OREANDA-NEWS. Fitch Ratings has assigned an 'AA-' rating to the following Winter Park, FL revenue bonds:

--Approximately $16,130,000 electric revenue refunding bonds, series 2016.

The bonds are scheduled for competitive sale on April 12. The series 2016 bonds will be used to advance refund a portion of the city's outstanding electric revenue bonds (series 2007) for interest cost savings and pay financing costs.

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

--Approximately $50.9 electric revenue bonds, series 2005A, 2007, 2009A and 2009B.

The Rating Outlook is revised to Negative from Stable.

SECURITY
The bonds will be secured by a first lien on net revenues of the city's electric utility system. The bonds will not be secured with a debt service reserve.

KEY RATING DRIVERS

SMALL DISTRIBUTION SYSTEM: The city of Winter Park, FL owns a small retail electric distribution system (the system) that serves a diverse, relatively affluent and largely stable service territory located immediately outside of Orlando, FL.

DIMINISHED LIQUIDITY DRIVES NEGATIVE OUTLOOK: The electric utility's history of maintaining little or no unrestricted cash reserves continues to offset its otherwise strong and consistent cash flow metrics and weigh on the rating. The utility's operating margin remained strong in fiscal 2015 based on preliminary unaudited year-end results; however, reserves were once again fully depleted as capital expenditures were greater than budgeted, fully exhausting the electric utility's unrestricted cash and investments. An existing, undrawn $8 million line of credit provides modest cushion.

ROBUST CASH FLOW METRICS: Utility operations consistently generate strong operating margins providing for Fitch calculated debt service coverage of no less than 2.0x after making an annual transfer to the city's general fund.

SHORTER-TERM POWER SUPPLY AGREEMENTS: Despite making favorable progress in recent years with increases to the duration of its power supply agreements from just three years to six years for the bulk of its requirements, the length of the contracts remains somewhat short, exposing the city to supply risk and future market price volatility.

COMPETITIVE RATES PROVIDE FLEXIBILITY: The continuation of affordable retail rates compared to other utilities within the region and across the state provides ample flexibility. Moreover, the city's ability and demonstrated willingness to adjust rates on an interim basis to recover mid-year changes in fuel costs has ensured good cost recovery.

REDUCTION IN DEBT LEVELS EXPECTED: Debt metrics have gradually improved from a previously high level over the last several years as capital needs continue to be fully funded from excess cash flow. As noted, equity ratios remain weak, but debt to funds available for debt service (FADS) now approximates the rating category median of 4.8x. Fitch expects this trend will continue as internal resources are expected to fund the entirety of capital needs over the next several years.

RATING SENSITIVITIES

RESTORATION OF LIQUIDITY: The inability of Winter Park, FL's electric utility to restore and sustain a healthier level of unrestricted cash and investments, together with its operating line of credit will ultimately trigger negative rating action.

POWER SUPPLY MANAGEMENT RISK: Winter Park's power supply management strategy includes contract renewal risk and counterparty exposure. While market prices have been relatively favorable in recent years, potential volatility could ultimately pressure electric fund margins, as well the current rating if not well managed.

CREDIT PROFILE

LACK OF RESERVES
The city's current funding of its ongoing capital program for the electric utility at the expense of healthier liquidity levels has emerged as a key credit concern, particularly given its history of depleting all available cash in both the city's enterprise funds to support prior capital needs. Unrestricted cash reserves were fully exhausted by the close of fiscal 2015, similar to the 2007-2009 timeframe when cash balances across all city funds were significantly reduced to fund citywide capital projects, including those of the electric utility.

Timely cost recovery coupled with the implementation of historical base rate increases provided for stronger net operating margins in the electric fund in more recent years, which in turn led to consistently high debt service coverage (DSC) and a relatively low but adequate level of unrestricted cash and investments between fiscals 2012-2014, averaging nearly 30 days. However, reserves were once again fully depleted in fiscal 2015 as capital expenditures related primarily to ongoing efforts to underground power lines were greater than budgeted by approximately $3.2 million.

Excess cash flow after covering the utility's full obligations, including the annual transfer to the city's general fund, is earmarked in the city's current financial forecast to fully fund annual capex, leaving no surplus cash to restore the system's liquidity ratios to a more satisfactory level. However, city officials note the forecast excludes expected savings related to the recent termination of an operating agreement as the possibility of an additional base rate increase in fiscal 2017. Positive variances relative to forecast results leading to the restoration of more acceptable unrestricted cash would likely stabilize the current rating.

PURCHASED POWER

The city continues to rely on a mix of purchase power agreements (PPAs) to meet the entirety of its load requirements. Purchases from Florida Power & Light (FPL; IDR of 'A'/Outlook Stable) and Orlando Utilities Commission (OUC; rated 'AA'/Outlook Stable) currently provide the vast majority of capacity and energy needs. The contract with FPL is for a fixed amount of capacity (22 MW) and expires at the end of calendar 2019. Purchases from OUC for up to 18.5 MW of supplemental capacity through a direct distribution level interconnection with Winter Park are also made pursuant to a PPA that runs through 2019.

In addition to the OUC contract, the balance of Winter Park's energy requirements are satisfied through power supply agreements with Gainesville Regional Utilities (GRU; rated 'AA-'/Outlook Stable) and Covanta. The agreements with GRU and Covanta run through 2018 and 2025, respectively, and require Winter Park to purchase a fixed amount of capacity (20 MW combined).

The city's recent transition from shorter-term power supply agreements of no less than three years with concurrent expiration dates to slightly longer-term agreements with a more diverse pool of suppliers with staggered expiration dates is viewed favorably by Fitch.

STRONG SERVICE TERRITORY
The city's electric utility serves a very stable service territory that exhibits good diversity among ratepayers, high customer wealth levels, and consistently low unemployment, all of which contribute to near perfect revenue collection.

Fitch expects the system's service area will remain largely stable given its attractive location and good access to the generally sound economy of the greater Orlando metropolitan area. Winter Park's low December 2015 unemployment rate of 4% continues a long trend of remaining below that of the broader region, state and nation. Income indicators measured on a per capita and median household basis are similarly strong.