Fitch Ratings has assigned an 'AA-' rating to the following Lakeland, FL
--Approximately $125,000,000 energy system revenue and refunding bonds,
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
--$314,870,000 energy system revenue bonds, series 2006, 2010 and 2012.
The Rating Outlook is Stable.
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.
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.
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
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.
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,
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.
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'.
Revenue-Supported Rating Criteria (pub. 16 Jun 2014)
U.S. Public Power Rating Criteria (pub. 18 May 2015)
Dodd-Frank Rating Information Disclosure Form
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