NEW YORK--(BUSINESS WIRE)--Fitch Ratings has assigned an 'AA' rating to the following city of Lincoln, NE Lincoln Electric System (LES, or the system) bonds:
--Approximately $120 million revenue refunding bonds, series 2016.
The bonds are scheduled to price via negotiation on August 2. Proceeds will be used to refund a portion of LES's outstanding parity bonds (series 2007A, 2007B and 2012) for interest cost savings.
In addition, Fitch has affirmed the following LES ratings:
--$618.5 million electric revenue bonds at 'AA'.
The Rating Outlook is Stable.
SECURITY
The revenue bonds are secured by a first lien on LES's net revenues.
KEY RATING DRIVERS
STRONG SERVICE TERRITORY: LES is a vertically integrated, retail electric provider to nearly 134,500 customers in an economically strong, growing service territory.
RATES PROVIDE FINANCIAL FLEXIBILITY: Notably low electric rates provide considerable revenue-raising flexibility to meet planned or unforeseen needs. A history of measured rate increases suggests a constructive relationship with city council, which must approve any such changes.
STRONG STABILITY AND MANAGEMENT: Extraordinarily stable cash flow metrics are evidence of LES's overall strong financial position and management, which includes extensive risk management and planning. Debt service coverage has remained nearly unchanged at an average of slightly more than 2x annually over the past five years.
RELATIVELY WEAK BALANCE SHEET METRICS: LES balance sheet metrics, including cash balances under a new liquidity target instituted in 2012, are typically weaker than Fitch's 'AA' rating category medians. However, monthly minimums for cash on hand and the historical stability of LES's financial and asset operations provide sufficient comfort.
GROWING RENEWABLE PORTFOLIO: An increasing proportion of renewable resources better positions the utility to meet existing and proposed environmental regulations. LES most recently added an additional 173 MW of wind capacity through two 25-year purchase power agreements and a 5-MW community solar project.
RATING SENSITIVITIES
FURTHER WEAKENING OF BALANCE SHEET METRICS: A further weakening of the Lincoln, NE electric system's liquidity and leverage metrics to levels consistently below its current forecast and well below rating category medians could result in downward rating pressure over the longer term.
STRONG SERVICE TERRITORY
LES is a vertically integrated retail electric provider to nearly 134,500 customers in an economically strong service territory that consistently exhibits exceptionally low unemployment rates (2.7% in May 2016). Lincoln is the state capital and home to the flagship campus of the University of Nebraska, both of which create considerable economic activity in the region.
RATE FLEXIBILITY
The headroom provided by its very low retail rates, coupled with a demonstrated willingness to raise rates midyear or with short notice, provides good indication of LES's capacity to generate revenues. Moreover, a $33.3 million rate stabilization fund (RSF) requiring just LES administrative board approval - not city council - is available to meet unexpected cost increases, absent rate action.
The system's rate structure does not include a fuel cost or purchased power adjustment. Such automatic adjustments can be a valuable tool to ensure the timely recapture of variable costs. However, LES's assets have provided predictable costs over time and its participation in the Southwest Power Pool Integrated Marketplace provides additional pricing efficiencies through a broader pool of resources.
EXCEPTIONALLY STABLE CASH FLOWS
Cash flow metrics are exceptionally stable and in line with Fitch's 'AA' rating category medians. Management sets a debt service coverage target of 2.0x, which it rarely misses. Moreover, forecast coverage through the 2020 planning period, assuming a reasonable annual average growth rate of 0.8% in energy sales, remains in line with this goal.
BELOW-AVERAGE BALANCE SHEET METRICS
In contrast to its strong cash flow metrics, LES's balance sheet ratios have been considerably weaker historically compared to rating category medians. However, the receipt of approximately $10.8 million related to a recent settlement agreement coupled with lower than budgeted capital expenditures helped improve days of cash on hand to 266 days at fiscal year-end 2015, in line with similarly rated retail systems.
Liquidity, based on forecast results through 2020, should recede to historical levels, equal to about 85 days of cash on hand. The projected reduction in cash reserves and return to lower liquidity levels is somewhat concerning, although LES's rate-raising capacity, the historical stability of its financial and asset operations and demonstrated ability to outperform prior forecasts provide comfort.
The ratio of equity to capitalization (29.5%, 2015) has remained relatively unchanged over the last several years, despite an increase in total debt outstanding. While LES forecasts a net increase in total debt outstanding by 2020, financial projections show this ratio remaining relatively steady at about 30%. The rating category median is 51.5%.
CHANGING RESOURCE PORTFOLIO
LES is positioning its resource portfolio for an operating environment that is increasingly focused on reducing carbon and other emissions. Existing and planned wind and solar resources coming online next year increase LES's renewable generation portfolio to the equivalent of nearly half of total sales. This is a measurable change from historical precedent; LES has traditionally relied on approximately 80% coal-fired generation.
For more information, the rating report titled 'Lincoln Electric System, Nebraska' dated March 3, 2015 is available on the Fitch Ratings website at www.fitchratings.com, or by clicking on the link.
For more information, the rating report titled 'Lincoln Electric System, Nebraska' dated March 3, 2015 is available on the Fitch Ratings website at www.fitchratings.com, or by clicking on the link.
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
Related Research
Lincoln Electric System, Nebraska
https://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=862885
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Dodd-Frank Rating Information Disclosure Form
https://www.fitchratings.com/creditdesk/press_releases/content/ridf_frame.cfm?pr_id=1008705
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https://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=1008705
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