OREANDA-NEWS. Fitch Ratings affirms the 'AA-' rating on the following Kissimmee Utility Authority, FL (KUA) bonds:

--\$89.9 million electric system revenue bonds, series 2003, 2005 and 2011.

The Rating Outlook is Stable.

SECURITY:

The bonds are secured by a first lien on net revenues of KUA's electric system, including transfers from the rate stabilization fund to the revenue fund.

KEY RATING DRIVERS

SMALL DISTRIBUTION SYSTEM: KUA owns and operates a small retail electric distribution system (the system) serving a diverse, largely stable customer base located in the Orlando metro area. Kissimmee's economic profile remains fairly limited, dependent in large part on tourism and its proximity to Orlando. Weak income indicators persist, although revenue collection remains strong.

RELIABLE, LONG-TERM POWER SUPPLY: The system's participation in Florida Municipal Power Agency's (FMPA) All-Requirements Power Supply Project (rated 'A+'/Outlook Stable) and St. Lucie Project (rated 'A'/Outlook Stable) ensures the KUA a reliable power supply sufficient to meet future needs.

SOUND FINANCIAL PERFORMANCE: Below average cash flow metrics are well balanced by consistently strong liquidity ratios. Tighter debt service coverage (DSC) levels are a consequence of management's prudent strategy of keeping rates low, maintaining slim operating margins and instead relying on its sizeable liquidity position to balance cash flow needs.

LOW RATES: The authority's low rates, full rate-setting authority and timely full cost recovery provide management with meaningful revenue-raising flexibility. KUA's monthly residential bill - assuming usage of 1,000 kWh - currently falls 16% and 10% lower than the statewide average for investor owned and municipally owned electric utility systems.

LIMITED CAPITAL NEEDS: Capital spending is forecast to continue at a very manageable level and will not require additional debt financing. Consequently, Fitch expects continued improvement in KUA's already favorable debt metrics. All of KUA's outstanding revenue bonds fully amortize in 2018.

RATING SENSITIVITY

DECLINE IN FINANCIAL MARGINS: While not currently anticipated, sustained compression in operating margins leading to reduced liquidity could ultimately pressure the rating.

CREDIT SUMMARY

STABLE POWER SUPPLY
KUA's power supply is sufficient to meet its current needs as well as future load growth. Substantially all of the KUA's power supply demands, as well as scheduling, transmission, and associated services, are satisfied through the its participation in FMPA's ARP. KUA and the balance of the project's 14 participants are bound by 30-year power supply contracts that roll each year for one additional year, thereby keeping the length of the contracts at 30 years.

Subsequent to entering into the ARP, KUA, in October 2008, leased its ownership share of its generating assets to FMPA and waived its right to exercise a contract rate of delivery (CROD) provision under the ARP. The provision allows participants who contribute generation to the ARP to cap their load from the project at the participant's peak demand during the preceding 12 month period with five years notice to FMPA.

In return for leasing its generating assets and foregoing the CROD provision, KUA cedes having to fund operation, maintenance and capital costs of the assets to FMPA and receives a fixed capacity credit that serves as a reliable revenue stream. Capacity payments, which are effectively secured by the contracts of the ARP members, totaled \$11.4 million in fiscal 2014, equal to approximately 7% of total annual revenue.

Additional capacity is available to the authority through its participation in the FMPA's St. Lucie Project (rated 'A'/Stable Outlook), consisting of FMPA's 8.8% ownership interest in St. Lucie Unit No. 2, a 984 MW nuclear power plant operated by Florida Power & Light. KUA's participation in the St. Lucie Project provides up to 6.9 MW of additional capacity.

ROBUST LIQUIDITY AND LOW RATES PROVIDE FLEXIBILITY

Fitch-calculated DSC - after adjusting for an additional \$12.2 debt service payment related to the early call of previously outstanding bonds - improved in fiscal 2014 to 1.63x but remained well below Fitch's rating category median of 2.35x. Coverage of full obligations, which includes a transfer made to the Kissimmee's general fund, remained in line with prior years at about 1.0x, also solidly below the median ratio of 1.4x. Fitch notes the transfer is subordinate to the payment of debt service obligations pursuant to the flow of funds outlined in the bond indenture.

