Fitch assigns an 'AA-' rating to the City of Lubbock,
Texas' (the city) $2.7 million general obligation bonds, series 2006
(the GO bonds), $76.3 million tax and waterworks system surplus
revenue certificates of obligation, series 2006 (the COs), and $18.9
million general obligation refunding bonds, series 2006 (the GO
refunding bonds). All three issues will price the week of April 24.
The GO bonds and the COs will sell via negotiation through a syndicate
managed by Merrill Lynch & Co. The GO refunding bonds will price via
negotiation through A.G. Edwards & Sons, Inc. First Southwest Company
serves as the financial advisor. Fitch also affirms its 'AA-' rating
on the city's $368.9 million in outstanding GO bonds and COs. The
Rating Outlook is revised to Positive from Stable.
Repayment on the securities will be provided by an ad valorem tax pledge on all taxable property within the city, subject to a $2.50 per $100 of assessed valuation limitation. Further security is provided on the COs by a pledge of surplus net revenues, not to exceed $1,000, of the city's waterworks system. Proceeds will fund general city improvements and refund a portion of the city's outstanding tax-supported debt for interest savings.
The change in Rating Outlook to Positive from Stable represents the continued gains in general fund reserve levels, which now approximate city policies. The change also reflects the improved financial performance of the city's electric utility, Lubbock Power and Light (LP&L, rated 'BBB+' by Fitch), minimizing its potential impact on general fund operations in the future. Finally, development activity in the city appears to be accelerating, which will increase tax receipts and enhance the general fund's operating flexibility. Assuming continuance of these trends, upward movement on the rating is possible.
The 'AA-' rating reflects the prevailing health and stability of the local economy, the tax resources that economic activity provides for general revenues of the city, and the modest direct tax supported debt burden on residents. Also reflected in the rating is the relationship with LP&L that has required financial support when the utility has encountered operating challenges.
A significant transfer of funds to the electric utility in fiscal 2003 depleted general fund cash and reserves. Subsequently, the city through a combination of strong revenue performance in fiscal 2004 and administrative action in fiscal 2005, restored, to a large extent, general fund reserve levels. Also, fiscal 2004 and 2005 witnessed both operating surpluses and improved cash balances for the electric utility. The general fund recovery has occurred more rapidly than anticipated and the likelihood of additional general fund financial support for LP&L appears less likely.
For fiscal 2004, general fund operations contributed approximately $3.3 million to fund balance, primarily due to strong revenue collections. Fiscal 2005 results were also favorable with the general fund experiencing net income of $4.7 million, boosting general fund reserves to just under the city's policy of 20% of operating revenues. An additional $2 million to $3 million surplus is expected in fiscal 2006, allowing the city to meet its general fund balance goal. Simultaneously, no additional transfers to LP&L were required in either fiscal 2004 or 2005 and none is expected in fiscal 2006.
Taxable assessed value (TAV) growth has been good, rising by 8% for the current tax year and an annual average of 8% over the past five years. Correspondingly, building permit valuation growth has continued, with calendar years 2003-2005 each recording over $400 million. The city's TAV for fiscal 2006 is $9.4 billion and prospects for growth are favorable. Over 60 residential and commercial developments are currently underway in the city, a portion of which are expected to add upwards of $3 billion in new TAV over the next 10-15 years.
The city maintains a low direct debt position at $883 per capita, or 1.9% of TAV. When debt from overlapping municipal entities are included, the debt burden rises, but remains moderate at $1,839 per capita and 3.9% of TAV. Amortization is average, with 50% of debt outstanding retired in 10 years.
The electric utility faces direct competition and risks loss of market share should its rates be significantly higher than its competitor. The utility's significant operating deficit in fiscal 2003 reflected power generation costs attributable to high natural gas prices and a previous reliance solely on natural gas power generation, along with the inability to pass on these costs immediately to customers without risking market share. The city subsequently hedged this risk through long-term purchased power contracts, thereby removing its dependence on gas generated power. Additional administrative policy, operational, and capital improvements have enhanced the utility's competitive posture and financial viability. Although local economic indicators are positive, due to the competitive local environment for electric power, the desired financial posture in the electric utility may take several years to regain. However, it appears less likely that additional support from the general fund will be required given LP&L's steady financial improvement.
