Fitch Affirms Lakeland, FL's Energy System Revs at 'AA-'; Outlook Stable

NEW YORK--()--Fitch Ratings has affirmed the 'AA-' rating on the following Lakeland, FL revenue bonds:

--Approximately $338,565,000 energy system revenue bonds, series 1999A, 1999B, 2006, 2010 and 2012.

The Rating Outlook is Stable.

SECURITY

Outstanding energy system revenue bonds are secured by a first lien on net revenues of the city's electric system.

KEY RATING DRIVERS

SIZEABLE RETAIL ELECTRIC UTILITY: Lakeland FL owns and operates a vertically integrated retail system (the system) serving a stable service territory composed primarily of residential users. Despite being well situated between Orlando and Tampa, economic and wealth indicators somewhat lag those of the state and nation, although revenue collection remains strong with only minimal write-offs each year.

VERY LOW RATES: Electric rates continue to rank among the lowest in the state, providing the system with significant flexibility. In addition, a city ordinance requiring timely adjustments in the system's fuel rate limits the under-recovery of fuel costs to a very low threshold.

SOUND FINANCIAL PERFORMANCE: Financial metrics continue to exceed management's prudent targets and approximate Fitch's rating category medians. Fiscal 2013 ended with debt service coverage of 1.9x and available reserves that provided for 180 days of cash on hand. Fitch expects the system's future financial performance will remain at a similar level based on the most recent financial forecast.

AMPLE CAPACITY: Existing power supply resources are anticipated to be sufficient for the long-term. The system's owned generating capacity and fuel mix are weighted towards natural gas-fired resources. However, no single generating asset accounts for more than 36% of total capacity and the ability to purchase power from the Florida Municipal Power Pool (FMPP) allows for additional diversification.

MANAGEABLE CAPITAL PROGRAM: Excess cash flow and existing resources are expected to be sufficient to fund capital needs through fiscal 2018, which should improve the system's already moderate debt burden. Potential costs related to proposed environmental regulations are not likely to be onerous.

RATING SENSITIVITIES

EXPOSURE TO VARIABLE RATE DEBT: Proactive management of the system's extensive exposure to short-term debt with large bullet maturities remains critical.

CREDIT PROFILE

STABLE SERVICE TERRITORY

Lakeland Electric provides generation, transmission, and distribution services to a service area that includes the incorporated area of the city (implied UTGO rated 'AA'/Stable by Fitch) as well as neighboring unincorporated areas of Polk County, FL (Implied UTGO rated 'AA'/Stable). The customer base is sufficiently diverse, dominated by residential end users that account for almost 85% of total customers and nearly half (48.5%) of total fiscal 2013 sales. Sales derived from the system's ten largest customers are somewhat concentrated, typically accounting for almost 20% of total annual sales; however, much of that percentage is attributable a very stable mix of healthcare and governmental employers.

AMPLE CAPACITY

The city owns and operates a mix of generating units that provide ample capacity totaling 980.5 MW. Total energy requirements have historically been generated almost entirely from Lakeland's ownership interest in a coal-fired steam turbine generator jointly owned with the Orlando Utilities Commission (OUC; rated 'AA'/Stable) and a wholly owned 354-MW combined cycle natural gas generating plant. The facilities are known as McIntosh Plant Units No. 3 and 5, respectively. Any remaining energy requirements are typically satisfied through capacity purchases from the Florida Municipal Power Pool (FMPP).

SOUND FINANCIAL PERFORMANCE

Fitch calculated debt service coverage is typically at or close to 2.0x while coverage of full obligations, including an annual transfer made to the city's general fund, has averaged 1.5x over the prior five years. Rating category medians for both ratios are 2.4x and 1.4x, respectively. Fitch notes that management prudently targets debt service coverage of 2.0x and a minimum of 150 days of cash on hand for operations when formulating the annual budget.

Electric rates are currently the lowest in the state, providing the system with considerable financial and operating flexibility. As of May 2014, the average monthly residential bill - assuming usage of 1,000 of kWh - totals about $103, significantly lower than the $125 and $121 statewide average for investor and municipally owned utilities, respectively.

MANAGEABLE CAPITAL PROGRAM

Capital needs over the intermediate term appear manageable, and are not expected to require additional debt issuance. New generation projects are not included in the capital plan; officials believe the system's ample capacity from both owned generation and available purchases from FMPP will preclude the need for additional generation for about the next ten years.

Debt levels have steadily improved as capital expenditures continue to be funded from current resources. The ratio of debt to funds available for debt service (FADS) now equals the rating category median of 5.1x, and equity has grown from 34.5% of capitalization in fiscal 2009 to a healthier 41% at the close of fiscal 2013.

MANAGEABLE VARIABLE RATE EXPOSURE

Nearly half (44%) of the system's $438.6 million of currently outstanding parity debt is attributable to a five-year bank loan with Bank of America and variable-rate energy system revenue bonds issued in 2012. Both borrowings carry a floating rate with five-year bullet maturities coming due in 2017 and 2019, respectively.

The exposure to variable rate debt and associated interest rate swaps remains somewhat of a concern; however, the city's management team has demonstrated its ability over the years to successfully refund bullet maturities, manage interest rate risk and maintain access to ample liquidity. The lack of put risk associated with the outstanding floating rate notes together with access to a city-wide pooled investment fund that currently totals $316 million also ensure sufficient cushion.

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

Applicable Criteria and Related Research:

--'U.S. Public Power Peer Study -- June 2014' (June 13, 2014);

--'U.S. Public Power Peer Study Addendum - June 2014' (June 13, 2014);

--'U.S. Public Power Rating Criteria' (March 18, 2014).

Applicable Criteria and Related Research:

U.S. Public Power Peer Study -- June 2014

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=749789

U.S. Public Power Peer Study Addendum - June 2014

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=750283

U.S. Public Power Rating Criteria

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=740841

Additional Disclosure

Solicitation Status

http://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=841716

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Contacts

Fitch Ratings
Primary Analyst
Christopher Hessenthaler, +1 212-908-0773
Senior Director
Fitch Ratings, Inc.
33 Whitehall Street
New York, NY 10004
or
Secondary Analyst
Ryan A. Greene, +1 212-908-0593
Director
or
Committee Chairperson
Dennis Pidherny, +1 212-908-0738
Managing Director
or
Media Relations:
Elizabeth Fogerty, +1 212-908-0526
elizabeth.fogerty@fitchratings.com

Sharing

Contacts

Fitch Ratings
Primary Analyst
Christopher Hessenthaler, +1 212-908-0773
Senior Director
Fitch Ratings, Inc.
33 Whitehall Street
New York, NY 10004
or
Secondary Analyst
Ryan A. Greene, +1 212-908-0593
Director
or
Committee Chairperson
Dennis Pidherny, +1 212-908-0738
Managing Director
or
Media Relations:
Elizabeth Fogerty, +1 212-908-0526
elizabeth.fogerty@fitchratings.com