Fitch Rates Orlando Utility Commission's (FL) Utility System Rev & Ref Bonds 'AA'; Outlook Stable

NEW YORK--()--Fitch Ratings has assigned a 'AA' rating to the following Orlando Utilities Commission (OUC) revenue bonds:

--Approximately $143,430,000 utility system revenue and refunding bonds series 2016A.

The series 2016 bonds are scheduled for negotiated sale the week of June 22, 2016. The current offering will refund portions of outstanding parity obligations (series 2006 and 2009B) for interest cost savings with no extension of current bond maturity dates. The bonds will not carry a debt service reserve.

In addition, Fitch has affirmed the following ratings on OUC's outstanding bonds:

--$1,413,765,000 utility system revenue bonds at 'AA';

--$98,360,000 utility system revenue bonds at 'F1+'.

The Rating Outlook is Stable.

SECURITY

The bonds are secured net revenues derived by the operation of the combined system.

KEY RATING DRIVERS

LARGE COMBINED UTILITY SYSTEM: The Orlando Utilities Commission (OUC) provides electric, water, chilled water and lighting services on a retail basis to a diverse, stable and economically strong service area. OUC's vertically integrated electric utility generates the vast majority of combined revenues, accounting for approximately 87% of gross income.

STRONG FINANCIAL METRICS: Cash flow metrics on a combined basis have continued to strengthen in recent years with Fitch-calculated debt service coverage and coverage of full obligations, including a sizeable dividend payment to the city of Orlando, improving to nearly 2.30x and 1.50x, respectively. Liquidity has long been a primary credit strength as days cash on hand routinely exceeds Fitch's median number by a wide margin. Fitch expects similar financial results to continue based on OUC's most recent financial forecast ending in 2020.

AMPLE POWER AND WATER SUPPLY: The electric system's owned and partially owned generating assets are sufficiently diversified by fuel mix and number of assets, and provide ample capacity needed to meet load growth through the 2023 timeframe. The ability to purchase power from the Florida Municipal Power Pool (FMPP) allows for additional diversification.

COMPETITIVE RATES PROVIDE FLEXIBILITY: OUC's full rate setting authority and competitive electric and water rates provide ample flexibility. Management expects to pass through a fuel rate reduction in the coming months, which should further enhance the system's cost competitiveness. Available liquidity includes robust funding of fuel and rate stabilization funds used to stabilize rates in the event of rising variable costs and/or declining sales.

MANAGEABLE CAPITAL NEEDS: Planned spending for OUC's capital program appears manageable and is forecast to be funded primarily from excess cash flow. Fitch does not expect planned debt issuance programmed into the five-year program to adversely impact the combined system's favorable debt metrics. Preliminary studies are currently underway to evaluate the potential construction of a new electric generating asset that could be needed beyond 2020.

SHORT-TERM RATING: Maintenance of the Short-Term 'F1+' rating reflects OUC's long-term credit quality and sizeable unrestricted cash reserves available to fund the maximum purchase price in the event of a mandatory tender of the series 2011A bonds.

RATING SENSITIVITIES

ESCALATION IN TRANSFER PAYMENTS: While not currently anticipated, additional increases in the Orlando Utilities Commission's already large annual dividend payment to the city of Orlando's general fund at the expense of cash flow and liquidity metrics could exert downward pressure on the rating.

CREDIT PROFILE

OUC is a combined utility system providing primarily electric generation, transmission and distribution service on a retail basis to customers within the city of Orlando and surrounding portions of Orange County, FL. OUC also operates a water production, transmission and distribution system, and provides chilled water and lighting services.

STRONG FINANCIAL PERFORMANCE CONTINUES

Financial performance has steadily improved over the prior three fiscal years, prompted by customer growth and a return to positive load growth. Fitch calculated debt service coverage has remained above 2.0x since fiscal 2013, while coverage of full obligations averaged 1.55x over the same span. Median ratios for the rating category were 2.4x and 1.7x, respectively, in 2015.

