Fitch Ratings has assigned an 'AA' rating to the following city
of Lincoln, NE Lincoln Electric System (LES) bonds:
--Approximately $162 million revenue and refunding bonds, series
2015A.
The bonds are scheduled to price via negotiation on March 11,
2015. Proceeds will be used to refund a portion of LES's
outstanding series 2007A and 2007B bonds and reimburse the system
for approximately $66 million of capital improvements.
In addition, Fitch has affirmed the following LES ratings:
--$611 million electric revenue bonds at 'AA' (par amount as of
Dec. 31, 2014);
--$150 million electric system revenue commercial paper (CP)
note program at 'F1+';
--$150 million electric system revenue CP bank note at 'AA'.
The rating on the bank note, which is a promissory note
evidencing LES's obligation to the Bank of Tokyo-Mitsubishi UFJ,
Ltd. (Fitch IDRs of 'A/F1') for any draws made on a $150 million
revolving liquidity facility, is based on LES's long-term
rating.
The Rating Outlook is Stable.
SECURITY
The revenue bonds are secured by a first lien on LES's net
revenues.
The CP notes and bank note are secured by system net revenues,
junior to the prior payment of LES's long-term debt.
KEY RATING DRIVERS
STRONG SERVICE TERRITORY: LES is a vertically integrated, retail
electric provider to 133,292 customers in a strong, growing service
territory.
RATES PROVIDE FINANCIAL FLEXIBILITY: Very 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 evidence 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.
BELOW AVERAGE BALANCE SHEET: Balance sheet metrics, including
lower cash balances under a new liquidity target instituted in
2012, are below 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 some 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 173MW of wind capacity through two, 25-year purchase
power agreements, as well as a 5MW community solar project.
STRONG LONG-TERM RATING AND LIQUIDITY: LES's 'AA' long-term
rating and its sufficient internal liquidity sources, including a
$150 million revolving liquidity facility, support the 'F1+' rating
on its CP note program.
RATING SENSITIVITIES
BALANCE SHEET WEAKNESS: Stalled improvement in balance sheet
metrics could drive longer-term rating action. Forecast metrics
remain below rating category medians.
TIGHTER LIQUIDITY: While minimum liquidity thresholds make it
unlikely, any sustained compression in LES's CP coverage below
1.25x could ultimately lead to negative rating action.
CREDIT PROFILE
STRONG SERVICE TERRITORY
LES is a vertically integrated retail electric provider to
133,292 customers in a strong service territory exhibiting some of
the lowest unemployment rates in the country (2.4% in December
2014). 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 $22.5 million rate stabilization fund (RSF)
requiring just LES administrative board approval - not city council
- is available to balance rates.
LES'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
LES's cash flow metrics are exceptionally stable and in line
with Fitch's 'AA' rating category medians. Management sets a debt
service coverage target of 2x, which it rarely misses. Moreover,
forecast coverage through the 2019 planning period, assuming 1.4%
average annual energy growth, remains in line with this goal.
BELOW-AVERAGE BALANCE SHEET METRICS
In contrast to its strong cash flow metrics, LES's balance sheet
ratios are weaker than rating category medians and remain so
through the forecast period. LES's rate-raising capacity and the
historical stability of its financial and asset operations provide
comfort. However, a stalled trend of improving balance sheet
metrics could drive longer term rating action. Equity ratios may be
pressured by additional debt-financed costs of environmental
retrofits.
LES's 2014 cash on hand by Fitch's calculation was 148 days
(unaudited) compared with the rating category median 183 days. The
system's 2015 modeled liquidity threshold totals 74 days cash on
hand, or $55.8 million. This represents a one-third decrease from
the 2014 level. However, LES does not intend to reduce certain cash
balances to near the minimum levels until its RSF ($22.5 million)
reaches a $28.5 million goal, likely in 2018. LES's liquidity model
instituted in 2012 prudently sets minimum cash balances for each
month.
The 2014 ratio of equity to capitalization was 29.9% (unaudited)
compared with the rating category median of 49.7%. Equity ratios
have improved only modestly over the past five years since LES's
prior building cycle and remain largely stable during the planning
period.
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.
Moreover, LES forecasts the attractive pricing of such resources to
save the system $429 million over the next 25 years. This is a
measurable change from historical precedent; LES has traditionally
relied on approximately 80% coal-fired generation.
LES's rates should provide flexibility to manage environmental
costs of retrofitting owned and participatory coal-fired assets
over the next several years. While total costs remain uncertain, a
January 2014 Environmental Protection Agency ruling on the Laramie
River Station currently suggests upwards of $82.5 million in
additional costs to LES, which LES includes in forecasts.
COMMERCIAL PAPER PROGRAM
LES's strong long-term credit characteristics, coupled with its
available liquidity sources, support the 'F1+' rating on its $150
million CP program. The program has been an inexpensive source of
interim financing of capital projects, reflecting, in part, LES's
credit quality. The program currently has $55 million of available
capacity.
Liquidity sources include a $150 million revolving liquidity
facility provided by the Bank of Tokyo-Mitsubishi UFJ, Ltd., as
well as the system's own cash and investments. A bank note
obligates LES for the full repayment of any draws on the credit
facility.
Total available sources provided 1.9x the maximum borrowable
amount of CP at Dec. 31, 2014. This comfortably exceeded Fitch's
expected metric of 1.25x the maximum program size for the 'F1+'
rating. Stronger coverage compared with LES's typical 1.3x-1.6x
range in prior months reflects the addition of a three-year, $50
million revolving credit agreement with a separate bank.
Additional information is available at
'www.fitchratings.com'.
Applicable Criteria and Related Research:
--'Fitch Affirms Municipal Energy Agency of Nebraska's Revs at
'A'; Outlook Stable' (Feb. 23, 2015);
--'U.S. Public Power Peer Study Addendum -- February 2015' (Feb.
9, 2015);
--'Fitch Rates Nebraska Public Power District's 2015 General
Revs 'A+'; Outlook Stable' (Jan. 15, 2015);
--'Rating U.S. Public Finance Short-Term Debt' (Jan. 7,
2015);
--'2015 Outlook: U.S. Public Power and Electric Cooperative
Sector (Steady as She Goes)' (Dec. 10, 2014);
--'Revenue-Supported Rating Criteria' (June 16, 2014);
--'U.S. Public Power Rating Criteria' (March 18, 2014);
--'District Energy Corporation, Nebraska' (May 28, 2013).
Additional Disclosure
Solicitation Status
http://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=980833
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Fitch RatingsPrimary AnalystRyan A. Greene,
+1-212-908-0593DirectorFitch Ratings, Inc.33 Whitehall StreetNew
York, NY 10004orSecondary AnalystChristopher Hessenthaler,
+1-212-908-0738Senior DirectororCommittee ChairpersonKathy
Masterson, +1-512-215-3730Senior DirectororMedia RelationsElizabeth
Fogerty, New York,
+1-212-908-0526elizabeth.fogerty@fitchratings.com