PROVIDER
Toho is an independent special district created in 2003 to provide a regional approach to the development, planning, and delivery of potable water, wastewater and reclaimed water services. The service area is large (1,500 square miles) and the customer base is mostly residential and stable with 86,000 retail water customers (87% residential) and roughly 80,000 retail sewer customers served through four regional subsystems. Toho also serves over 11,000 reclaimed water and 15,000 irrigation customers.
The sub-systems represent the four separate utility acquisitions made by Toho since its inception, and while geographically separate, the systems are run as one enterprise by an experienced management team. Toho I, which covers the city of Kissimmee, is the largest sub-system comprising about 75% of total demand.
Toho is located in Osceola County (implied general obligation pledge rated 'AA-' with a Stable Outlook by Fitch), which includes the cities of Kissimmee and St. Cloud, just south of Orlando and adjacent to Disney World. The county's economy has had a strong tourism-based component since the opening of Walt Disney World in 1971. The Walt Disney Co. (rated 'A' with a Stable Outlook) employs 62,000 employees in Orange and Osceola counties, while Osceola's other large employers are largely related to tourism, retail, and healthcare. As of August 2012, the unemployment rate for the Orlando MSA improved to 8.7% from 10.7% a year prior.
RATES EQUALIZED, REMAIN AFFORDABLE
The acquisition of various existing utilities over the years led to a disparity in rates for each sub-system. Rates were equalized in 2012 so that all customers now pay approximately the same rate for service no matter which sub-system they reside in. While rates were increased for most customers (mainly those residing in the city of Kissimmee), overall rates remain manageable at $47 for 6,000 gallons of use, or a still affordable 1.2% of median household income. Future projected annual rate increases are expected to be within a modest range of 2.5%-5%.
SOLID SYSTEM INFRASTRUCTURE, NEW WATER SUPPLY TO BE DEVELOPED
Water supply consists of minimally treated groundwater from the upper Floridan Aquifer. Through two separate water use permits issued by the South Florida Water Management District (SFWMD), Toho can draw an average of 42 MGD, which is still sufficient to meet average demand of approximately 32 MGD in 2011.
Long-term water supply is expected to be enhanced by the recent receipt of a water use permit to develop additional groundwater sources at Cypress Lake. Development of the new supply, which is expected to be in conjunction with other regional utilities and will increase Toho's resources by an additional 12 MGD, is outside the current five-year capital program. However, once developed, the new supply will meet Toho's needs for the foreseeable future.
Toho's water treatment capabilities remain exceptional on a combined basis at approximately 71 MGD, leaving about 55% capacity relative to current average demand. System capacity for the wastewater utility is also good with 31 MGD of combined treatment capabilities versus average demand in 2011 of 21 MGD (or 68% of total capacity).
WELL MANAGED FINANCES
Toho's financial profile remains sound. In fiscal 2010, the system generated over $30 million in net available revenues, which provided strong coverage of debt service of 2.6x (excluding system development charges and PILOT payments, which are not part of the legal definition of operating expenses). Fiscal 2010 results were aided somewhat by a large one-time increase in investment income due to the receipt of a termination payment from the unwinding of the constant maturity swap.
Financial results in fiscal 2011 were similar to fiscal 2010 with an increase in operating revenues; although a rise in annual debt service led to a slight decline in debt service coverage for the year to just over 2.3x excluding system development fees and PILOT payments.
Pro forma financial results show a continuation of previously strong performance. Debt service coverage is projected to remain above 2.0x through the forecast from operating cash flow alone, even improving during the later years with projected ongoing rate increases and lack of additional debt issuances. Liquidity is strong with over 550 days of cash on hand for operations, and coupled with below average rates, provides solid financial flexibility.
LOW DEBT; CAPITAL NEEDS EXPECTED TO BE INTERNALLY FUNDED
The debt burden remains relatively modest at $1,100 per customer and 30% of net plant in fiscal 2011. The system's five-year, $108 million CIP will focus on system rehabilitation and repair and is expected to be financed with system equity and other pay-go sources. Federal regulatory mandates requiring lower levels of nitrogen and other nutrients in wastewater effluent could require additional capital investment, although the system does not have any surface water discharge. Fitch will continue to monitor developments related to numeric nutrient criteria and its impact, if any, on the system.
Capital costs to develop and deliver the new water supply has been estimated by management to be upwards of $150 million for 30 MGD, with Toho's proportional share approximating $60 million. Given the low debt burden, affordable rates and manageable ongoing capital needs, Fitch does not expect the resulting costs to be a burden to the system over the long-term.
Additional information is available at 'www.fitchratings.com'. The ratings above were solicited by, or on behalf of, the issuer, and therefore, Fitch has been compensated for the provision of the ratings.
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.
Applicable Criteria and Related Research:
-- 'Revenue-Supported Rating Criteria' (June 12, 2012);
-- 'U.S. Water and Sewer Revenue Bond Rating Criteria' (Aug. 3, 2012);
-- '2012 Water and Sewer Medians' (Dec. 8, 2011);
-- '2012 Sector Outlook: Water and Sewer' (Dec. 8, 2011).
Applicable Criteria and Related Research:
Revenue-Supported Rating Criteria
U.S. Water and Sewer Revenue Bond Rating Criteria
2012 Water and Sewer Medians
2012 Outlook: Water and Sewer Sector