OREANDA-NEWS. Fitch Ratings assigns an 'AA-' rating to the following Okaloosa County, FL (the county) revenue bonds:

--\$67.3 million water and sewer revenue refunding and improvement bonds, series 2015.

Proceeds of the series 2015 bonds will be used to current refund all of the county's water and sewer revenue bonds, series 2004 and 2012, and to advance refund all of the county's water and sewer revenue bonds, series 2006; to finance and reimburse the county for certain system additions, extensions and improvements; and to pay for issuance costs.

The bonds are scheduled for negotiated sale the week of May 4.

In addition, Fitch affirms the 'AA-' rating on the following:

--\$65.6 million public water and sewer system revenue bonds, series 2004 and 2006 (prior to the current refunding).

The Rating Outlook is Stable.

SECURITY

The bonds are payable from the net water and sewer revenues of the county's system (the system).

KEY RATING DRIVERS

IMPROVING FINANCIAL PERFORMANCE: Debt service coverage (DSC) has steadily improved over time and is forecast to be approximately 2x through fiscal 2019. Liquidity has remained solid at over 300 days' cash on hand (DCOH) and is expected to remain solid.

MANAGEABLE CAPITAL PLAN: The system's five-year capital improvement plan (CIP) totals \$52.5 million, reflecting a minimal 3% decrease from the county's prior plan. Approximately 90% of the CIP projects will be funded by internal sources.

MODERATE DEBT BURDEN: The system's total debt prior to this refunding represents nearly 50% of the system's plant and equates to less than \$1,200 per customer. These measures fit comfortably in Fitch's 'AA' category median range and are expected to remain favorable.

RATE-SETTING FLEXIBILITY: Customer charges are affordable at 1.5% of median household income (MHI) allowing management sufficient flexibility to implement moderate planned rate increases.

STABLE ECONOMY: The county's unemployment rate continues to fall and the main economic driver, Eglin Air Force Base (AFB), continues to provide ample tax base and economic output.

RATING SENSITIVITIES

CONTINUED SOLID FINANCIAL RESULTS: Should solid financial results continue, including strong DSC, sustained ample liquidity, and manageable debt and capital needs, upward rating action may be warranted.

CREDIT PROFILE

Okaloosa County (implied unlimited tax general obligation bonds rated 'AA-' by Fitch) is located in the northwest Florida Panhandle along the Gulf of Mexico. The Okaloosa County Water and Sewer System serves close to 130,000 people in the unincorporated parts of the county. The customer base is primarily residential and includes approximately 37,000 water and 34,000 sewer customers.

SOUND ALBEIT NARROW ECONOMY

The economy is anchored by the Eglin AFB, which employs about 11,000 military and 11,000 civilian personnel. Tourism is another major economic driver, with beach resorts and destinations lining the county's popular 'Emerald Coast.' The county unemployment rate continues to fall and at 4.6% is below state (6.1%) and national (6.2%) levels as of December 2014. County wealth levels are 16% higher than state and 3% higher than national averages.

STEADILY STRONG FINANCIAL COVERAGE

Financial metrics have generally improved since 2009 due to consistent rate increases and controlled operating expenditures. Excluding one-time system connection fees, the system ended unaudited fiscal 2014 with 2.1x senior lien DSC and 1.9x all-in DSC including state revolving fund (SRF) loan payments. Based on financial forecasts provided in a feasibility report, and incorporating the current debt refunding amortization schedule, DSC is expected to stay strong at an average of 2.1x for the senior lien and 2x on an all-in basis through fiscal 2019.

Liquidity has been strong historically, averaging 320 DCOH since 2009 and unaudited fiscal 2014 results estimate that liquidity exceeded 430 DCOH. According to the financial forecast, liquidity should stay robust through fiscal 2019 as much of the system's capital needs will be met through capital grants, remaining loan proceeds, capital expansion charges (CECs) that are collected to fund system expansion needs, and other cash restricted in the system's capital projects fund. Free cash-to-depreciation, which measures surplus revenues available to fund reinvestment, has also improved over time and exceeded 100% in unaudited fiscal 2014. This ratio should average 93% over the next five years.

CAPITAL COSTS REMAIN AS EXPECTED

The system's five-year CIP through fiscal 2019 has leveled off at a manageable \$52.5 million. Approximately 25% of the CIP will fund a five million gallon per day (mgd) expansion of the utility's largest treatment plant, the Arbennie Pritchett water reclamation facility. This upgrade will enable the county to accommodate anticipated flows from the city of Fort Walton Beach and the Eglin AFB. Roughly 6% of the CIP, or \$3 million, will fund the purchase and installation of automated water meter readers (AMRs) to enhance customer service and provide greater accuracy for water consumption and leak detection. The remainder of the plan will be funded by internal sources and will primarily support water supply resiliency, renewal and replacement, and right-sizing of water and sewer main projects.

MANAGEABLE DEBT BURDEN

Long-term debt per customer was an estimated \$1,164 in fiscal 2014, well below Fitch's 'AA' category median of \$1,934., Debt-to-plant was about 48% that year, also consistent with the 50% 'AA' category median. Amortization of the current bond issuance reflects the prior schedule and is considered rapid with principal payout at 49% and 90%, respectively, in 10 and 20 years.

The series 2015 bonds will refund the entirety of all remaining series 2004 and 2006 bonds and the system's 2012 bank note, as well as provide \$3 million in new funding to support the county's AMR installation program. The county will also release its current debt service reserve fund, approximately \$7.4 million, to be used as a part of the series 2015 financing.

Under the series 2015 resolution, management modifies certain prior covenants including the rate covenant. The rate covenant modification removed the second prong of the original two-pronged test; however, it still requires that net revenues equal 110% of the current fiscal year senior lien annual debt service (ADS), 100% of subordinate ADS, and any amounts required by the resolution to be deposited into the reserve fund. Given the system's prudent debt management and improving financial position, Fitch is not concerned by these modified legal provisions.

DEDICATED AND CONSISTENT RATE SETTING

The county has sole rate-setting authority and management has raised rates annually in accordance with a five-year schedule that is set to conclude in fiscal 2016. Rates are expected to stay flat for two years and then resume annual increases at a 2.3% pace in fiscals 2019 and 2020. The combined average residential water and sewer bill (assuming usage of 6,000 gallons per month) totaled \$67 in fiscal 2014, equal to 1.5% of MHI. Even with the projected rate increases, charges should remain affordable and are not expected to exceed 1.7% of MHI through fiscal 2017.