S & P Orange County, FL Rationale

Summary:

Orange County, Florida; Water/Sewer

Primary Credit Analyst:

Scott D Garrigan, Chicago (1) 312-233-7014; [email protected]

Secondary Contact:

Scott Winrow, New York 212-438-4725; [email protected]

Table Of Contents

Rationale

Outlook

Related Criteria And Research

WWW.STANDARDANDPOORS.COM/RATINGSDIRECT MARCH 30, 2016 1

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Summary:

Orange County, Florida; Water/Sewer

Credit Profile

US$82.555 mil wtr & wastewtr util rev bnds ser 2016

Long Term Rating AAA/Stable New

Rationale

Standard & Poor's Ratings Services assigned its 'AAA' rating to the Orange County Utilities (OCU), Fla.'s series 2016

water and wastewater utility revenue bonds. Standard & Poor's also assigned its 'AAA' underlying rating (SPUR) to

OCU. The outlook is stable.

The rating reflects the system's extremely strong financial profile, along with consistently high economic growth in the

area.

The enterprise risk profile is the result of the system's:

• Service area with moderate wealth and income indicators and low unemployment,

• Affordable water rates representing 1.7% of median household income,

• Low-risk operations characterized by ample water and wastewater capacity, and

• Strong operational management.

The financial risk profile reflects the system's:

• Extremely strong all-in debt service coverage (DSC) levels,

• Strong liquidity with over $44 million in unrestricted cash,

• Very low debt to capitalization, and

• Strong financial management.

The senior-lien bonds are secured by a pledge of the net revenues of the water and wastewater systems. We

understand bond proceeds will be used to finance capital projects. We view the bond provisions as credit neutral. Key

provisions include a rate covenant of 1.2x annual debt service and an additional bonds test (ABT) of 1.2x maximum

annual debt service (MADS).

Enterprise risk profile

Our assessment of the system's enterprise risk profile as "extremely strong" reflects the county's stable and predictable

revenue and cash flow streams from low-risk water and sewer service, a natural monopoly in its service area, and a

strong operational management framework.

Orange County is in central Florida and has an estimated 1.2 million residents; this number has grown incrementally in

recent years. The county seat, Orlando, is a domestic and international tourist destination and home to Walt Disney

World, Sea World, and Universal Studios. Leading employers across the county include Walt Disney Co. (70,000


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employees), Orange County Public Schools (22,347), Universal Orlando Resort (19,000), and Adventist Health

System/Florida Hospital (18,668). Unemployment for the county declined to 5.8% for calendar 2014 from 8.5% for

calendar 2012; more recently in November 2015, it fell further to 4.4%. Median household effective buying income

(MHHEBI) is adequate at 85% of U.S. levels.

We consider the customer base very diverse, based on the leading 10 customers contributing roughly 8% of total

revenues. Over the next few years, management anticipates the pace of new connections to mirror recent trends

averaging around 2%-3%.

OCU did a comprehensive independent Financial Feasibility Study in 2016 which incorporated financial projections

based on automatic 3% annual rate increases in water and sewer rates over the next five years. Although rate increases

are automatic, the management team evaluates financial and capital needs on an annual basis and recommends to the

Board of County Commissioners on whether the 3% rate increases are needed. Given county income levels, we view

the rates as affordable at about $51.48 per month for an average residential customer for 6,000 gallons. When

annualized, this amount represents about 1.7% of MHHEBI.

Based on our operational management assessment, we view the system to be a '1' on a scale of '1' to '6', with '1' being

the strongest. We view the operational management of the system as strong. Rates are reviewed annually and

management has proactively analyzed the rate structure and incorporated recommendations from the Financial

Feasibility Study. OCU also commissioned an independent Consulting Engineer's Report (CER), which detailed the

current status and future needs of the water and wastewater system. While the system currently has capacity for

average and peak demand, and, given projections for long-term customer growth, pressure on capacity is anticipated

down the line. The primary water source for OCU is groundwater from the Floridan Aquifer with permitted annual

average withdrawal of 102 million gallons per day (mgd). The system consists of 49 active wells with a combined

pumping capacity of about 148 mgd, which we understand adequately meets average daily demand of roughly 58 mgd.

The system also consists of potable water storage facilities of roughly 50 million gallons, which help balance daily

fluctuations in water demand and provide for contingency situations. According to the CER, increase in annual average

demand is projected to be 74 mgd and 80 mgd in 2020 and 2025, respectively.

