OREANDA-NEWS. Fitch Ratings assigns an 'AA+' rating to the following Tohopekaliga Water Authority, FL's (Toho) revenue bonds:

--$167 million utility system revenue and revenue refunding bonds, series 2016.

The bonds are expected to sell via negotiation the week of March 14.

Proceeds of the 2016 bonds will be used to fund various system-wide capital improvements, current refund all or a portion of outstanding series 2012 privately placed notes and advance refund all or a portion of callable outstanding series 2011A bonds for savings (savings taken annually, no extension of maturities), and pay issuance costs.

In addition, Fitch affirms the following ratings:

--Approximately $150 million in outstanding utility system revenue bonds (prior to the refunding) at 'AA+'.

The Rating Outlook is revised to Positive from Stable.

SECURITY

The bonds are payable from a senior lien pledge of the net revenues of Toho's water and sewer system (the system) and system development charges.

KEY RATING DRIVERS

POSITIVE OUTLOOK ON STRONG FINANCES AND FLEXIBILITY: Toho's 'AA+' rating is supported by strong financial performance with robust free cash flow and liquidity. Low rates, an affordable debt burden and expectations for further improvement in financial performance provide significant flexibility and drive the Positive Outlook.

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. Capital needs include a combination of renewal and maintenance projects and system expansion. The majority of the system's comprehensive capital improvement plan (CIP) will be funded from pay-as-you-go sources and system development fees, further improving debt levels.

FAVORABLE DEBT PROFILE: Toho's debt burden is low compared to similarly rated systems and is expected to continue to trend positively over the next few years despite the 2016 issuance. With roughly $195 million in outstanding bonds and notes outstanding in fiscal 2015, most debt metrics compare favorably to medians for systems rated 'AAA' by Fitch.

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 with some diversification underway. However, local employment continues to be tied to the economically sensitive tourism and services sectors.

RATING SENSITIVITIES

UPWARD MOVEMENT POSSIBLE ON CONTINUED GAINS: Tohopekaliga Water Authority's bonds could be upgraded if the currently outlined financial pro forma is executed, which systematically boosts already robust free cash flows and liquidity amid expectations for continued comprehensive capital investment and maintenance of a low debt burden.

CREDIT PROFILE

INDEPENDENT REGIONAL SERVICE PROVIDER

Toho is an independent special district that was 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. The voting members are appointed by their respective members: two by the Osceola County Board of Commissioners, two by the Kissimmee city council, one by Polk County, and the final voting member, the board chairperson, is appointed by joint resolution of Osceola County and the city of Kissimmee.

LARGE AND STABLE SERVICE AREA, MOSTLY RESIDENTIAL CUSTOMER BASE

Toho is located in Osceola County (implied unlimited tax general obligation bonds rated 'AA-' with a Stable Outlook), just south of Orlando and adjacent to Disney World in central Florida. The area'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 in Orange and Osceola counties, while Osceola's other large employers are primarily related to tourism, retail and healthcare.

Due to its central location and access to two international airports (Orlando and Tampa) and an extensive highway system, a significant manufacturing and distribution network has developed to complement the tourism-dependent economy. Employment gains over the past several years have lowered the unemployment rate for the Orlando-Kissimmee-Sanford metropolitan statistical area to 4.5% in November 2015.

Toho's service area is large (1,500 square miles) with a mostly residential and stable customer base. In 2015, Toho served approximately 93,000 retail water and 87,000 retail sewer customers through four regional subsystems. Toho also served over 13,000 reclaimed water and 16,000 irrigation customers in fiscal 2015. Each of the sub-systems within Toho's service area represents the four separate utility acquisitions made by Toho since its inception.

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. Toho's infrastructure is in good condition with most facilities built within the last 20-30 years. Overall capacity in the system is strong and despite the geographical distance between sub-areas, appropriate redundancy is provided by interconnection amongst Toho's treatment facilities as well as emergency hookup capability with local providers.

WELL-MANAGED FINANCES, STRONG FLEXIBILITY

Toho's finances remain strong as evidenced by consistently solid margins and healthy debt service coverage (DSC) over the past six years. In fiscal 2015 the system generated approximately $50 million in total net revenues (after operating expenses and including non-recurring system development charges), which produced DSC of over 3.0x for the second consecutive year and 2.4x without the one-time fees. These ratios include annual payment in-lieu of taxes as an operating expense of the system even though such payments are legally subordinate to debt service.

Liquidity is also strong with more than 330 days of cash-on-hand in fiscal 2015, which coupled with low customer rates provides solid financial flexibility. Flexibility is further enhanced with the inclusion of approximately $92 million in capital expansion-related funds on hand that can support roughly 30% of the system's five-year capital program, allowing Toho to easily re-invest in capital assets while large cash balances accumulate from operations.

Pro forma financial results provided by Toho's rate consultant show a continuation of strong performance. DSC is projected to rise to 4.0x in fiscal 2018 from all revenues and to 2.8x from operating revenues alone. Forecasts indicate further improvement in financial metrics in fiscals 2019 and 2020, with DSC nearing 5.0x from all revenues and 3.6x excluding growth-related fees, levels that approximate utilities rated 'AAA' by Fitch.

