NEW YORK--(BUSINESS WIRE)--Fitch Ratings assigns an 'AA' rating to the following Tohopekaliga Water Authority (Toho), FL's utility system revenue refunding bonds:
--$94.82 million utility system revenue refunding bonds, series 2011A.
The bonds are expected to sell via negotiated sale on Wednesday, March 2, 2011.
These bonds were originally rated by Fitch on Nov. 03, 2010 in advance of the pending sale. The sale was delayed due to market conditions. Fitch withdraws the 'AA' rating on the series 2010A bonds.
Bond proceeds will be used to current refund all of the outstanding series 2007 variable-rate bonds, finance all or a portion of the costs associated with termination of the interest rate swap, fund a deposit to the debt service reserve sub-account for the bonds, and pay costs of issuance.
In addition, Fitch takes the following rating action on Toho's outstanding parity bonds:
--Approximately $97 million, series 2003A and 2003B, affirmed at 'AA';
--Approximately $90 million (prior to the refunding), series 2007, affirmed at 'AA'.
The Rating Outlook is Stable.
RATING RATIONALE:
--System management is strong, characterized by still solid financial margins and debt service coverage, maintenance of healthy liquidity, and robust annual capital spending for system maintenance.
--A debt burden and capital plan that remain manageable and will continue to be funded with equity contributions and growth-related charges.
--The system features solid overall system capacity, though management is in the process of securing additional water rights for longer-term demand.
--The service area economy within the greater Orlando metropolitan statistical area (MSA) is relatively stable, although local employment continues to be tied to economically sensitive tourism and services.
--Rates are reasonable for a majority of system customers; however, for the portion of customers with already above-average rates (about 40% of total accounts) future rate flexibility may be limited.
KEY RATING DRIVERS:
--The system's ability to maintain solid financial metrics, including strong cash balances, while addressing both its intermediate capital needs and longer-term water supply needs, will continue to be an important rating consideration.
--Fitch will continue to monitor the system's ability to maintain a stable customer profile in light of the area's economically sensitive employment base and unsettled housing market.
SECURITY:
The bonds are secured by a pledge of the net revenues of the water system, including system development charges. While pledged, system development charges are not included in the rate covenant or additional bonds test.
CREDIT SUMMARY:
The Tohopekaliga Water Authority (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. Toho, which is located primarily in Osceola County (implied GO rating of 'AA-' by Fitch) provides services to a mainly residential customer base of 81,000 water accounts through four regional sub-systems over a service area that covers 1,500 square miles. The sub-systems essentially 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. The customer base is fairly diverse with the 10 leading customers comprising 12% of total system revenues in fiscal 2010.
Water supply consists of minimally treated groundwater from the Floridan Aquifer. Through two separate water use permits issued by the South Florida Water Management District (SFWMD), Toho can draw an average of 42 million gallons of water per day (MGD), which is enough to meet current average demand of approximately 30 MGD. While one of the permits has recently expired, SFWMD is currently reviewing Toho's application for a renewal, which includes a request for an additional 3-4 MGD of use. Slower than originally projected customer growth is expected to allow current water supply to meet Toho's needs through 2020, and while additional water resources are already being explored, capital expense related to new water sources is not in the scope of the current capital plan. Total water treatment capacity is exceptional at 76 MGD, while the average system flow in fiscal 2010 was just 32 MGD, or 42% of current capacity. System capacity for the wastewater utility is also good with 31.5 MGD of combined treatment capabilities versus average demand in 2010 of 21.5 MGD (or 68% of total capacity).
While the system's historically strong annual financial margins and debt service coverage levels have come under some pressure from increasing annual debt service and a slight decline in operating revenues in fiscal 2009, the financial profile of the system remains solid. High liquidity levels provide financial flexibility - the system ended fiscal 2009 with unrestricted balance sheet cash of over $45 million, or 370 days cash on hand. The system is expected to end fiscal 2010 (unaudited) with better financial results than originally projected. For fiscal 2010, management expects to end the year with $65 million in unrestricted cash, which is equivalent to 500 days of operating expenses. Going forward, management expects to maintain cash balances at levels closer to 300 days, which is close to the median level for the rating category. For fiscal 2009, all-in debt service coverage of senior lien bonds (and annual government transfers related to system acquisition) exceeded 2.4 times (x). Excluding one-time developer fees, coverage was a still solid 1.8x. Slightly better financial margins for fiscal 2010 are projected to produce nearly 2.6x debt service coverage including developer fees, and 2.2x without such fees. Pro forma financials show debt service coverage maintained at similarly strong levels for fiscal 2011, and the adoption of additional projected rate increases will likely further bolster coverage.
