Fitch Ratings said March 19 that the city of Lubbock in Texas is facing an imminent, critical decision on replacing a power supply contact due to expire later this decade.
Fitch on March 19 assigned an ‘A+’ rating for certain bonds issued by the city of Lubbock on behalf of its municipally-owned electric utility system known as Lubbock Power & Light (LP&L). Bond proceeds will fund various improvements to the distribution system.
In addition, Fitch affirmed 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.
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.
WTMPA supplies LP&L’s power through an all-requirements wholesale contract with Xcel Energy (NYSE: XEL). Fitch said 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.
The 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, Fitch pointed out.
Fitch said it views the sometimes “contentious” relationship between the utility, its board, and city political leaders with some caution, particularly given the 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.
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.
The decision on new power supply, 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 Electric Reliability Council of Texas 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.