NEW YORK--(BUSINESS WIRE)--
Fitch Ratings has assigned an 'AA' rating to the following city of Lincoln, NE Lincoln Electric System (LES) revenue bonds:
--Approximately $71 million revenue and refunding bonds, series 2013.
The bonds are scheduled to price competitively on June 6, 2013. Proceeds will be used to refund LES' series 2005 bonds for approximately 32% savings of the refunded par amount and redeem $24 million of outstanding commercial paper notes.
In addition, Fitch affirms the 'AA' rating on LES' outstanding revenue bonds, which total $538 million net of the series 2005 bonds.
The Rating Outlook is Stable.
The bonds are secured by a first lien on system net revenues.
KEY RATING DRIVERS
STRONG SERVICE TERRITORY: LES is a vertically-integrated, retail electric provider serving 130,546 customers in a strong service territory exhibiting low unemployment rates.
ELECTRIC RATES PROVIDE FLEXIBILITY: LES' electric rates are regularly among the lowest in the nation, which provides considerable revenue-raising flexibility. Rate increases require city council approval, which adds a layer of complexity. However, the relationship between LES and the council appears constructive, as regular, measured rate increases have been approved nearly every year.
CASH FLOW METRICS EVIDENCE STABILITY: Cash flow metrics, including an average of 2.0x debt service coverage, are very stable and in line with rating category medians.
NEW LIQUIDITY TARGET: A new liquidity target instituted in 2012 sets daily minimums for cash on hand, based on 10 years of budget data and simulations of various risks. Cash balances will ultimately be lower under the new policy. However, the historical stability of LES' financial operations, including its relatively less volatile coal-centered fuel supply, provides some comfort.
SUFFICIENT CAPACITY: LES has sufficient capacity to meet projected demand through 2029. A preponderance of coal-fired generation could ultimately add costs, given current and proposed environmental regulations. However, LES' low rates provide considerable headroom to manage any additional capital needs.
STRONG MANAGEMENT TEAM: LES is proactive in risk management, forecasting, and disclosure. The system's stable and strong financial position provides evidence of management's proficiency.
BALANCE SHEET SHIFT: A marked shift in LES' balance sheet metrics would likely drive any longer-term rating action. The metrics are fundamentally strong but below Fitch's 'AA' rating category medians. In addition, the forecast is mixed. The new liquidity target is better informed than in prior years, but it reduces cash balances over time. However, no planned additions to generating capacity ultimately cause some improvement in debt ratios.
STRONG SERVICE TERRITORY
LES is a retail electric provider in a strong service territory exhibiting some of the lowest unemployment rates in the country (3.4% in March 2013). In addition, healthy customer growth has averaged 0.8% annually since 2006 to 130,546 today.
The city of Lincoln is the state capitol and home to the flagship campus of the University of Nebraska, both of which create considerable economic activity in the region.
The headroom provided by LES' low rates, coupled with its ability to increase rates on relatively short 30-45 days' notice, provides it with considerable flexibility to raise revenues for ongoing business operations and mitigate unforeseen risks.
LES' rates rank 11th lowest in its June 2012 National Electric Rate Survey of 106 cities (as of Jan. 1, 2012), and forecast increases through the 2017 planning period are in line with historical changes.
STABLE FINANCIAL METRICS
Cash flow metrics are very stable and in line with rating category medians. Management sets a target ratio of 2.0x debt service coverage, which it typically meets. In addition, forecasted coverage through the 2017 planning period remains in line with this target.
Balance sheet ratios are weaker than rating category medians, but the historical stability of LES' financial operations and its rate-raising flexibility provides some comfort. Forecast changes in the balance sheet are mixed, and a marked shift in these metrics would likely drive any longer-term rating action.
A new liquidity policy establishes minimum cash balances for each day. This prudently assumes that various, identified risks could interrupt LES' business operations at any point of the year. Nevertheless, the $49.1 million minimum threshold established by the policy is well below LES' $100.7 million of currently available resources.
The ratio of equity to capitalization is about half the rating category median at 28.7%. However, equity ratios are improving slowly and should benefit from LES' ample generating capacity. Management does not anticipate a need for additional debt-financed resources before 2029.
LARGELY COAL-FIRED GENERATION
LES currently has 1,054MW of total resources, which exceeds its peak demand of 786MW by a considerable margin. Available capacity is split near evenly between coal (45%) and natural gas-fired (43%) facilities. However, coal-fired resources typically produce the vast majority of system energy (85% in 2012).
No significant environmental retrofits are envisioned under current EPA regulations. However, the high proportion of coal-fired energy could lead to additional costs over time.
A sustainability target furthers LES' efforts to diversify fuel sources by meeting projected load growth through 2016 (48MW) with renewable resources and demand side management. LES intends to meet 20MW of this goal in 2013 and exceed the 2016 target by 8MW.
Additional information is available at www.fitchratings.com.
This rating action was informed by information identified in Fitch's U.S. Public Power Rating Criteria and Revenue-Supported Rating Criteria.
Applicable Criteria and Related Research:
--'U.S. Public Power Rating Criteria' (Dec. 18, 2012);
--'Lincoln Electric System, Nebraska' (June 14, 2012);
--'Revenue-Supported Rating Criteria' (June 12, 2012).
Applicable Criteria and Related Research
Lincoln Electric System (Revenue Bonds)
Revenue-Supported Rating Criteria
U.S. Public Power Rating Criteria
Ryan A. Greene, +1-212-908-0593
Fitch Ratings, Inc.
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Christopher Hessenthaler, +1-212-908-0773
Dennis Pidherny, +1-212-908-0738
Elizabeth Fogerty, +1-212-908-0526