Nov 9 - Fitch Ratings assigns an 'AA' rating to the Orlando Utilities
Commission (OUC), Florida's $250 million utility system revenue refunding bonds
series 2013A. The bonds are expected to price Nov. 28 through negotiated sale.
Bond proceeds will be used to refund the 1996A (Multi-Modal), 2003A and 2003B
Fitch also affirms the 'AA' rating on the following outstanding OUC bonds as
--$197.2 million water and electric revenue bonds;
--$1.46.2 billion utility system revenue bonds.
The Rating Outlook is Stable.
The bonds are secured by net revenues of the combined electric and water system.
KEY RATING DRIVERS
STRONG FUNDAMENTALS: The electric and water utility's 'AA' rating reflects solid
financial metrics, competitive rates, a diverse fuel mix and experienced
SOLID FINANCIAL COVERAGE: Fitch calculated debt service coverage (DSC) has
historically hovered around 2.0 times (x). On a more conservative basis, DSC
adjusted for purchased power and general fund transfers, coverage equaled a
solid 1.55x in 2011. These figures are in line with Fitch 'AA' public power
AMPLE LIQUIDITY: There is approximately $600 million of cash reserves or 354
days cash on hand, which provides ample coverage of outstanding variable-rate
demand bonds and other financial and capital obligations. This mitigates
concerns about the lack of a debt service reserve fund.
DIVERSIFIED CAPACITY: OUC's generating mix of coal (41% of capacity) and natural
gas (54%) provides good operating flexibility and enables the utility to offer
low cost electric service to its customers.
SLOWER ECONOMY: The utility's service territory has been impacted by the weak
economy and slower demand for electricity. This conservatism has been
incorporated into OUC's planning models.
WHAT COULD TRIGGER A RATING ACTION
Excessive Transfer Payments: Transfer payments levels are currently high, and
Fitch would view negatively any unusually large payments above current levels.
Electric and Water Systems
OUC employs a diverse mix of coal and natural gas generation; supplemented by a
small component of nuclear power. Plans to add more nuclear generation appear to
have been discarded. OUC believes it has sufficient generation capacity until
2017. Generating capacity totals about 1,850 MW and is made up by fuel type for
2011 as follows: natural gas (54%), coal (41%), nuclear (4%) and renewable (1%).
OUC has contracts with three coal suppliers to provide about 58% of needs
through 2013. The utility hedges against its budget for up to 75% of estimated
retail natural gas prices in the current fiscal year and also maintains a fuel
stabilization fund to help mitigate short-term fuel variability. Additionally,
the utility can pass increased costs to its customers based solely on the
decision of its governing board.
The water system's customer base is reasonably diverse. OUC's water customers
include 106,203 residential, 13,107 commercial and 16,106 irrigation customers
as of Aug. 31, 2012. The 10 largest water customers comprise approximately 8.5%
of total water sales, with the largest being approximately 2.2%. The water
supply is obtained from 32 deep wells from the Floridian Aquifer. With a
consumptive use permit (CUP) through May 2023, supply is expected to be
sufficient through the duration of the CUP.
Financial Performance Positive
OUC has historically demonstrated strong and stable financial metrics; however,
Fitch-calculated debt service coverage (DSC) did decline to 1.71x in 2010 from
2.07x in fiscal 2009 largely due to increases in interest expenses from 2009
bonds, as well as the issuance of Build America Bonds in early 2010. Despite the
drop in coverage and the use of fuel stabilization funds to offset fuel costs,
OUC's cash position has continued to improve, which Fitch views as a credit
positive. Management forecasts assume DSC above 2.0x (1.6x adjusted) and days
cash on hand greater than 200 days over the next several years.
Transfers to the City
OUC makes both a revenue-based transfer and an income-based dividend payment to
the city of Orlando. In 2008, the board fixed the payments through 2011. Revenue
based payments for fiscal year 2012 were $29.6 million and fixed-income payments
were $47.1 million, with the total approximating $76.8 million. For 2013, this
number is expected to be $76 million. The size of the transfer payments (over 8
percent of total revenues) remains high for the rating category.
Service Territory Stable
Future growth of the electric system is forecasted at about 2% annually for the
next several years, with above average growth expected to come from areas
surrounding the Lake Nona Medical City, which is southeast of the Orlando
International Airport and from plans to add SunRail, a mass transportation
network closer to the city. Water customer and sales growth is expected to be
about 1.5% yearly for the next five years. Unemployment rates for Orange County,
FL, the state of Florida and the U.S., based on preliminary August 2012 figures,
was 8.6%, 9.0% and 8.2%, respectively. Attendance at major theme parks continues
to remain stable.
Additional information is available at 'www.fitchratings.com'. The ratings above
were solicited by, or on behalf of, the issuer, and therefore, Fitch has been
compensated for the provision of the ratings.
In addition to the sources of information identified in Fitch's
Revenue-Supported Rating Criteria and U.S. Public Power Rating Criteria, this
action was informed by information from CreditScope.
Applicable Criteria and Related Research:
--'Revenue-Supported Rating Criteria' (June 12, 2012);
--'U.S. Public Power Rating Criteria' (Jan. 11, 2012).
Applicable Criteria and Related Research:
Revenue-Supported Rating Criteria
U.S. Public Power Rating Criteria