Fitch Affirms Ocala's (FL) Utility Systems Rev Bonds; Outlook Stable

NEW YORK--(BUSINESS WIRE)-- Fitch Ratings affirms the 'AA-' rating on the following Ocala, FL bonds:

--Approximately $23.9 million utility systems revenue bonds, series 2007A and 2007B.

The Rating Outlook is Stable.

SECURITY

The utility systems bonds are secured by a first lien on net revenues of the city's electric system and a subordinate lien on net revenues of the city's water and sewer system. The water and sewer system currently has no outstanding senior lien obligations.

KEY RATING DRIVERS

COMBINED UTILITY SYSTEM: The city of Ocala owns and operates a combined utility system providing electric, water and wastewater services on a retail basis to a stable service territory that includes the city of Ocala and neighboring unincorporated areas of Marion County. Electric system operations generate approximately 85% of combined revenues.

RELIABLE POWER SUPPLY: Ocala is the second largest participant in Florida Municipal Power Agency's (FMPA) All-Requirements Power Supply Project (ARP, rated 'A+' with a Stable Outlook by Fitch). The ARP provides the city's electric system with a reliable long-term power supply sufficient to meet future load growth.

SOUND FINANCIAL PERFORMANCE: Financial metrics of the combined system have compared well historically to Fitch's 'AA-' rating category medians with debt service coverage consistently at or above 2.0x and balance sheet resources providing well in excess of 200 days of cash on hand. Coverage of full obligations has been weaker in recent years (1.02x in 2014) but remains acceptable for the current rating.

CHALLENGING DEMOGRAPHICS: The service area exhibits a limited local economy with weak income levels that could ultimately impede cost recovery. However, unemployment is comparable to state and national levels, utility collections have remained strong and the combined system benefits from a highly diverse customer base.

AFFORDABLE RATES PROVIDE FLEXIBILITY: The city's electric rates are on par with the statewide average for both municipal- and investor-owned utility systems, with no additional base rate increases currently forecast. Water and sewer rates are considered somewhat high relative to service area income levels, although the city appears committed to raising needed revenues to fund its ongoing capital program.

LIMITED CAPITAL NEEDS: Capital needs through the current forecast period of both utility systems appear manageable and are not expected to require additional debt financing. Consequently, Fitch expects further improvement in the combined system's already favorable debt levels.

RATING SENSITIVITIES

SUSTAINED IMPROVEMENT IN FINANCIAL METRICS: The confluence of Ocala, FL's combined utility system's improved cash flow metrics, maintenance of an already strong balance sheet and the continuation of declining debt ratios could lead to positive rating consideration.

CREDIT PROFILE

Ocala, FL is located in Marion County near the geographic center of the state, about 40 miles south of Gainesville and 90 miles north of Orlando. The city's utilities both serve a diverse service territory with residential electric customers accounting for nearly 41% of annual energy sales. The 10 largest users exhibit no concentration in revenues and/or sales, making up less than 8% of electric system gross income. The water and sewer utility's customer base is considerably smaller with approximately 23,650 and 28,300 water and sewer accounts served, respectively. However, sales and related revenue are very diverse among metered users, similar to the electric utility.

FMPA PROJECT PARTICIPANT

The entirety of the city's power supply demands, as well as scheduling, transmission, and associated services, are satisfied through the city's participation in FMPA's ARP. Ocala and the balance of the project's 12 participants are bound by 30-year all-requirements power supply contracts that extend each year for one additional year, thereby keeping the length of the contracts at 30 years. Participants must provide one-year's notice to halt the contract from automatically rolling for another year.

AMPLE CAPACITY AND SUPPLY

The city's current water supply allocation and available treatment capacity are reportedly sufficient to meet long-term needs of the service area. The city owns and operates a water treatment facility permitted to treat more than twice the average daily demand. A current 20-year consumptive use permit (CUP) issued in 2007 allows for withdrawals from the upper Floridan aquifer. Wastewater assets include three water reclamation facilities with permitted treatment capacity of approximately 13.0 mgd compared to an average daily flow of 5.2 mgd treated in fiscal 2014.

