OREANDA-NEWS. Fitch Ratings has affirmed the short-term rating on Orlando Utilities Commission (OUC), Florida's $98.36 million variable-rate utility system revenue bonds series 2011A at 'F1+'.

SECURITY

The bonds are secured by net revenues of the combined electric and water systems.

KEY RATING DRIVERS

SOUND FUNDAMENTALS: OUC, a combined electric, water and chilled water utility, has consistently demonstrated strong financial metrics, competitive rates, a diversified fuel mix and a highly professional management team, all of which support the short-term rating.

STRONG LIQUIDITY: OUC has a history of maintaining sizeable cash reserves, exceeding 300 days cash on hand, which provides substantial protection for the series 2011A self-liquidity variable-rate demand bonds.

GOOD FINANCIAL RATIOS: Fitch calculated debt service coverage (DSC) equaled 2.2x in fiscal year 2014, with coverage of full obligations at a healthy 1.64x. Debt as a percentage of capitalization was 54.8%. Management expects to maintain healthy financial ratios going forward.

DIVERSE FUEL MIX: The electric system employs a diverse fuel mix (for retail load), with a recent breakdown as follows: coal (51.5%), natural gas (39.7%), nuclear (7.9%) and renewables (0.9%). This provides good operating flexibility and low-cost electric service to its customers.

ADDRESSING SLOWER ECONOMY: OUC was affected by the recent economic slowdown and leadership worked hard to reduce costs and incorporate more conservative assumptions into its planning model. An upswing in the economy and increased customer growth look to be underway.

RATING SENSITIVITIES

RISE IN TRANSFER PAYMENTS: Orlando Utilities Commission's transfer payment to the city of Orlando is well above average for the utility sector. Further significant increases in payments that detract from the utility's credit standing could have negative implications for OUC's long- and short-term ratings.

CREDIT PROFILE

The electric system provides service to customers within the city of Orlando and certain continuous areas. The water system offers service to the city of Orlando and portions of Orange County. OUC operating revenues are significantly reliant on electric system operations, with a smaller weighting for water and chilled water services.

OUC employs a diverse mix of coal and natural gas generation, which is expected to be sufficient to meet customer demand well past 2020. 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 has an environmental compliance plan that it believes is sufficient to meet changing guidelines.

The water system's customer base is reasonably diverse. Water supply is obtained from 32 deep wells from the Floridan Aquifer. With a consumptive use permit (CUP) expiring in 2024, supply should be sufficient through the duration of the CUP.

OUC continues to review its electric and water rate design, with the intent of developing a fairer cost design over the next several years. There were no electric base rate increases planned for 2015 or 2016, excluding possible impacts of the Clean Power Plan, and a 5% water rate increase is likely in the April 2016 timeframe.

FINANCIAL RATIOS POSITIVE

Over 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 1.80x level. Recurring cash reserves are projected to exceed $450 million.

DEBT PROFILE

The series 2011A bonds were issued, and are remarketed, as 'windows' and are subject to optional and mandatory tender under certain circumstances. OUC is not obligated to pay the purchase price of bonds that are optionally tendered and not remarketed; however, failure by OUC to purchase the bonds will cause all bonds to become subject to mandatory tender (and purchase by OUC) at the end of the applicable mandatory tender window (180-days).

During the windows period, OUC may (i) remarket the bonds after a change in mode which might require obtaining a bank liquidity facility, or (ii) refund the bonds. If OUC is unable to take any of these actions, then OUC will be required to use its own funds to either redeem the bonds on mandatory tender date.

The series 2011A bonds remain 'synthetically fixed' through an interest rate swap with Morgan Stanley.