Fitch Affirms Tohopekaliga Water Authority, FL's Utility System Revs at 'AA+'; Outlook Stable

NEW YORK--()--Fitch Ratings has affirmed the ratings for Tohopekaliga Water Authority, FL's (Toho) approximately $120 million in outstanding utility system revenue bonds at 'AA+'.

The Rating Outlook is Stable.

SECURITY

The bonds are secured by a senior lien pledge of the net revenues of Toho's water and sewer system and system development charges.

KEY RATING DRIVERS

STRONG FINANCIAL METRICS: Toho's strong financial performance and flexibility is supported by high historical debt service coverage (DSC), solid financial margins, above-average liquidity, and affordable rates.

SOUND OPERATIONS AND CAPITAL PLANNING: Treatment capacity remains strong on a combined basis, and the development of additional water supplies will improve and diversify long-term resources.

FAVORABLE DEBT PROFILE: Toho's debt burden is low compared to similarly rated systems. With about $200 million in outstanding bonds and notes, debt is just 22% of net plant, $972 per customer, and a manageable 18% of gross revenues.

MANAGEABLE CAPITAL NEEDS: Capital needs include a combination of system renewal and maintenance projects, and system expansion. Overall, the capital improvement plan (CIP) is modest and will be funded mainly from pay-as-you-go sources and system development fees, allowing an already favorable debt burden to further improve.

STABLE SERVICE AREA: Toho is a large regional service provider located in the greater 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.

RATING SENSITIVITIES

RATING STABILITY EXPECTED: Fitch expects a stable operating environment and strong financial performance over the intermediate term given the low rate structure, manageable projected rate increases and no additional debt plans.

Credit Profile

INDEPENDENT REGIONAL 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. Governance is provided by a board of six voting members, and three non-voting liaison members. Voting members are appointed, serving three-year staggered terms, and each voting member must be a ratepayer and qualified elector within the service area. Of the six voting members, two are appointed by the Osceola County Board of Commissioners, two by the Kissimmee city council, one by Polk County, and the board chairperson is appointed by joint resolution of Osceola County and Kissimmee.

LARGE AND STABLE SERVICE AREA, MOSTLY RESIDENTIAL CUSTOMER BASE

Toho is located in Osceola County (implied unlimited tax general obligation 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 maintains a strong tourism-based component since the opening of Walt Disney World in 1971. The Walt Disney Co. (rated 'A' with a Stable Outlook by Fitch) employs approximately 74,000 employees in Orange and Osceola counties, while Osceola's other large employers are primarily related to tourism, retail, and healthcare. Employment gains over the past several years have lowered the unemployment rate for the Orlando-Kissimmee-Sanford metropolitan statistical area to 5.4% in February 2015, which is down significantly from the February 2011 rate of 10.6%.

Toho's service area is large (1,500 square miles) and the customer base is mostly residential and stable with 91,000 retail water customers (87% residential) and roughly 85,000 retail sewer customers served through four regional subsystems. Toho also served over 13,000 reclaimed water and 16,000 irrigation customers in fiscal 2014. Customer growth trends are anticipated to be about 3% annually through the five-year capital budget as the region continues to develop over the long term.

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 and parts of Osceola County, is the largest sub-system comprising about 75% of total demand.

SOLID SYSTEM INFRASTRUCTURE; NEW WATER SUPPLY BEING DEVELOPED

Water supply consists of minimally treated groundwater from the upper Floridan Aquifer. Toho can draw an average of 42 million gallons per day (mgd), which is sufficient to meet average demand of approximately 35 mgd in fiscal 2014. Demand has been relatively steady as some of the strong customer growth trends have been partially offset by lower per customer usage.

Long-term water supply will be enhanced by the development of additional groundwater sources at Cypress Lake, which will be a shared resource with cooperative members (including St. Cloud and Orange and Polk Counties), and other potential projects.

Development of Cypress Lake (which taps the lower Floridan Aquifer) will increase Toho's resources by an additional 12 mgd. Preliminary engineering has been completed and the initial funding for a new treatment plant and other facilities, along with other water supply projects is included in the current five-year CIP.

