Fitch Rates Lubbock Power and Light, TX's $16MM Power System Revenue Bonds
'A+'; Outlook Stable
SAN FRANCISCO -- April 16, 2013
Fitch Ratings assigns an 'A+' rating to the following bonds issued by the city
of Lubbock, TX on behalf of its municipally-owned electric utility system
known as Lubbock Power & Light (LP&L):
--$16 million electric light and power system revenue bonds, series 2013.
Bond proceeds will fund various system improvements, including the replacement
of a cooling tower, and refund outstanding electric light and power system
revenue bonds. The bonds will be sold via negotiation the week of April 22nd.
In addition, Fitch affirms its 'A+' rating on $63.7 million outstanding
electric light and power system revenue bonds, series 2001 and 2010.
The Rating Outlook on all bonds is Stable.
Bonds are secured by a pledge of net revenues from the electric system.
KEY RATING DRIVERS
RETAIL ELECTRIC SYSTEM: LP&L is a city owned, integrated public utility that
provides electricity to approximately 101,000 meters in Lubbock, Texas. LP&L
is the largest (95% of total revenues) of the four member West Texas Municipal
Power Authority (WTMPA), a joint powers agency established to coordinate and
meet its members' power supply needs.
UNCERTAIN FUTURE POWER SUPPLY: WTMPA supplies LP&L's power through an
all-requirements wholesale contract with Xcel Energy. The all-requirements
contract expires in 2019, leaving some uncertainty as to what LP&L's power
supply and operating profile will be in the future.
COMPETITIVE RATES: Electric rates remain very competitive, although rate
flexibility has been somewhat compromised as recent requests to raise rates
have not been approved by city council. Fitch views LP&L's ability to raise
rates in a timely manner as a key rating factor, particularly given the
utility's debt issuance plans and relatively large capital needs.
POTENTIAL FUNDING REQUIREMENTS: LP&L's preliminary five-year capital plan
anticipates debt financing of up to $100 million through 2018, which could
increase based on power supply decisions. The planned issuance could
significantly raise debt levels and pressure financial margins.
FINANCIAL METRICS STABLE AFTER ACQUISITION: LP&L's financial performance
remained relatively stable in fiscal 2012 following the acquisition of its
principal competitor in fiscal 2011. Acquisition related debt lowered
financial margins as anticipated, but metrics remain adequate for the rating.
SOUND SERVICE AREA: Lubbock serves as the education and medical center for
this largely agricultural area. Unemployment rate remains well below the state
and national average and the region benefits from affordable housing and
relatively stable home prices. Wealth levels as measured by median household
income are below average, but have grown more quickly than the national
average over the past two years.
UNWILLINGNESS TO RAISE RATES: A continued unwillingness on the part of LP&L
and the city council to raise rates and preserve financial margins,
particularly as capital expenditures and debt rise, would likely result in
negative rating action.
FURTHER DECLINE IN FINANCIAL METRICS: Financial metrics remain adequate for
the rating level at the end of fiscal 2012 but will decline in fiscal 2013
given the delay in implementing rate increases and a planned reduction in
cash. Further deterioration in financial metrics beyond fiscal 2013 would
likely lead to a downgrade.
LP&L is a fully integrated electric utility serving approximately 101,036
meters in Lubbock, Texas. Lubbock was largely a dual service area before LP&L
acquired Southwestern Public Service Co.'s (SPS) local distribution system in
October 2010. LP&L remains in competition in two relatively small overlapping
service areas where LP&L does not have a significant presence. Fitch does not
view the remaining competition as a significant credit concern as the
overlapping services areas are defined, limited in geographical size and
customer base, and of minimal importance to LP&L's operations.
FUTURE POWER SUPPLY
LP&L projects its June 2019 power needs at 720 MW. The net requirement is
expected to be approximately 356 MW (approximately 46% of need) after
factoring: (1) LP&L's owned generation with a dependable natural gas capacity
of approximately 194 MW and, (2) 170 MW (plus 1.5% annually) contracted with
Xcel as part of the SPS acquisition that begins in June 2019 (expires 2044).