Annual transfers to the city's general fund have remained manageable to the combined system, but are considered high by Fitch when compared with peer utilities. Transfers primarily to the city of Orlando accounted for 11.9% of total utility revenue in fiscal 2015, more than twice the median percentage of 4.9%. The dividend, which is calculated to equal 60% of fixed income before contributions, is made pursuant to bond resolution after satisfying annual debt service obligations as well as the payment of all operating expenses.

OUC's primary credit strength remains its balance sheet. Available liquidity, which includes fuel and rate stabilization funds, moneys designated by policy only for future debt service payments and a robust renewal and replacement fund, provided nearly 341 days of cash on hand at the close of fiscal 2015, significantly higher than the median (266).

LEVERAGE NOT EXPECTED TO INCREASE OVER THE MEDIUM TERM

OUC's debt profile has shown modest improvement over the last several years, leaving leverage metrics solidly in line with median ratios for the 'AA' rating category. Fitch expects this steadily improving trend will continue through the current forecast period, although higher leverage beyond 2020 could result should preliminary plans to construct additional electric generating assets move forward.

Current capacity exceeds peak retail demand by a comfortable margin. However, the looming expiration of a purchase power agreement coupled with potential plans to shutter coal-fired facilities could prompt the need to construct new generation.

STABLE SERVICE TERRITORY

OUC provides utility services to the city of Orlando and surrounding portions of Orange and Osceola Counties, including the city of St. Cloud. The service area benefits economically from a sizeable tourism and hospitality sector that accounts for approximately one-fifth of total area employment.

Disney World, located immediately outside the city, serves as the largest county employer, employing about 74,000 or over 10% of the total county workforce. Steadily expanding education and health services sectors provide additional diversification.

Wealth and employment indicators for the city and broader metro area generally sound. Unemployment continues to trend downward, falling to 3.8% in April 2016, slightly below state and national figures. Income indicators are somewhat low, likely due to the prevalence of service sector jobs.

Nevertheless, write-offs and accounts receivable balances remain low, indicating consistently strong revenue collection.

The electric system serves a relatively diverse customer base with residential customers typically accounting for about 30% of both retail sales and total electric operating revenue. No meaningful customer concentration exists as the 10 largest customers for the electric and water systems comprise about 19.5% and 10.5% of total revenues of the respective systems. OUC does not service Disney. The electric system also maintains wholesale energy contracts with the cities of Vero Beach, Bartow, Winter Park and Lake Worth. The contracts are staggered, expiring in 2017, 2019 and 2023. Firm commitments to the cities total 202 MW. OUC officials are continuing to pursue additional wholesale opportunities, which, if successful would be viewed positively by Fitch given OUC's 30% reserve margin.

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

Applicable Criteria

Rating U.S. Public Finance Short-Term Debt (pub. 17 Nov 2015)
https://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=873508

Revenue-Supported Rating Criteria (pub. 16 Jun 2014)
https://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=750012

U.S. Public Power Rating Criteria (pub. 18 May 2015)
https://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=864007

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Contacts

Fitch Ratings
Primary Analyst:
Christopher Hessenthaler, +1-212-908-0773
Senior Director
Fitch Ratings, Inc.
33 Whitehall Street
New York, NY 10004
or
Secondary Analyst:
Andrew DeStefano, +1-212-908-0284
Director
or
Committee Chairperson:
Dennis Pidherny, +1-212-908-0738
Managing Director
or
Media Relations:
Elizabeth Fogerty, +1-212-908-0526
New York
elizabeth.fogerty@fitchratings.com

Contacts

Fitch Ratings
Primary Analyst:
Christopher Hessenthaler, +1-212-908-0773
Senior Director
Fitch Ratings, Inc.
33 Whitehall Street
New York, NY 10004
or
Secondary Analyst:
Andrew DeStefano, +1-212-908-0284
Director
or
Committee Chairperson:
Dennis Pidherny, +1-212-908-0738
Managing Director
or
Media Relations:
Elizabeth Fogerty, +1-212-908-0526
New York
elizabeth.fogerty@fitchratings.com