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):

--$7.7 million electric light and power system revenue bonds, series 2016.

Bond proceeds will fund various improvements to the distribution and transmission system.

In addition, Fitch affirms the 'A+' rating on $70.2 million outstanding electric light and power system revenue bonds, series 2010, 2013, 2014, and 2015.

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 103,475 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.

POWER SUPPLY TRANSITION: WTMPA supplies LP&L's power through an all-requirements wholesale contract with Xcel Energy Inc. (Xcel). The all-requirements contract expires in 2019, at which point LP&L plans on transitioning the majority of its load into the Electric Reliability Council of Texas (ERCOT) from the Southwest Power Pool (SPP) and managing its power needs through a combination of long- and medium-term contracts.

FAVORABLE DEBT PROFILE: Debt metrics compare favorably with similarly rated systems but are likely to rise to still manageable levels with projected debt issuances of $210.5 million through fiscal 2021.

RECENT RATE INCREASES APPROVED: Rates are expected to remain competitive despite moderate increases projected over the next three years. While the service area is viewed as sensitive to rate increases, the demonstrated political support for recent changes helps anchor expectations that future increases will be adopted as projected.

STABLE FINANCIAL METRICS: Recent base rate increases have stabilized the system's financial metrics at levels generally in line with rating category medians. Liquidity levels are sound despite being somewhat below average for the rating at 134 days, while debt service coverage levels are solid at 2.41 times (x) in fiscal 2015.

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 6.9% of LP&L's revenues.

RATING SENSITIVITIES

CITY AND UTILITY TENSION: Fitch would view a return to the historically contentious relationship between Lubbock Power and Light (LP&L), its board, and city political leaders with some caution as the utility undertakes a series of important changes over the near term. A lack of support for the utility's prospective rate increases and financial performance could negatively affect the rating.

POWER SUPPLY TRANSITION: Prolonged delays in LP&L's transition into the ERCOT market or significantly higher than expected costs that are not offset by corresponding rate increases could negatively pressure the rating.

CREDIT PROFILE

LP&L is the largest municipal electric utility in the West Texas region, serving approximately 103,475 meters in Lubbock, Texas, and some limited surrounding areas. LP&L's acquisition of Southwestern Public Service Co's (SPS) local distribution system in 2010 removed its largest competitor and transformed most of LP&L's service territory into a single-certificated area. In addition, the acquisition helped provide the electrical infrastructure necessary to split the electric distribution system between ERCOT and SPP, as the utility plans to do following the expiration of the all-requirements contract with Xcel in May 2019.

FUTURE POWER SUPPLY

The utility's plan for its power supply starting in June 2019 is to transition the majority of the system's load (approximately 70%) into the ERCOT market and secure medium-term power supply contracts of five to 10 years to meet its power needs. A smaller portion of the system, largely consisting of assets acquired from SPS, will be electrically isolated from the portion connected with ERCOT and will remain connected to SPP.

Fitch views the plan as reasonable, particularly given the utility's other options that were generally more expensive and included building significant additional generation. However, the power supply transition involves noteworthy changes in the utility's business strategy, requires significant capital investment, and has a relatively short implementation timeframe.

Management expects that they will be able to meet the timeframe but has contracted with a power marketing company to purchase short-term capacity and energy in SPP to bridge any delays. This exposes the utility to potentially volatile short-term power markets, although this risk is partially mitigated by the utility's sound liquidity position and its rate structure, which includes a purchase power recovery factor that will allow for the recovery of purchased power costs over a six month timeframe.

RISING, COMPETITIVE RATES

LP&L's rates are competitive and have benefited from the all-requirements contract from Xcel. Even with the recent base rate increases of 9.5% in June 2013 and 5.75% in October 2015 and 2016, the utility's rates are expected to remain below the Texas average and competitive with other Texas municipal utilities. Despite the relatively low rates, Fitch continues to view LP&L's customer base as being rate sensitive, based in part on political opposition to rate increases several years ago. However, rate increases have garnered more support and less reported ratepayer opposition over the past couple of years, helping to stabilize the utility financially.

STABLE FINANCIAL PERFORMANCE

LP&L's financial metrics in fiscals 2015 and 2014 benefited from recent base rate increases. Fitch-calculated debt service coverage, which is not adjusted for debt legally defeased during the year but 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 2.41x and 2.37x in fiscals 2015 and 2014, respectively. Fitch-calculated coverage adjusted for transfers, primarily consisting of the franchise fee and payment in lieu of taxes (PILOT) paid to the city, was lower but still satisfactory for the rating at 1.61x and 1.56x in fiscals 2015 and 2014, respectively.

Liquidity levels are sound, despite being somewhat below rating category medians, and supported by a reserve policy requiring a minimum level of three months gross metered revenue, which amounts to approximately $65 million for fiscal 2016. LP&L retained unrestricted funds of $64.7 million, or 134 days cash on hand, at the end of fiscal 2015.