Fitch Affirms Orlando, FL's Wastewater System Revs at 'AAA'; Outlook Stable

NEW YORK--()--Fitch Ratings has affirmed the following Orlando, FL (the city) revenue bonds:

--$32 million wastewater system revenue bonds, series 2013, at 'AAA'.

The Rating Outlook is Stable.

SECURITY

The bonds are secured by a senior lien pledge of the wastewater system's net operating revenues and a subordinate lien on the proceeds of a utilities services tax (UST).

KEY RATING DRIVERS

HEALTHY FINANCES: Financial metrics are very strong, a result of historical rate increases and significantly lower annual debt service beginning in fiscal 2014. Cash levels also have greatly improved, with the system ending fiscal 2015 with over $160 million in unrestricted cash and renewal and replacement funds, equivalent to over 1,100 days cash on hand.

MANAGEABLE CAPITAL NEEDS: The capital improvement plan (CIP) totals $244 million through 2021 and will focus on system upkeep and renewal. Funding is expected to come primarily from non-debt sources, including existing cash and capacity charges. Nevertheless, liquidity should remain strong.

MODEST DEBT PROFILE: The debt burden is an affordable $1,166 per customer as of fiscal 2015 and just 7% of operating revenues. While additional debt is expected, the debt burden is anticipated to remain low.

HIGH RATES EXPECTED TO LEVEL: Wastewater charges are a relatively high $48 per month for the average residential customer. While the city commission approved automatic annual adjustments, rates were not increased in fiscals 2016 or 2017. Already strong financial margins, high cash balances and manageable capital needs indicate the city may forego or curtail future increases.

STABLE, DIVERSIFYING ECONOMY: The regional economy continues to diversify with employment in professional and business services, health care and education, and biotechnology but remains subject to fluctuations in tourism and related services. Steady employment growth has lowered the unemployment rate.

RATING SENSITIVITIES

FINANCIAL PERFORMANCE: While currently unforeseen, the rating on the city of Orlando's wastewater bonds could change with a reversal of the system's very strong financial performance.

CREDIT PROFILE

The city of Orlando's ('AAA' Issuer Default Rating) wastewater utility provides sewer collection and treatment services to a large retail customer base of 75,500 sewer and 4,000 reclaimed water accounts. The customer base is mostly residential and stable.

STRONG FINANCES A KEY CREDIT STRENGTH

The system's financial performance has been solid historically with DSC bolstered by the pledged utilities services taxes (UST). DSC from all pledged revenues, including the UST, averaged 4.9x or better on the senior lien bonds and 3.4x of all debt service in fiscal 2009-2013. However, when excluding the UST, DSC on the senior bonds was just 1.8x in fiscal 2009 and 1.4x all in. Results improved in subsequent years as system operating revenues, led by sizable rate increases, increased by $24 million (or 42%) from 2009-2013. By fiscal 2013, DSC excluding UST was over 3.0x for the senior lien bonds and 2.3x all-in.

The restructuring of the system's outstanding debt in 2013, which resulted in much lower annual debt service, led to exceptionally strong DSC from operating revenues alone commencing in fiscal 2014. In fiscal 2015, DSC was over 14.0x on the senior bonds and a very healthy 4.75x all-in from operating revenues alone (not including connection fees, which are no longer pledged to bonds, or the UST). Other key financial ratios, including operating margin, free cash flow (FCF), and liquidity have also improved over the past five years.

The system makes annual dividend payments to the city's general fund totaling $6.5 million in 2015, which is set at a somewhat elevated but manageable 7.9% of prior year operating revenues. The dividend payments are legally excluded from operating expenses but are nonetheless accounted for in the audited financial statements as an O&M expense. Fiscal 2016 results are not yet available, although management has indicated operating revenues have surpassed budgeted expectations leading to expectations for strong positive results for the year.