Supply needs after 2019, when WTMPA's contract with Xcel expires, are expected
to be partially met through a new 13 year contract. The contract (beginning
2019) between WTMPA and Elk City II Wind, LLC (a subsidiary of NextEra Energy
Resources) is for 100 MW of wind generation. Discussions on securing
additional capacity are ongoing with management expecting to take formal
action over the next 18 months.
Electric Rate Strategy
LP&L is currently undergoing a strategy shift in its electric rate setting
process. Prior to the acquisition of SPS's distribution system, LP&L's
strategy was to stay modestly below SPS's rates. Since the acquisition, the
city council voted on three separate occasions (once in 2011 and twice in
2012) against approving rate increases recommended by the Electric Board.
Instead, council requested and the Electric Board initiated a rate study that
is expected to provide additional information regarding LP&L's revenue
Management expects that rates will be increased at the end of fiscal 2013 or
beginning of fiscal 2014 based on the rate study's results. Future rates
increases will be driven by LP&L's business need rather that matching changes
initiated by competitors.
Recent financial performance has been below historical levels due to delayed
rate increases and the acquisition of SPS in October 2010. However, Fitch
views the benefits of operating in a less competitive environment as
outweighing the reduction in financial metrics. Metrics remain adequate
compared to medians for the rating level at the end of fiscal 2012, however,
continued deterioration beyond what is expected in fiscal 2013 would likely
result in negative rating action.
Fitch calculated debt service coverage, which includes LP&L's portion of
outstanding general obligation and certificates of obligation bonds issued by
the city on LP&L's behalf, was 2.07x and 1.99x in fiscals 2011 and 2012,
respectively. After adjusting for transfers (primarily consisting of the
franchise fee and PILOT paid to the city), coverage declined to 1.41x and
1.29x in fiscals 2011 and 2012.
Days cash on hand declined to 135 at the end of fiscal 2012, significantly
lower than the ending balance of 293 days in fiscal 2010, but is still
comparable to the 'A+' medians for cash (138 days). LP&L plans on using an
additional $8.3 million in cash, an increase of approximately $1 million
compared to earlier estimates for the year.
SIGNIFICANT CAPITAL PLAN
LP&L's five-year CIP, estimated at $183.3 million, is significantly higher
than the 2011 plan ($76.9 million). The increase reflects several factors: (1)
the higher than expected capital costs associated with upgrading LP&L's
distribution system in order to consolidate with the purchased SPS system; (2)
overhauling gas resources; and (3) improving the transmission system to
The CIP reflects the planned issuance of approximately $100.6 million in
revenue bonds, including the proposed series 2013 issuance. However, Fitch
notes that LP&L's remaining debt issuance plans remain uncertain and will
depend on future rate increases and power supply decisions.
STABLE SERVICE AREA
The City of Lubbock (rated 'AA+', Stable by Fitch) is located in northwest
Texas. Lubbock has a stable economy that is based on agriculture,
manufacturing and wholesale trade. Lubbock serves as the education and medical
center for the area and is home to Texas Tech University (rated 'AA+', Stable
by Fitch), which is both the largest employer in the City and the largest
customer of LP&L. The top 10 customers show less concentration following the
acquisition of SPS, but still remain elevated at 21% of energy and 16% of 2012
revenues (29% of energy and 22% of revenues in fiscal 2010). However, this
concentration is mitigated somewhat by the stability of the two largest
customers (Texas Tech University and the City of Lubbock) that comprised 9% of
energy and 7% of revenues in fiscal 2012.
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);
--'Revenue-Supported Rating Criteria' (June 12, 2012).
Applicable Criteria and Related Research
U.S. Public Power Rating Criteria
Revenue-Supported Rating Criteria
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
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.
Matthew Reilly, +1-415-732-7572
Fitch Ratings, Inc.
650 California St.
San Francisco, CA 94108
Ryan Greene, +1-212-908-0593
Dennis Pidherny, +1-212-908-0738
Elizabeth Fogerty, New York, +1 212-908-0526
Press spacebar to pause and continue. Press esc to stop.