The updated financial forecast indicates results that are slightly better than the previous forecast provided to Fitch and reflects a more proactive approach to future rate-setting by management than previously indicated. After a 7.5% rate increase in fiscal 2016, prospective rate increases, previously expected at 2.5% annually, are now anticipated to increase between 2.5% - 5% per year in order to provide funding to meet the system's share of a regional water supply initiative (explained further below) and other capital needs.

Additionally, the forecast contains other feasible assumptions including modest growth in flows and operating expenses and no additional debt after the 2016 issuance. Given the current trajectory of capital spending (only 15% of which is projected to be debt-funded) and expectations for higher margins and increased annual cash flows, Fitch projects Toho's cash balances will roughly triple over the next four years. Fitch believes the forecast and its assumptions are sound and generally feasible.

LOW DEBT TO CONTINUE DESPITE CAPITAL SPENDING

Toho's entire $190 million debt portfolio as of fiscal 2015 consists of long-term fixed rate bonds and direct loans, a modest amount for a system of this size. Outstanding debt equated to an affordable $922 per customer, 27% of net plant and just 16% of gross revenues. Leverage has been steadily improving over the past six years as capital needs have been mainly pay-go funded. After issuance however, amortization of existing and proposed debt is somewhat slow with just 32% retired over the next 10 years but improves to 81% retired in 20 years.

Approximately $50 million in 2016 proceeds (including estimated premium) will be new money for capital projects, while the remaining up to $119 million will be used to current and advance refund all or a portion of outstanding bonds and notes for net present value interest savings. Maturities for the 2016 refunding are expected to match the outstanding debt and while the majority of the savings are projected to occur between fiscal years 2021 - 2028, annual savings will continue through final maturity in 2036. Despite the new bonds and slow amortization, the debt burden is projected to continue to trend lower.

COMPREHENSIVE BUT MANAGEABLE CAPITAL PROGRAM

The system's five-year, $337 million CIP is roughly 30% larger than the prior five-year plan shown to Fitch but is still expected to be financed mainly from pay-as-you-go sources (32% of total funding), existing and future system development charges (about 54%), and 2016 bond proceeds. Roughly 40% of the CIP will focus on water infrastructure projects, 18% on wastewater improvements and 30% on treatment and collection. The remaining projects will be distributed between system-wide upgrade and rehabilitation, plant improvements and expansion projects. Capital needs beyond 2020 include $15 million - $17 million annually in renewal and replacement projects as well as further alternative water supply initiatives and other expansionary projects.

SOLID SYSTEM INFRASTRUCTURE; NEW WATER SUPPLY BEING DEVELOPED

Water supply consists of minimally treated groundwater from the upper Floridan Aquifer. Toho can draw up to 43.5 million gallons per day (mgd), which is well in excess of average demand of approximately 34 mgd in fiscal 2015. Demand has been relatively steady as some of the strong customer growth trends have been partially offset by lower per-customer usage. However, Toho and other regional water systems project continued long-range customer growth, in Toho's case customer growth has been roughly 2.2% annually, resulting in a need to cooperate on strategic initiatives to develop additional water supply.

In 2011, Toho entered into a cooperative interlocal agreement with the counties of Orange and Polk and the city of St. Cloud to design and develop regional solutions to long-term water needs. Development of the Cypress Lake wellfield (which taps the lower Floridan Aquifer) will increase total supply for the cooperative's members by 30 mgd, from which Toho will be entitled to 12 mgd.

Approximately $10 million has been spent by Toho to date on design and permitting, preliminary engineering and construction of test wells. Total cost estimates for the Cypress Lake projects are in the $200 million-$250 million range, although Toho's costs will be proportioned to projected output (about 40%). Initial funding for a new treatment plant and other facilities, along with other water supply projects, is included in the current five-year CIP. Toho's significant annual margins, low rates and modest debt burden provide capacity and flexibility to meet long-term capital needs.

AFFORDABLE RATES; AUTONOMOUS RATE-SETTING

Rates in Toho historically have been adjusted annually during the budget process with new rates effective each Oct. 1. These rates can be adjusted at any time during the year. 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 equalized in 2012 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 approximately $62 per month for 7,500 gallons of use in fiscal 2016, or a still very affordable 1.7% of median household income. Even after the proposed/anticipated rate increases are enacted as set forth in Toho's financial pro forma, rates will remain affordable.

BOND RESOLUTION AMENDMENTS ARE CREDIT NEUTRAL

With the issuance of the 2016 bonds, Toho will make changes to its legal documents. In Fitch's opinion, the planned changes, which come via a new amended and restated master bond resolution, will largely modernize and clarify some legal definitions and covenants, and provide Toho with flexibility. For example, the amended resolution will allow Toho to issue short-term commercial paper obligations, update the definition of operating expenses to include required payments for contracted services (i.e., additional water supply), remove the required governmental transfers from the rate covenant and additional bonds test so as not to be required to raise rates in order to fund those payments, and remove the potential for bondholder acceleration in the event of default.