Fitch Affirms Reedy Creek Improvement District's Utilities Revenue/Refunding Bonds at 'A'

Fitch Ratings has affirmed the 'A' rating on the following Reedy Creek Improvement District (RCID or the District) bonds:

--$94.2 million utilities revenue and refunding bonds series 2005-2 and 2013-1.

The Rating Outlook is Stable.

SECURITY

The bonds are secured by a first lien on net revenues of the combined utility system, after payment of operations and maintenance costs.

KEY RATING DRIVERS

COMBINED UTILITY SYSTEM: RCID is a combined system providing eight utility services. Electric service accounts for the majority of system revenues, at 58% of 2014 total utility revenues.

SUBSTANTIAL CUSTOMER CONCENTRATION: Utility service requirements are dominated by the Florida-based theme parks owned by Walt Disney Company (Disney, rated 'A'; Stable Outlook by Fitch). Disney accounts for 83% of the District's total system revenues. As a result, the District's rating is highly correlated with, but not directly linked to Disney. Disney's solid credit quality has been a positive rating factor for the District in recent years.

IMPORTANCE OF THEME PARKS: The theme parks and resorts located within the District's service area are important to Disney's financial performance. As such, Fitch believes that making payments to the District for utility services are a high priority for Disney and a credit positive for RCID.

RELATIVELY WEAK FINANCIAL METRICS: The District's financial metrics are weak, relative to Fitch medians for comparable 'A' rated utility systems, but stable. Fiscal 2014 debt service coverage, liquidity, and equity to capitalization ratios for the District are at 1.34x (Fitch median 1.59x), 45 days (113 days), and 28.6% (40.1%), respectively. Positively, equity capitalization should continue to improve as debt rapidly amortizes, with 59% of debt scheduled to mature thru fiscal 2019.

SHORTER TERM POWER PURCHASES: The vast majority of the District's power supply is purchased pursuant to short term, two and three year contracts. Although the short-term contracts have resulted in competitive wholesale power costs due to favorable market conditions in recent years, the duration of these agreements exposes the utility to longer term price uncertainty.

VULNERABILITY OF BOARD INDEPENDENCE: Disney's ability to elect a majority of the District's board members by virtue of its dominant land ownership position is a credit concern. Offsetting this concern is the District's long history of maintaining stable financial metrics; coupled with a positive, constructive working relationship between the District and Disney.

RATING SENSITIVITIES

CHANGE IN DISNEY CREDIT QUALITY: Given the substantial concentration of utility services provided to the Disney theme parks and resorts, Disney's credit quality remains a primary credit factor in the District's rating.

ADEQUATE FINANCIAL METRICS: A failure to adequately increase utility service rates to maintain the District's financial performance could lead to negative rating action, particularly as the District's financial metrics are currently weak for the 'A' rating category.

CREDIT PROFILE

RCID was created in 1967 by a special act of the state legislature. The legislation granted the District governmental powers to promote recreation oriented projects, economic development and tourism - objectives the legislature determined served a valid public purpose. The act was passed in anticipation and support of the development of Walt Disney World Resort (Disney World), which opened in 1971. The District continues to provide a wide range of essential utility services (including electric, water, sewer, natural gas) primarily to Disney World.

WEAK BUT STABLE FINANCIAL METRICS

While fiscal 2014 financial metrics show some improvement, certain of the District's key financial metrics remain below the medians for 'A' rated retail systems. Debt service coverage (DSC) modestly improved in fiscal 2014 to 1.34x, compared to the Fitch 'A' rated utility system median of 1.59x (2013). For the past five years, DSC has averaged about 1.20x - which is the level management targets to achieve. As per the Indenture, the rate covenant is 1.10x annual debt service requirements.

Positively, the utility system debt is amortizing at a rapid pace. Debt-to-FADS was much improved in fiscal 2014 to 4.8x (rating category median is 6.6x). Equity capitalization likewise strengthened to 28.6% for fiscal 2014 from 20.0% in 2013. Annual debt service is anticipated to drop significantly in 2020 to $13.0 million (from $37.9 million in 2014). This will provide the District with considerable financial flexibility at the current rating level. The District's projected capital projects are moderate and manageable through fiscal 2017, totaling $30 million. Earlier this year, RCID entered into a bank loan with TD Bank to fund these expected projects. RCID's privately placed debt ($142.8 million outstanding as of FYE 2014) is taken into account in Fitch-calculated financial ratios.

DISTRICT IS EXPOSED TO THE DISNEY OPERATION

Disney's business dominance in the service area exposes the District to high customer concentration, as it accounted for 83% of utility operating revenues in 2014. The parks and resort businesses, which account for 31% of Disney's 2014 revenues, have exhibited a degree of resiliency in the recent sluggish macroeconomic environment but remain at risk in the event of additional economic uncertainty. Favorably, Disney World has a long track record as one of the world's top tourist destinations; and Disney continues to make substantial investments in its Florida theme parks and resorts to maintain its position.

Should macroeconomic volatility return, Fitch expects these cyclical businesses to be under renewed pressure but that the Disney credit and financial profile will likely remain within its current ratings. Utility reliability is an integral part of this operation and it is Fitch's view that Disney places a high priority on making payments to the District for utility services, thereby supporting the District's 'A' rating.

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

In addition to the sources of information identified in Fitch's Revenue-Supported Rating Criteria and U.S. Public Power Rating Criteria, this action was informed by information from CreditScope.

Applicable Criteria and Related Research:

--'U.S. Public Power Rating Criteria' (March. 18, 2014);

--'Revenue-Supported Rating Criteria' (June 14, 2014);

--'U.S. Public Power Peer Study' (June 2014);

--'Fitch Affirms Disney IDR at 'A'; Outlook Stable' (March 30, 2015).

Applicable Criteria and Related Research:

U.S. Public Power Rating Criteria

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=740841

Revenue-Supported Rating Criteria

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=750012

U.S. Public Power Peer Study -- June 2014

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=749789

Additional Disclosure

Solicitation Status

http://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=983155

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