The system ended fiscal 2015 with $154 million in unrestricted cash and investments and $6 million in renewal and replacement fund balances, which together comprised an exceptionally strong 1,131 days cash on hand. Including accounts receivable, liquid resources are a very strong 3.5x current liabilities.

According to management, approximately $70 million of cash reserves are expected to be appropriated for capital projects, leading to a decline in liquidity over the next few years. However, Fitch expects cash balances will remain strong due to the large excess annual cash flows the system is expected to continue to generate from operations.

RATES ARE HIGH BUT FUTURE INCREASES EXPECTED TO BE MODEST

Sewer rates consist of a fixed base charge for service and consumption charges based on water use. Fixed charges make up a sizable portion of the sewer bill, which is viewed favorably as the system is less dependent upon demand/use. Outside city customers (about half of the customers served) are charged a 25% surcharge.

Sewer rates are elevated at $48 per month for residential users (assuming 6,500 gallons), equivalent to 1.4% of median household income (MHI). On the positive side, rates were held constant in fiscals 2016 and 2017 and existing rates provide significant cost recovery of the system's fixed obligations and expected renewal and replacement needs.

A new rate study is underway that will outline future rate needs, incorporating capital spending requirements and expectations for customer growth. While decisions on future rate needs are under review, Fitch anticipates the city may elect to suspend or curtail the 5% automatic annual rate increases going forward, as it has over the past two years.

MANAGEABLE CAPITAL NEEDS AND DEBT BURDEN

The system's $244 million five-year CIP through 2021 will focus on system-wide improvements including upgrades to two of its treatment facilities. Projected capital spending is large relative to system fixed assets but manageable at $48 million annually. The city expects to spend nearly $90 million in collection system upgrades and another $80 million on lift station rehab and improvements, which combined account for 70% of proposed capital spending.

In addition to cash and annual cash flows which are expected to account for over 80% of CIP funding sources, the city plans to access additional low-interest subordinate lien state revolving fund loans to fund the remainder of the program. While capital needs are manageable, the average age of plant is a high 22 years in fiscal 2015, indicating the system has a fair amount of deferred maintenance needs.

All of the system's debt is comprised of fixed-rate, long-term bonds or state loans. With just $92 million in total debt outstanding in fiscal 2015, debt ratios are low. Debt to net plant equaled 23% and debt per customer was an affordable $1,287 in fiscal 2015, both ratios are near or below the medians for the rating. Debt is also just 1.98x funds available for debt service and annual debt service is just 9% of system operating revenues. The debt profile should remain manageable with limited additional debt needs and strong projected financial results. Debt amortizes in a rapid 60% over the next 10 years.

STRONG SERVICE AREA CHARACTERISTICS

Orlando and the surrounding communities make up one of the world's leading tourist destinations and remains the economic anchor for central Florida. In addition to tourism, the regional economy includes healthcare and education, professional and business services, and biotechnology. The unemployment rate for the Orlando-Kissimmee-Sanford MSA is down to 4.4% in August 2016, continuing a trend of steady improvement in the rate over the past six years (rate was 11.4% in August 2010).

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

Applicable Criteria

Revenue-Supported Rating Criteria (pub. 16 Jun 2014)

https://www.fitchratings.com/site/re/750012

U.S. Water and Sewer Revenue Bond Rating Criteria (pub. 03 Sep 2015)

https://www.fitchratings.com/site/re/869223

Additional Disclosures

Dodd-Frank Rating Information Disclosure Form

https://www.fitchratings.com/creditdesk/press_releases/content/ridf_frame.cfm?pr_id=1015591

Solicitation Status

https://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=1015591

Endorsement Policy

https://www.fitchratings.com/regulatory

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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
Director
+1-212-908-9105
or
Committee Chairperson
Doug Scott
Managing Director
+1-512-215-3725
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
Director
+1-212-908-9105
or
Committee Chairperson
Doug Scott
Managing Director
+1-512-215-3725
or
Media Relations
Elizabeth Fogerty, +1 212-908-0526
elizabeth.fogerty@fitchratings.com