SOUND FINANCIAL PROFILE

The combined utility system's financial profile generally compares well to Fitch's 'AA-' rating category medians, despite a modest decline in cash flow metrics in fiscal 2014. While electric sales increased by about 1% over the prior year, Fitch-calculated debt service coverage and coverage of full obligations declined to 1.92x and 1.02x, respectively compared to rating category medians of 2.48x and 1.43x.

Fitch notes that annual transfers made to the city's general fund out of the electric fund are limited by policy to a manageable 6% of budgeted revenues, and are made after satisfying debt service obligations. Water and sewer fund transfers are capped at 2% of gross sales averaged over the three most recent fiscal years.

Liquidity remains a credit strength, despite multiple years of drawing down the electric system's well-funded rate stabilization fund (RSF). Days cash on hand (inclusive of the RSF) has remained consistently strong over the prior four years, registering well above 200 days. Fitch expects this trend will continue given the city's prudent policy requiring a minimum balance of 150 days cash in its electric operating reserve and no less than 15% of projected fuel costs in the electric RSF.

Financial projections through 2019 appear achievable given reasonable growth assumptions and no plans to issue additional debt. The city's most recent rate study for the electric system exhibits positive cash flow in each year after satisfying operating expenses and debt service obligations, funding the annual transfer to the city's general fund and current funding capex.

Additional information is available at 'www.fitchratings.com'.

Applicable Criteria

Revenue-Supported Rating Criteria (pub. 16 Jun 2014)

https://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=750012

U.S. Public Power Rating Criteria (pub. 18 May 2015)

https://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=864007

Additional Disclosures

Dodd-Frank Rating Information Disclosure Form

https://www.fitchratings.com/creditdesk/press_releases/content/ridf_frame.cfm?pr_id=990928

Solicitation Status

https://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=990928

Endorsement Policy

https://www.fitchratings.com/jsp/creditdesk/PolicyRegulation.faces?context=2&detail=31

ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: HTTP://FITCHRATINGS.COM/UNDERSTANDINGCREDITRATINGS. IN ADDITION, RATING DEFINITIONS AND THE TERMS OF USE OF SUCH RATINGS ARE AVAILABLE ON THE AGENCY'S PUBLIC WEBSITE 'WWW.FITCHRATINGS.COM'. PUBLISHED RATINGS, CRITERIA AND METHODOLOGIES ARE AVAILABLE FROM THIS SITE AT ALL TIMES. FITCH'S CODE OF CONDUCT, CONFIDENTIALITY, CONFLICTS OF INTEREST, AFFILIATE FIREWALL, COMPLIANCE AND OTHER RELEVANT POLICIES AND PROCEDURES ARE ALSO AVAILABLE FROM THE 'CODE OF CONDUCT' SECTION OF THIS SITE. FITCH MAY HAVE PROVIDED ANOTHER PERMISSIBLE SERVICE TO THE RATED ENTITY OR ITS RELATED THIRD PARTIES. DETAILS OF THIS SERVICE FOR RATINGS FOR WHICH THE LEAD ANALYST IS BASED IN AN EU-REGISTERED ENTITY CAN BE FOUND ON THE ENTITY SUMMARY PAGE FOR THIS ISSUER ON THE FITCH WEBSITE.

View source version on businesswire.com: http://www.businesswire.com/news/home/20150917005997/en/

Fitch Ratings
Primary Analyst
Christopher Hessenthaler
Senior Director
+1-212-908-0773
Fitch Ratings, Inc.
33 Whitehall St.
New York, NY 10004
or
Secondary Analyst
Stacey Mawson
Director
+1-212-908-0678
or
Committee Chairperson
Dennis Pidherny
Managing Director
+1-212-908-0738
or
Media Relations:
Sandro Scenga, +1-212-908-0278
[email protected]

Source: Fitch Ratings

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