WELL-MANAGED FINANCES AND LOW DEBT BURDEN

Toho's finances remain strong evidenced by consistently solid margins and healthy DSC over the past five years. In fiscal 2014, the system generated approximately $44 million in total net revenues (including non-recurring system development charges), which produced DSC in excess of 3.0x, and 2.1x without the one-time fees. These ratios include annual payment in-lieu of taxes (PILOTs) as an operating expense of the system.

Liquidity is strong with more than 400 days of cash-on-hand for operations in fiscal 2014, and coupled with below-average rates, provides solid financial flexibility. Pro forma financial results show a continuation of previously strong performance. DSC is projected to remain near 3.0x from all revenues through the forecast and above 2.0x from operating cash flow alone. DSC improves during the later years of the forecast with projected 2.5% rate increases and no planned debt issuances.

With just $199 million in total debt outstanding, the debt burden was a modest $972 per customer and 22% of net plant in fiscal 2014. Overall, debt ratios have been steadily improving and are below the 'AA' category medians. Debt carrying charges are also manageable at just 18% of gross revenues.

The system's five-year, $256 million CIP is expected to be financed from pay-as-you-go sources (32% of total funding), future system development charges (about 64%), and a modest amount of additional debt. Roughly one-third of the CIP will focus on alternative water supply projects. The remaining projects will be distributed between system upgrade and rehabilitation, various plant improvements and expansion projects, and sewer line and lift station rehabilitation.

AFFORDABLE RATES; AUTONOMOUS RATE-SETTING

Rates in Toho historically have been adjusted annually during the budget process with new rates effective each October 1, although they can be adjusted at any time. The rate structure includes both a base charge for service and consumption charges. The base charge represents about 30% of the combined bill, which Fitch views favorably as the system is less reliant upon demand, which can be influenced by weather, economic conditions or general price elasticity. Customers are billed monthly and collections are typically strong.

Rates for all of Toho's sub-areas were recently equalized so that all customers pay approximately the same rate for service. While rates were increased for most customers (mainly those residing in the city of Kissimmee), overall rates remain affordable at $53 per month for 7,500 gallons of use in fiscal 2015, or a still very affordable 1.4% of median household income.

Additional information is available at 'www.fitchratings.com'.

In addition to the sources of information identified in Fitch's Revenue-Supported Rating Criteria, this action was additionally informed by information from Creditscope.

Applicable Criteria and Related Research:

--'Revenue-Supported Rating Criteria' (June 2014);

--'U.S. Water and Sewer Revenue Bond Rating Criteria' (July 2013);

--'2015 Water and Sewer Medians' (December 2014);

--'2015 Outlook: Water and Sewer Sector' (December 2014).

Applicable Criteria and Related Research:

Revenue-Supported Rating Criteria

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=750012

U.S. Water and Sewer Revenue Bond Rating Criteria

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=715275

2015 Water and Sewer Medians

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=818409

2015 Outlook: Water and Sewer Sector

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=818410

Additional Disclosure

Solicitation Status

http://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=984680

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Contacts

Fitch Ratings
Primary Analyst
Andrew DeStefano
Director
+1 212-908-0284
Fitch Ratings, Inc.
33 Whitehall Street
New York, NY 10004
or
Secondary Analyst
Eva D. Rippeteau
Associate Director
+1 212-908-9105
or
Committee Chairperson
Adrienne M. Booker
Senior Director
+1 312-368-5471
or
Media Relations:
Elizabeth Fogerty, +1 212-908-0526
elizabeth.fogerty@fitchratings.com

Contacts

Fitch Ratings
Primary Analyst
Andrew DeStefano
Director
+1 212-908-0284
Fitch Ratings, Inc.
33 Whitehall Street
New York, NY 10004
or
Secondary Analyst
Eva D. Rippeteau
Associate Director
+1 212-908-9105
or
Committee Chairperson
Adrienne M. Booker
Senior Director
+1 312-368-5471
or
Media Relations:
Elizabeth Fogerty, +1 212-908-0526
elizabeth.fogerty@fitchratings.com