Fitch's rating definitions and the terms of use of such ratings are available on the agency's public site, www.fitchratings.com. Published ratings, criteria and methodologies are available from this site, at all times. Fitch's code of conduct, confidentiality, conflicts of interest, affiliate firewall, compliance and other relevant policies and procedures are also available from the 'Code of Conduct' section of this site.
Repayment on the securities will be provided by an ad valorem tax pledge on all taxable property within the city, subject to a $2.50 per $100 of assessed valuation limitation. Further security is provided on the COs by a pledge of surplus net revenues, not to exceed $1,000, of the city's waterworks system. Proceeds will fund general city improvements and refund a portion of the city's outstanding tax-supported debt for interest savings.
The change in Rating Outlook to Positive from Stable represents the continued gains in general fund reserve levels, which now approximate city policies. The change also reflects the improved financial performance of the city's electric utility, Lubbock Power and Light (LP&L, rated 'BBB+' by Fitch), minimizing its potential impact on general fund operations in the future. Finally, development activity in the city appears to be accelerating, which will increase tax receipts and enhance the general fund's operating flexibility. Assuming continuance of these trends, upward movement on the rating is possible.
The 'AA-' rating reflects the prevailing health and stability of the local economy, the tax resources that economic activity provides for general revenues of the city, and the modest direct tax supported debt burden on residents. Also reflected in the rating is the relationship with LP&L that has required financial support when the utility has encountered operating challenges.
A significant transfer of funds to the electric utility in fiscal 2003 depleted general fund cash and reserves. Subsequently, the city through a combination of strong revenue performance in fiscal 2004 and administrative action in fiscal 2005, restored, to a large extent, general fund reserve levels. Also, fiscal 2004 and 2005 witnessed both operating surpluses and improved cash balances for the electric utility. The general fund recovery has occurred more rapidly than anticipated and the likelihood of additional general fund financial support for LP&L appears less likely.
For fiscal 2004, general fund operations contributed approximately $3.3 million to fund balance, primarily due to strong revenue collections. Fiscal 2005 results were also favorable with the general fund experiencing net income of $4.7 million, boosting general fund reserves to just under the city's policy of 20% of operating revenues. An additional $2 million to $3 million surplus is expected in fiscal 2006, allowing the city to meet its general fund balance goal. Simultaneously, no additional transfers to LP&L were required in either fiscal 2004 or 2005 and none is expected in fiscal 2006.
Taxable assessed value (TAV) growth has been good, rising by 8% for the current tax year and an annual average of 8% over the past five years. Correspondingly, building permit valuation growth has continued, with calendar years 2003-2005 each recording over $400 million. The city's TAV for fiscal 2006 is $9.4 billion and prospects for growth are favorable. Over 60 residential and commercial developments are currently underway in the city, a portion of which are expected to add upwards of $3 billion in new TAV over the next 10-15 years.
The city maintains a low direct debt position at $883 per capita, or 1.9% of TAV. When debt from overlapping municipal entities are included, the debt burden rises, but remains moderate at $1,839 per capita and 3.9% of TAV. Amortization is average, with 50% of debt outstanding retired in 10 years.
The electric utility faces direct competition and risks loss of market share should its rates be significantly higher than its competitor. The utility's significant operating deficit in fiscal 2003 reflected power generation costs attributable to high natural gas prices and a previous reliance solely on natural gas power generation, along with the inability to pass on these costs immediately to customers without risking market share. The city subsequently hedged this risk through long-term purchased power contracts, thereby removing its dependence on gas generated power. Additional administrative policy, operational, and capital improvements have enhanced the utility's competitive posture and financial viability. Although local economic indicators are positive, due to the competitive local environment for electric power, the desired financial posture in the electric utility may take several years to regain. However, it appears less likely that additional support from the general fund will be required given LP&L's steady financial improvement.
Fitch's rating definitions and the terms of use of such ratings are available on the agency's public site, www.fitchratings.com. Published ratings, criteria and methodologies are available from this site, at all times. Fitch's code of conduct, confidentiality, conflicts of interest, affiliate firewall, compliance and other relevant policies and procedures are also available from the 'Code of Conduct' section of this site.