OCU's sewer system consists of three wastewater treatment plants with a combined capacity of about 91 mgd.

Average annual flows across the county were 55 mgd (2014). OCU has numerous wholesale wastewater and/or

reclaimed water contracts with Orlando, the City of Apopka, Ocoee, the Orlando Utilities Commission, Seminole

County, Winter Garden, and Winter Park. Wholesale revenues constitute less than 5% of total operating revenues.

According to the CER, increase in annual average flows is projected to be 63 mgd and 71 mgd in 2020 and 2025,

respectively.

Financial risk profile

Our assessment of the system's financial risk profile as "extremely strong" reflects the county's historically strong

coverage and liquidity position that we anticipate will stay consistent over time, a manageable debt structure, and a

strong financial management framework.

OCU's sustained healthy financial position is reflected by its very strong annual DSC and liquidity margins. The

authority's operations yielded strong DSC of 10.4x in 2014 and 9.8x 2013. Historically, water and sewer connection


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Summary: Orange County, Florida; Water/Sewer

fees, averaging $25.5 million over the last three years, have been restricted for capital improvements and are not

pledged to the series 2016 bonds. Previous audited results for all-in debt service averaged over 10x for 2012 to 2014.

In draft financials for 2015, DSC is extremely strong at 27x. However, OCU is planning on additional debt of

approximately $100 million over the next five years to fund capital needs. According the management, projected DSC

will remain extremely strong estimated at roughly 10.3x and 6.4x for 2016 and 2017, respectively, even with the added

debt.

Although falling, liquidity remains very strong, in our view; in 2014, unrestricted cash of about $44 million represented

138 days' cash. Management targets surplus cash balances of at least $30 million per year.

Based on our financial management assessment, we view the system to be a '1' on a scale of '1' to '6', with '1' being the

strongest. We view the system as strong, meaning policies are embedded and likely sustainable. Long-term financial

planning is detailed and reasonable. The county's combined water and sewer capital improvement plan totals $685

million from 2016-2020. This is a significant increase over prior years as OCU is entering a phase of system expansion

to add capacity. The projects will be funded through combined revenues of the system, connection fees, state

revolving funds, and additional debt issuances. The county's current debt-to-capitalization ratio is, in our opinion, very

low at 2% with over $24 million outstanding.

Outlook

The stable outlook reflects our expectation that OCU will preserve its strong financial profile given its automatic rate

adjustments and manageable capital needs. In our opinion, the healthy service area economy and growing customer

base further support the rating. While we do not expect a rating action in the next two years, we note a lower rating

could follow a deterioration of financial metrics. We would likely lower the rating if revenues and cash declined

sharply.

Downside scenario

Given the historical and projected financial performance, we do not anticipate taking any negative rating action. There

would likely need to be a significant deterioration in either coverage or liquidity levels before a downward rating action

would occur.

Related Criteria And Research

Related Criteria

• USPF Criteria: Rating Methodology And Assumptions For U.S. Municipal Waterworks And Sanitary Sewer Utility

Revenue Bonds, Jan. 19, 2016

• USPF Criteria: Methodology: Definitions And Related Analytic Practices For Covenant And Payment Provisions In

U.S. Public Finance Revenue Obligations, Nov. 29, 2011

• USPF Criteria: Assigning Issue Credit Ratings Of Operating Entities, May 20, 2015

• Ratings Above The Sovereign: Corporate And Government Ratings—Methodology And Assumptions, Nov. 19, 2013

• Criteria: Use of CreditWatch And Outlooks, Sept. 14, 2009


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Related Research

• U.S. State And Local Government Credit Conditions Forecast, Jan. 11, 2016

• U.S. Municipal Water And Sewer Utilities 2014 Sector Outlook: Learning To Do More With Less, Jan. 9, 2014

Certain terms used in this report, particularly certain adjectives used to express our view on rating relevant factors,

have specific meanings ascribed to them in our criteria, and should therefore be read in conjunction with such criteria.

Please see Ratings Criteria at www.standardandpoors.com for further information. Complete ratings information is

available to subscribers of RatingsDirect at www.globalcreditportal.com. All ratings affected by this rating action can

be found on Standard & Poor's public Web site at www.standardandpoors.com. Use the Ratings search box located in

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S & P Orange County, FL Rationale