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 January 11, 2016 - 12:30 PM EST
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Fitch Rates Lakeland, FL's Energy System Rev & Ref Bonds 'AA-'; Outlook Stable

Fitch Ratings has assigned an 'AA-' rating to the following Lakeland, FL revenue bonds:

--Approximately $125,000,000 energy system revenue and refunding bonds, series 2016.

The series 2016 bonds are scheduled for negotiated sale the week of Jan. 18, 2016. The current offering will refund portions of outstanding parity obligations (series 2006 and 2014) and finance various improvements to the city's electric utility.

In addition, Fitch has affirmed the 'AA-' rating on the following outstanding bonds:

--$314,870,000 energy system revenue bonds, series 2006, 2010 and 2012.

The Rating Outlook is Stable.

SECURITY

The bonds are secured by net revenues of the city's electric utility and will carry a springing debt service reserve.

KEY RATING DRIVERS

SIZEABLE RETAIL ELECTRIC UTILITY: Lakeland, FL owns and operates a vertically integrated retail system (the system) serving a diverse customer base throughout a stable service territory situated between the Tampa and Orlando metro areas. Economic and wealth indicators lag those of the state and nation, but revenue collection has remained strong.

VERY LOW RATES: Electric rates continue to rank among the lowest in the state, providing the system with significant flexibility and capacity for additional debt, if necessary. 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.

SOLID FINANCIAL PERFORMANCE: Cash flow and liquidity metrics continue to exceed management's prudent targets and approximate Fitch's rating category medians. Historical concerns related to variable rate exposure are also being addressed through the proposed refunding. Based on unaudited, preliminary results, fiscal 2015 ended with Fitch calculated debt service coverage of 2.81x and approximately 175 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 POWER SUPPLY: Existing power supply resources are 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 some diversification.

MANAGEABLE CAPITAL PROGRAM: Capital needs through fiscal 2020 are projected to be funded entirely from excess cash flow and a modest portion of the current offering, which should allow leverage ratios to continue improving. Potential costs to comply with the Environmental Protection Agency's Clean Power Plan are outside of the current planning period but should be manageable given Lakeland's ample power supply and low retail rates.

RATING SENSITIVITIES

IMPLEMENTATION OF CURRENT FORECAST: Lakeland Electric's execution of its current financial forecast, which includes improving debt service coverage, a slight increase in liquidity and a continued reduction in leverage, would likely prompt positive rating consideration.

ESCALATION IN TRANSFER PAYMENTS: While not currently anticipated, additional increases in the annual transfer payment to the city's general fund at the expense of cash flow and liquidity metrics could exert downward pressure on the rating.

CREDIT PROFILE

STABLE SERVICE AREA

Lakeland Electric provides generation, transmission, and distribution services to a largely stable service area that includes the incorporated area of the city (implied ULTGO rated 'AA'/Outlook Stable) as well as neighboring unincorporated areas of Polk County, FL (Implied ULTGO rated 'AA'/Outlook Stable). The city is located approximately 30 miles west of the Tampa metro area.

The customer base is well diversified, dominated by residential users that account for almost 85% of the total customer base and nearly half (49%) of aggregate energy sales. Customer concentration is limited as a result with revenue derived from the 10 largest customers typically composing less than 15% of total revenue and 20% of combined sales. The system's largest customers represent a varied mix of industries and appear sufficiently rooted to the service territory.

SOLID AND CONSISTENT FINANCIAL OPERATIONS

The utility continues to generate solid net operating margins leaving financial metrics largely in line with rating category medians. 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 2.48x and 1.43x, respectively.

Transfers to the city's general fund have remained manageable to the electric utility, but are considered somewhat high by Fitch when compared to peer utilities. The dividend to the city accounted for 10.7% of total operating revenue of the electric utility in fiscal 2014, notably higher than the rating category median of 7.7%. Future increases to the transfer formula at the expense of financial margins would be viewed negatively.

Total balance sheet resources provided for 166 days cash on hand in fiscal 2014, slightly below the rating category median of about 200 days but satisfactory relative to utility's overall risk profile. Cash reserves are projected to increase slightly through the forecast period ending in 2020 while debt service coverage before making the annual transfer to the city's general fund remains at no less than 2.60x.

LOW RATES

Despite the implementation of modest base rate increases in fiscals 2014 and 2015 totaling 6.5%, the November 2015 residential rate totaled 10.7 cents/kWh, notably lower than the statewide averages for investor (12.8 cents) and municipally owned (11.4 cents) utilities, respectively. Future base rate increases included in the current financial forecast are limited to a 5% adjustment in fiscal 2019, which should ensure the system's rates remain competitive.

FURTHER MODERATION IN LEVERAGE RATIOS EXPECTED

Capital needs through 2020 appear manageable, and are not expected to require additional debt issuance. Planned spending over the ensuing five-year period is estimated at $166.1 and will be funded entirely from excess cash flow and a portion of the current offering. Longer-term, expenditures will likely be driven by the utility's Clean Power Plan compliance strategy and decisions related to the operations at the coal-fired McIntosh Unit 3.

Debt levels have steadily improved as capex continues to be funded from current resources. Leverage ratios approximate Fitch's rating category medians as a result with further improvement expected given the system's lack of additional borrowing needs and scheduled debt amortization. The ratio of debt to funds available for debt service (FADS) nearly equals the rating category median of 4.8x, and equity has steadily grown from 34.5% of capitalization in fiscal 2009 to a healthier 45% at the close of fiscal 2014.

Lakeland Electric's exposure to variable debt remains significant. Nearly half (47.6%) of the system's $409.8 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. The bank loan was executed in 2014 to refund floating rate notes (series 2009) that carried a $100 million bullet maturity due Oct. 1, 2014.

The current offering will refund approximately $75 million of the $95 million currently outstanding under the bank loan, reducing Lakeland Electric's exposure to variable rate debt to a more moderate 31% of total leverage. The utility's still sizeable exposure to variable rate debt and derivatives 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.

IMPROVING ECONOMY

Wealth and economic indicators continue to lag the state and nation, although utility revenue collection has continued at close to 100% of total billings. The city was slow to recover from the most recent economic recession, but economic trends of late have been much improved. Employment gains of 2.2% and 2% in 2013 and 2014, respectively followed by year-over-year growth through October 2015 have outpaced continued growth in the city's labor force. Consequently, the city's latest unemployment rate is down to 5.2% compared to 6.1% one year prior. Wealth indicators rank anywhere from 15%-20% below statewide averages.

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

Additional Disclosures

Dodd-Frank Rating Information Disclosure Form

https://www.fitchratings.com/creditdesk/press_releases/content/ridf_frame.cfm?pr_id=997702

Solicitation Status

https://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=997702

Endorsement Policy

https://www.fitchratings.com/jsp/creditdesk/PolicyRegulation.faces?context=2&detail=31

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 DEFINITIONS AND THE TERMS OF USE OF SUCH RATINGS ARE AVAILABLE ON THE AGENCY'S 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.

Fitch Ratings
Primary Analyst
Christopher Hessenthaler
Senior Director
+1-212-908-0773
Fitch Ratings, Inc.
33 Whitehall Street
New York, NY 10004
or
Secondary Analyst
Eva Rippeteau
Associate Director
+1-212-908-9105
or
Committee Chairperson
Dennis Pidherny
Managing Director
+1-212-908-0738
or
Media Relations:
Elizabeth Fogerty, +1 212-908-0526
elizabeth.fogerty@fitchratings.com


Source: Business Wire (January 11, 2016 - 12:30 PM EST)

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