Once the 2007 bonds are refunded, Toho will no longer have any swaps outstanding. The fixed payer swap, executed to provide a hedge for the series 2007 variable-rate bonds, will be terminated along with the refunding of those bonds. In addition, management recently decided to unwind the outstanding constant maturity swap (CMS), which was not tied to any debt instrument. The CMS generated positive annual cash flow and had a positive valuation as of its termination, providing the authority with a total of $10 million in unrestricted resources to be used to pay a portion of the termination payment to be owed on the fixed payer swap (estimated at $11.5 million). Since it was not providing a hedge against any debt, Fitch considers the unwinding of the CMS to be a positive development despite the favorable mark-to-market fair value and positive cash flows received while it was outstanding.
The debt burden is modest at $1,300 per customer in fiscal 2010, and will likely moderate further due to limited future borrowing plans. The system's $200 million five-year capital improvement plan (CIP) is manageable and is expected to continue to be financed with system equity, growth-related development charges, and a potential bond issuance in 2015. However, Fitch notes the impact of the EPA's more stringent nutrient criteria for the system's wastewater discharge could require significant additional capital investment, and will be monitored. Since 2003, Toho has completed nearly $250 million in capital improvements and system repair and replacement.
Toho has rate setting autonomy, and has incrementally raised rates over the years. While rates vary somewhat between sub-areas, the rate structure for each of the sub-areas is similar and includes both a monthly base charge and consumption charges. Combined rates for a majority of system customers are manageable at $28 (for 5,000 gallons of use), or roughly 0.7% of median household income. For the remaining customers, rates are above average at closer to $60 per month. Planned additional rate increases will push rates higher, which may generate affordability concerns for residents with already above-average rates.
Toho is located in Osceola County (population 273,000), which includes the cities of Kissimmee and St. Cloud, just south of Orlando and adjacent to Disney World. Population growth had been strong for at least the past decade; however, expectations are for more modest growth going forward. The county's economy has had a strong tourism-based component since the opening of Walt Disney World in 1971. Walt Disney employs approximately 62,000 and many of the other large employers within the county are tourism related. The healthcare and higher education sectors also play a role in the economy. As of December 2010, the county's unemployment rate was still high at 12.4%. Fitch housing data shows foreclosure rates in the county are higher than the national average, but about equivalent to the state as a whole.
Legal provisions are slightly weaker than similarly rated utilities. The authority covenants to maintain rates and charges sufficient to produce net revenues equal to at least 115% of annual debt service plus 100% of required deposits for renewal and replacement, subordinate debt service, and government transfers (Toho agreed to make transfer and/or PILOT payments to the city of Kissimmee, and to Osceola and Polk counties as part of the transfer of ownership, and the financial considerations related thereto, of the respective acquired utility systems). Under the agreements, the rate of transfer to the respective entities is capped at 12% of gross system revenues.
The additional bonds test is 115% coverage of maximum annual debt service (MADS) plus 100% coverage of MADS for subordinate bonds and 100% of the required deposits for renewal and replacement and annual governmental transfers. The test period is 12 consecutive of the previous 24 calendar months, or the most recent fiscal year. The debt service reserve account is segregated for each series of bonds.
Additional information is available at 'www.fitchratings.com'
In addition to the sources of information identified in the 'U.S. Revenue-Supported Rating Criteria', dated 8 Oct. 2010, this action was additionally informed by information from Southeastern Investment Securities, LLC (the financial advisor), and Post, Buckley, Schuh and Jernigan, Inc. (the consulting engineer).
Applicable Criteria and Related Research:
'U.S. Revenue-Supported Rating Criteria', dated Oct. 8, 2010;
'Water and Sewer Revenue Bond Rating Guidelines', dated Aug. 6, 2008;
'2011 Water and Wastewater Medians', dated Jan. 18, 2011;
'2011 Outlook: Water and Wastewater Sector', dated Jan. 18, 2011.
For information on Build America Bonds, visit www.fitchratings.com/BABs.
Applicable Criteria and Related Research:
2011 Outlook: Water and Wastewater Sector
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=593286
2011 Water and Wastewater Medians
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=593285
Water and Sewer Revenue Bond Rating Guidelines
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=395918
Revenue-Supported Rating Criteria
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=564565
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