An interlocal agreement between KUA and the city of Kissimmee requires the authority to make an annual transfer equal to 7.6% of its total operating revenue. While the percentage is slightly elevated relative to transfers made by similarly rated retail utility systems, KUA continues to demonstrate its ability to easily absorb the cost.

The authority's unrestricted cash and available reserves, including a sizeable rate stabilization fund (RSF), totalled \$99.7 million at the close of fiscal 2014, equal to nearly 250 days of cash on hand compared to the rating category median of 180 days. The RSF was established in fiscal 2003 with an initial \$5 million deposit and has since grown to a substantial \$70 million by fiscal year-end 2014.

The RSF is available for any operating purpose, although KUA's internal policy requires a minimum balance of \$5 million. Additional fiscal policies include preserving unrestricted cash at a minimum of 45 days of fixed O&M, maintaining DSC of no less than 1.25x and retaining a \$5 million minimum balance for future capital outlay. KUA's prudent liquidity policies in total equated to a satisfactory 70 days cash in fiscal 2014.

Financial projections through fiscal 2018 show little deviation from historical operating results. Based on what Fitch believes are reasonable assumptions, including annual growth of less than 2% in both customers and energy sales as well as no additional debt plans, DSC (inclusive of the annual general fund transfer) is forecast to remain, on average, closer to 1.10x. Fitch does not expect a material decline in liquidity, despite KUA's plan to fund annual capex from excess cash flow and existing reserves. Management's plan to keep base rates level through the current planning period is also reflected in the forecast.

STRONG COST RECOVERY
The authority's affordable rates and full rate-setting authority provide management with meaningful revenue-raising flexibility. KUA's residential bill based upon 1,000kWh of usage currently totals \$108, about 16% and 10% lower than the statewide average for investor owned and municipally owned utility systems.

The last two rate increases of 18.07% and 33.93% in 2005 and 2008, respectively, were intended primarily to move a large portion of fuel costs into the base rate as a means to achieve greater full cost recovery. As a result, the base rate now collects in excess of what fuel and purchased power costs currently are, prompting KUA to provide a credit back to customers. Fitch continues to view KUA's rate structure positively, particularly against the backdrop of flat to declining energy sales occurring both regionally and nationally.

DECLINING DEBT LEVELS

Capital spending is forecast to continue at a very manageable level and will not require additional debt financing. KUA's 2015-2018 capital expenditure plan totals \$86.7 million, up modestly from the nearly \$74 million prior plan that spanned fiscals 2013-2016.

KUA's ability and willingness to current fund its capital needs over the last several years has resulted in a favorable and ongoing improvement in leverage ratios. The utility's ratios of debt to funds available for debt service (FADS) as well as debt as a percentage of capitalization have steadily declined, dropping to 43% and 3.6%, respectively, compared to the rating category medians of 51.5% and 5.1x. All of KUA's outstanding revenue bonds fully amortize in 2018.

STABLE SERVICE TERRITORY
The authority serves approximately 65,000 customers in a service territory that includes the city of Kissimmee and unincorporated areas of Osceola County ('AA-'/Stable Outlook). Slightly more than half of KUA's customers are located in the Kissimmee while the balance are located immediately outside city limits. Kissimmee serves as the county seat and is located less than 20 miles outside of Orlando, FL.

Disney World (rated 'A'/Stable Outlook) remains the Kissimmee's dominant employer and continues to anchor the broader economy of the Orlando area. Kissimmee's unemployment rate continues to show year over year improvement, falling from 6% at the close of 2013 to 5.1% in December 2014. Despite the positive trend, weak income levels persist, driven in large part by the prevalence of tourism related jobs. The city's per capita and median household income equal just 64% and 76%, respectively, of the state indices and less than 70% of the national figures. Despite the weak income levels, utility bill collections have remained strong with annual write-offs remaining comfortably below 0.5%.