The rating on the bank note, which is a promissory note evidencing LES's obligation to the
The Rating Outlook is Stable.
The revenue bonds are secured by a first lien on LES's net revenues.
The commercial paper (CP) notes and bank note are secured by system net revenues, subject solely 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 131,927 customers in a growing service territory exhibiting consistently strong employment figures. A preponderance of coal-fired generation meets 88% of LES's 2014 forecast energy requirements.
RATES PROVIDE FLEXIBILITY: Considerable revenue-raising flexibility resulting from very low electric rates will become increasingly more important as costs of environmental regulations materialize. Measured rate increases nearly every year suggest a constructive relationship with city council, which must approve any such increases.
CASH FLOWS EVIDENCE STABILITY: Extraordinarily stable cash flow metrics evidence LES's overall strong financial position and management. 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-average versus 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.
STRONG MANAGEMENT TEAM: The system's stable and healthy overall financial position evidences management's proficiency. LES is proactive in risk management, forecasting, and disclosure.
STRONG LONG-TERM RATING AND SUFFICIENT LIQUIDITY: LES's strong 'AA' long-term rating and its sufficient internal liquidity sources, including a
RATE ACTION: Timely and sufficient rate action to support its financial position, particularly as current and expected environmental regulations add incremental costs, will be an important rating factor over the next several years.
BALANCE SHEET WEAKNESS: Stalled improvement in balance sheet metrics could drive longer-term rating action. Forecast metrics slowly improve but remain below Fitch's rating category medians.
TIGHTER LIQUIDITY: While its minimum liquidity thresholds make it unlikely, any sustained compression in LES's CP coverage below 1.25x could ultimately lead to negative rating action.
STRONG SERVICE TERRITORY
LES is a vertically-integrated retail electric provider in a strong service territory exhibiting some of the lowest unemployment rates in the country (3.4% in
The city of
New environmental costs incurred to retrofit existing facilities or through higher wholesale power costs may press LES to implement additional rate increases during the next several years. The headroom provided by its low rates, a practice of regular rate increases over the past decade, and a demonstrated willingness to raise rates midyear or with short notice in response to natural disasters provides good indication of LES's capacity to raise revenues. Nevertheless, Fitch believes this is the foremost challenge facing the system.
LES's rates rank 13th lowest in its
EXCEPTIONALLY STABLE CASH FLOWS
Cash flow metrics are exceptionally stable and in line with Fitch's 'AA' rating category medians. Management sets a target ratio of 2.0x debt service coverage, which it rarely misses. In addition, forecasted coverage remains in line with this target.
BELOW-AVERAGE BALANCE SHEET METRICS
In contrast to its strong cash flow metrics, LES's balance sheet ratios compared unfavorably to rating category medians. LES's rate-raising capacity and the historical stability of its financial and asset operations provide some comfort. However, forecast balance sheet metrics remain below the medians through LES's 2018 planning period, and a stalled trend of improvement could drive longer-term rating action.
A new liquidity policy instituted in 2012 sets minimum cash balances for each month. This prudently assumes that various, identified risks based on 10 years of budget data could interrupt LES's business operations at any point of the year. Nonetheless, the 2014 forecast available balance (
In addition, the 2013 ratio of equity to capitalization (29.5%) was measurably below the rating category median (52.0%). While equity ratios are slowly improving and should benefit from LES's ample generating capacity, LES's target equity ratio remains lower than the median.
LARGELY COAL-FIRED GENERATION
LES's largely coal-fired generation (88% of 2014 forecast energy) has contributed handily to its low rates but presents some challenges as environmental regulations develop. Some of the system's owned or participatory units will require retrofits over the next several years to comply with existing and expected regulations. While total costs remain uncertain, a
LES's rolling sustainability target advances efforts to diversify fuel sources by meeting projected load growth (59MW) with renewable resources and demand side management. LES estimates that 23% of 2016 energy will be met with renewable resources. The system recently entered into a 20-year power purchase agreement for 100MW of additional wind capacity beginning in 2016.
COMMERCIAL PAPER PROGRAM
LES's strong long-term credit characteristics, coupled with its sufficient liquidity sources, support the 'F1+' rating on its CP note program. Liquidity sources include a three-year,
Total available sources provided 1.4x the maximum borrowable amount of CP at
LES uses its
COMMERCIAL PAPER LIQUIDITY FACILITY
The liquidity facility, which is sized to the maximum authorized amount of the CP note program, covers principal payments if rollover proceeds are insufficient to pay amounts due at maturity. The facility expires on
The unlikely occurrence of an accelerated term loan payment pursuant to the facility could cause LES short-term financial pressure. However, LES would likely use available cash balances for interim funding needs and refinance any such obligation with long-term debt. Fitch believes that the system's very low rates provide considerable headroom for such purposes.
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 Rating U.S. Public Finance Short-Term Debt criteria.
--'U.S. Public Power Rating Criteria' (
U.S. Public Power Rating Criteria
Source: Fitch Ratings
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