OREANDA-NEWS. Fitch Ratings has assigned an 'AA' rating to Orlando Utilities Commission's (OUC) \$92,225,000 utility system revenue bonds, series 2015A.

The bonds, together with other legally available funds, will be used to finance all or a portion of the cost of board approved projects for the system, including reimbursement of certain prior expenditures.

In addition, Fitch affirms the outstanding ratings as follows:

--\$1.44 billion outstanding utility system revenue and revenue refunding bonds at 'AA';
--\$18.58 million outstanding water and electric taxable revenue bonds at 'AA'.

The Rating Outlook is Stable.

SECURITY

The bonds are payable from net revenues from the operation of the OUC system and money in the funds and accounts established under the general bond resolution, which are on parity with outstanding bonds.

KEY RATING DRIVERS

FAVORABLE FUNDAMENTALS: OUC is a combined electric, water and chilled water utility, with a record of good financial performance, competitive utility rates and strong system operations.

DIVERSIFIED FUEL SUPPLY: The electric system, OUC's largest division, has a solid customer base and a diverse fuel mix (serving retail load), consisting of: coal (51.5%), natural gas (39.7%), nuclear (7.9%) and renewable (0.9%). This diversity allows for good operating flexibility and produces reasonable electric rates to customers.

FINANCIALS IMPROVE: OUC's service territory was negatively impacted by the economic recession and a slowdown in customer demand. Management responded by controlling costs and developing a comprehensive strategic business plan. Combined with the recent upturn in the economy, fiscal results have rapidly improved and debt service coverage (DSC) is forecasted to remain around 2.50 times (x), based on OUC calculations.

SOLID LIQUIDITY: Fiscal 2014 unrestricted cash and cash equivalents were quite robust at about \$536 million or 310 days on hand. This affords significant liquidity for working capital and utility operations and protection for the series 2011A self-liquidity variable-rate demand bonds.

RATING SENSITIVITIES

RISE IN TRANSFER PAYMENTS: City of Orlando transfer payments are well above average for the industry. Any significant increase in these payments could have negative credit implications.

CREDIT PROFILE

The electric system provides service to customers within the city of Orlando and certain contiguous areas, based on territorial agreements approved by the Florida Public Service Commission. The water system provides service to the city of Orlando, and portions of Orange County. Electric retail metered services (including inter-local) total 220,628 and water services equal 135,106. In fiscal 2014, total operating revenues were \$879.9 million and broke down as follows: retail electric and resale electric (87.6%), water (7.3%), chilled water (3.6%) and lighting (1.5%).

In order to deal with the negative impact of the recession and to maintain its standing as a leader in the utility sector, OUC management devised and implemented a strategic plan with four goals in mind: (1) maintain competitive electric and water rates; (2) optimize the customer experience; (3) improve organizational effectiveness and (4) achieve sustainability of electric and water resources. Efforts appear to have been successful and OUC's business and financial profile have returned to more historical levels.

SERVICE AREA IMPROVING

Growth for the electric system, during the period 2015-2019, is forecasted at about 1.8% annually. This will reflect a healthier tone to the economy, full opening of the VA Hospital in 2015, development of areas surrounding the Lake Nona Medical City, located southeast of the Orlando International Airport, and expansion of SunRail, a mass transportation network, closer to the city. Water customer and sales growth is expected to be about 1.3% yearly.

ELECTRIC PERFORMANCE SOUND

OUC employs a diverse mix of coal and natural gas generation, which the utility expects will be sufficient to meet customer demand for several more years. Generating capacity and purchase power totaled about 1,835 megawatts (MW) at Sept. 30, 2014, and, after firm commitments to other utilities, net available for retail was 1,628 MW, compared with peak demand in August 2014 of 1,198 MW, a new system record. The utility hedges a portion of its retail natural gas purchases and also maintains a fuel stabilization fund to help mitigate short-term fuel price volatility. It also believes that it has an environmental compliance plan adequate to meet changing policy.

WATER SUPPLY SUFFICIENT

The water system's customer base is reasonably diverse. Water supply is obtained from a number of deep wells from the Floridian Aquifer. With a consumptive use permit (CUP) expiring in 2023, supply looks to be sufficient. OUC has a long-term water strategy to meet its customers' water demands by making use of groundwater, reclaimed water, conservation and alternative water supplies.

UTILITY RATES COMPETITIVE

Rate setting is designed to recover revenue requirements, maintain competitive rates and keep rate levels generally stable. Electric and water base rates are reviewed at least annually; and fuel is a pass-through and is trued up monthly with over or under collection flowing to a fuel stabilization fund. There were no electric or water base rate increases in 2014 and no electric rate adjustment is planned for fiscal year 2015. OUC is considering increasing water rates with an overall impact to the customer of about 3%. However, the structure and actual amount of such increase have yet to be finalized.

FINANCIAL RESULTS IMPROVE

OUC has historically maintained healthy financial metrics. However, the impact of the economic recession, a reduction in customer usage patterns and higher debt service expense combined to depress financial performance earlier in the decade. Fitch-calculated DSC declined to 1.56x in 2012, down significantly from historical levels. Positively, cash and financial liquidity remained strong.

Given these financial pressures and secular changes occurring across the electric industry, OUC chose to develop and implement a comprehensive financial plan. The efforts paid off in 2013 and 2014 when DSC rebounded to previous levels, of well over 2.0x. For the next five years, OUC calculated DSC is targeted at 2.50x, with adjusted DSC (includes transfer payments and dividends as operating expenses) estimated at a solid 1.80x level.

Cash reserves are forecasted to remain at around \$450 million, equivalent to 250 days cash on hand. OUC's five-year capital plan for 2015-2019 is currently estimated at around \$796 million. Cash available for capital projects is expected to total \$477 million, leaving about \$319 million of needed funds.