OREANDA-NEWS. Fitch Ratings assigns an 'A+' rating for 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):

--\$13.3 million electric light and power system revenue bonds, series 2015.

Bond proceeds will fund various improvements to the distribution system.

In addition, Fitch affirms the 'A+' rating on \$77.8 million outstanding electric light and power system revenue bonds, series 2001, 2010, 2013, and 2014.

The Rating Outlook on all bonds is Stable.

SECURITY

Bonds are secured by a pledge of net revenues of the electric system.

KEY RATING DRIVERS

Retail Electric System: LP&L is a city-owned utility providing retail electricity to approximately 102,079 meters in and around the city of 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 Inc. (Xcel). The all-requirements contract expires in 2019, leaving uncertainty as to LP&L's future power supply and operating profile. LP&L expects to make a decision on whether to build additional generation or enter into a short-, medium-, or long-term purchase power agreement by the end of spring 2015.

Recent Rate Increases Approved: Rates have been restructured and raised by an average of 5.75% and 9.5% in 2014 and 2013, respectively. Fitch views the city's action to increase revenues as a positive step to improve financial margins for bondholders, but considers the service area as highly rate sensitive despite LP&L's competitive pricing. Annual rate increases are projected over the next several years.

Favorable Debt Profile: Debt metrics compare favorably with similarly rated systems, but are likely to weaken with projected debt issuance totaling \$124.6 million through fiscal 2019. Power supply decisions are not currently expected to significantly increase the utility's capital program and future debt plans.

Stable Financial Metrics: Recent rate increases led to a modest improvement in financial metrics in fiscal 2014. The utility's overall financial profile remains mostly in line with rating category medians, although liquidity levels are somewhat low but remain adequate for the rating.

Sound Service Area: Lubbock serves as the education and medical center for this largely agricultural region. The local economy is anchored by Texas Tech University, which along with the city accounts for 7% of LP&L's revenues.

RATING SENSITIVITIES

Power Supply Decisions: Forthcoming decisions regarding how to meet future power supply needs and the related financial and debt plans to support that decision could affect the current rating. Significant changes to LP&L's risk profile and debt burden, without appropriate financial and operational risk management, could pressure the current rating.

City and Utility Tension: Fitch views the sometimes contentious relationship between the utility, its board, and city political leaders with some caution, particularly given pending power supply decisions. Given City Council's approval authority of LP&L rates and budget, a lack of support for the utility's financial performance during the transition could also negatively affect the rating.

CREDIT PROFILE

LP&L is the largest municipal electric utility in the West Texas region serving approximately 102,079 meters in Lubbock, TX and some limited surrounding areas. Power supply needs are currently met through an all-requirements contract between WTMPA and Xcel that expires in 2019.

EVOLVING BUSINESS STRATEGY AND POWER SUPPLY

LP&L began a significant change in its business strategy with its 2010 acquisition of Southwestern Public Service Co.'s (SPS) local distribution system, removing its primary competitor and transforming most of LP&L's service area into a single-certificated area. The resultant change reduced the utility's risk from competition and led to a number of changes in financial policies, including reserve requirements and financial and rate setting practices.

LP&L is poised to make another major decision that has the potential to dramatically change how its business is run with its upcoming decision on how to meet its power supply needs post-expiration of the Xcel contract in 2019. The decision, which management has indicated that it expects to make by the end of spring 2015, will be based on a resource study completed by Black and Veatch and a selection process involving LP&L management, the board, and city council. The primary decisions will focus on which type of natural gas fired generation to use (simple cycle or combined cycle) and whether to self-build or enter into a long-term purchase power agreement. In addition, LP&L is expected to enter either the SPP or ERCOT markets as a transmission owner and market participant.

LP&L is seeking to secure sufficient power supply for its retail load plus the relatively small load of the other three WTMPA participants. Management's projections reflect total June 2019 power needs at 836 MW, including reserves. The net requirement is expected to be approximately 552 MW (approximately 66% of need) after including: LP&L's owned generation, with a projected dependable natural gas capacity of approximately 114 MW, 170 MW (plus 1.5% annually) contracted with Xcel as part of the SPS acquisition that begins in June 2019 (expires 2044), and a WTMPA 100 MW wind energy agreement that runs from June 2019 through 2032.

Fitch remains neutral regarding LP&L's power supply decision, but will focus on how management handles the transition from its current role as a distribution system to that of a vertically integrated utility. Recent political disputes regarding rate setting, personnel decisions, and the 2019 power supply selection process raise concerns about the transition and city's support.

The recent change in LP&L's leadership has reportedly helped to improve relationships with the city. Fitch views this development positively as LP&L expects to implement additional rate increases and potentially hire staff with the necessary expertise to become a market participant.

RATE INCREASE; POLITICAL SENSITIVITY

LP&L's rates are competitive and have benefited from the all-requirements contract from Xcel. Even after the recent rate increases of 5.75% (October 2014) and 9.5% (June 2013), rates are below other Texas municipal utilities and those of Xcel. However, despite the relatively low rates, Fitch continues to view LP&L's rate flexibility as low based on the recent difficulty in passing proposed rate increases.

STABLE FINANCIAL PERFORMANCE

LP&L's financial metrics in fiscal 2014 benefitted from a full year of the 9.5% rate increase. Fitch-calculated debt service coverage, which is not adjusted for debt legally defeased during the year and does include LP&L's portion of outstanding general obligation (GO) and certificates of obligation (CO) bonds issued by the city on LP&L's behalf, was at 2.37x. Fitch-calculated coverage adjusted for transfers (primarily consisting of the franchise fee and payment-in-lieu of taxes paid to the city) was still adequate at 1.56x.

Liquidity levels are adequate for the rating and supported by a reserve policy requiring a minimum level of three months gross metered revenue (approximately \$57.2 million for fiscal 2015). At the end of fiscal 2014, LP&L retained unrestricted funds of \$62.8 million or 123 days cash on hand.