Rating Action Commentary
ֳ Revises CFTOD's Outlook to Positive; Affirms Util Rev Bonds at 'A'
Mon 14 Apr, 2025 - 12:14 PM ET
ֳ - New York - 14 Apr 2025: ֳ has affirmed the following Central Florida Tourism Oversight District (formerly known as the Reedy Creek Improvement District) combined utility system bonds:
--Approximately $39.1 million in outstanding utility revenue and utility refunding bonds series 2013-1, 2018-1 and 2018-2 at 'A'.
The district's Rating Outlook has been revised to Positive from Stable.
ֳ has assessed a standalone credit profile (SCP) for the district at 'a'. The SCP represents the credit profile of the district on a stand-alone basis irrespective of its relationship with and the credit quality of the Central Florida Tourism Oversight District (the district, Issuer Default Rating [IDR] AA-/Stable).
The 'A' rating and 'a' SCP reflect the district's consistently robust operating performance and very low financial leverage. The ratings also reflect the district's 'Very Strong' operating risk profile highlighted by a consistently very low cost burden.
The rating incorporates the district's strong revenue defensibility, which is rooted in the provision of monopolistic utility services and autonomous rate setting. It is limited, however, by the significant revenue and customer concentration of its largest customer, the Walt Disney Company (IDR, A-/Stable). Disney's operations consistently account for more than 80% of total utility system revenues and have periodically contributed to volatile performance as observed during the coronavirus pandemic.
The Positive Outlook reflects ֳ's view that continuing evidence of board support following the successful transition of the board structure, together with robust financial performance could lead to positive rating action. The previous board was comprised of Disney-appointed members. The new structure requires members to be appointed by the governor and confirmed by state senate. The degree of financial and operational support from the board and district's rate strategy for addressing the upcoming heightened capital cycle will be the key determinants in resolving the Outlook.
SECURITY
The bonds are secured by a first lien on net revenues of the combined utility system, after payment of operations and maintenance costs, and a fully cash-funded debt service reserve fund.
KEY RATING DRIVERS
Revenue Defensibility - 'a'
The district's independent legal ability to adjust utility rates and the mandate to provide multiple essential utility services to the district anchor the 'Strong' assessment for revenue defensibility. The district serves a limited 40 square mile territory encompassing Disney World and several other Disney and Disney-affiliated entities. These establishments contribute the majority of the district's operating revenues.
Disney operates four gated theme parks, two water parks, hotel and vacation club facilities, and leases property to several other hotel properties within the district. With the vast majority of the district's customers and revenues derived from operations tied to Disney-owned or related commercial properties, ֳ considers the concentration to be an asymmetric credit factor consideration to revenue defensibility.
While the revenues from Disney-related entities result in high concentration and lower revenue defensibility, utility service reliability is an integral part of the operation of the parks. In ֳ's view Disney places a high priority on making payments to the district for utility services at its flagship property.
Due to the limited residential sales activity and limited population served, local economic characteristics and income metrics are less of a credit consideration.
Operating Risk - 'aa'
The 'Very Strong' operating risk profile is driven by the very low electric operating cost burden, averaging 8.2 cents/kWh over the past five years. Operating costs increased to 8.6 cents in fiscal 2023 driven by higher natural gas prices but declined slightly to 8.3 cents in fiscal 2024 as natural gas prices normalized.
The district's operating cost flexibility has improved to 'Neutral' from 'Weaker'. This assessment reflects slightly longer power supply arrangements, as well as the neutral cost flexibility of its non-electric utility operations. The district's low-cost power supply was historically derived from a short-term purchased power agreement (PPA) with Duke Energy (Duke, not rated by ֳ). This was accompanied by several long-term solar energy PPAs with Duke and various other private solar developers.
The district's PPA with Duke expired at the end of fiscal 2024 and was replaced with a new PPA with Florida Municipal Power Agency (AA-/Stable) for up tp 112MWs that runs through fiscal 2029. While reliance on shorter-term contracts is an operating flexibility weakness, the low-cost firm pricing and management's ability to find replacement contracts largely offsets this concern. This leads to a 'Neutral' operating cost flexibility assessment. ֳ notes the utility's progress in layering long-term renewable contracts should keep operating costs stable and diversify the fuel mix.
The 'Midrange' capital planning and management assessment reflects the high age of plant and corresponding life-cycle investment needs, but factors less into the operating profile assessment. Capex is roughly 130% of annual depreciation. Plant age is still high averaging 26 years since 2020. The district is contemplating issuing additional bond financing to fund its heightened capex planning over the next five years. This would be focused on long-lived asset replacement, system expansion, and capacity requirements across its chilled and hot water, electric, wastewater and potable water utilities.
Financial Profile - 'aa'
The district's financial profile is 'Very Strong'. This is characterized by very low leverage and robust operating margins of 17% in fiscal 2024, slightly above its five-year historical average. Both operating revenues and expenses are down marginally year-over-year, driven by a slight decline in electric sales and lower natural gas prices, leading to flat a operating margin relative to 2023. Liquidity profile is 'Neutral' with Coverage of Full Obligations of 1.9x and adequate cash on hand. The continued robust operating margins, along with the amortization of its long-term debt, contributed to the decline in the district's leverage metric from 4.4x in fiscal 2022 to 2.2x in fiscal 2024.
Liquidity cushion metrics (cash on hand) have wavered between 46 and 100 days over the last five years. Notwithstanding liquidity of 95 days at FYE 2024, the district's liquidity profile remains weaker due to expectations that cash balances will decline.
ֳ's Analytical Stress Test (FAST) base case analysis is informed by the district's sales forecast, capex assumptions, and long-term debt amortization schedule. The base case results show leverage increasing towards 3x but remaining very low, even as assumed new debt is issued and the district enters a period of heightened capex. The stress case, which is the rating case, shows leverage increasing over 3x, but also remaining very low in the context of the revenue defensibility and operating risk assessments. A consistently very low leverage metric throughout the upcoming capital cycle could contribute to positive rating action.
RATING SENSITIVITIES
Factors that Could, Individually or Collectively, Lead to Negative Rating Action/Downgrade
--A sustained rise in leverage to closer to 8.0x in ֳ's rating case scenario;
--A rise in operating costs that leads to a lower operating risk assessment;
Factors that Could, Individually or Collectively, Lead to Positive Rating Action/Upgrade
--Continued sufficient financial and operational support from the newly formed board structure;
--Maintenance of its leverage below 7.0x in ֳ's rating case scenario and throughout the upcoming capital cycle.
PROFILE
The district operates a combined utility and is located about 15 miles southwest of the city of Orlando. It was originally created in 1967 by a special act of the state legislature in anticipation and support of the development of the Disney World Resort, which opened in 1971. The district continues to provide essential utility, roadway, and emergency services primarily to the Disney Resort.
Utility services include potable water and wastewater, solid waste, natural gas distribution and electric generation, transmission and distribution service. Electric service is the largest utility segment and accounts for over half of the district's revenues.
ֳ considers the utility to be a related entity to the general government of the district for rating purposes because of its utility system oversight, including the authority to establish rates and operations. The credit quality of the district's general government does not currently constrain the utility bond rating. As a result of being a related entity, the utility's ratings could become constrained by a material decline in the general credit quality of the district.
Florida House Bill 9-B, which was approved in 2023 by Florida governor Ron DeSantis, effectively replaced the district's previous Disney-related board with a new five-member board, appointed by the governor and confirmed by the state senate, among other matters. The district successfully transitioned its previous board structure to the current structure, with most current board members serving terms that expire no sooner than February 2027. All outstanding litigation between the district and Disney regarding the board transition has been settled and subsequently dismissed.
REFERENCES FOR SUBSTANTIALLY MATERIAL SOURCE CITED AS KEY DRIVER OF RATING
The principal sources of information used in the analysis are described in the Applicable Criteria.
ESG Considerations
The highest level of ESG credit relevance is a score of '3', unless otherwise disclosed in this section. A score of '3' means ESG issues are credit-neutral or have only a minimal credit impact on the entity, either due to their nature or the way in which they are being managed by the entity. ֳ's ESG Relevance Scores are not inputs in the rating process; they are an observation on the relevance and materiality of ESG factors in the rating decision. For more information on ֳ's ESG Relevance Scores, visit /topics/esg/products#esg-relevance-scores.
Additional information is available on
PARTICIPATION STATUS
The rated entity (and/or its agents) or, in the case of structured finance, one or more of the transaction parties participated in the rating process except that the following issuer(s), if any, did not participate in the rating process, or provide additional information, beyond the issuer’s available public disclosure.
APPLICABLE CRITERIA
APPLICABLE MODELS
Numbers in parentheses accompanying applicable model(s) contain hyperlinks to criteria providing description of model(s).
- FAST Econometric API - ֳ Analytical Stress Test Model, v3.1.0 (1)
ADDITIONAL DISCLOSURES
ENDORSEMENT STATUS
| Reedy Creek Improvement District (FL) | EU Endorsed, UK Endorsed |