Fitch Rts $22.2MM Tax & Elec Sys Obligs of Lubbock, TX 'AA-'

Business Wire, August 22, 2003

Business Editors

AUSTIN, Texas--(BUSINESS WIRE)--Aug. 22, 2003

Fitch Ratings has assigned a 'AA-' rating to the $13.3 million tax and electric light and power system surplus revenue certificates of obligation (COs), series 2003 and $8.9 million tax and electric light and power system surplus revenue refunding bonds, series 2003 of Lubbock, Texas. Additionally, the 'AA-' ratings on the city's $203.9 million of general obligation bonds and COs outstanding have been affirmed. The Rating Outlook is Stable.

The issues are scheduled to sell via negotiation on August 26 to syndicates managed by A.G. Edwards & Sons. Dated August 15, 2003, both series will mature serially April 15, 2004-2023. Securities maturing on or after April 15, 2013 will be subject to optional redemption at par plus accrued interest on April 15, 2012, or any date thereafter.

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 assessed valuation limitation. The securities are further secured by a pledge of surplus net revenues of the city's electric and power system. Proceeds of the COs will be used for improvements and extensions to the city's electric light and power system, while the bond proceeds will refund $8.5 million of electric light and power system revenue bonds outstanding that were issued to provide interim financing for system improvements.

The 'AA-' rating reflects the prevailing health and stability of the local economy, its positive effect on the primary general revenues of the city, and the very modest direct tax supported debt burden on residents. Also reflected in the rating and recent downgrade of the city's tax supported debt is the considerably low cash position of the general fund, the financial difficulties encountered in the city's electric utility, Lubbock Power and Light (LP&L), as well as some contract management issues regarding the utility. Fitch has today downgraded its rating on the electric revenue bonds of LP&L to 'BBB ' from 'A ' with a Negative Rating Outlook. These issues are the first combined tax and electric system surplus revenue pledge debt transactions undertaken for utility.

The utility's financial condition has ultimately required financial support from the general fund, as well as the waterworks and solid waste enterprise funds. Although local economic indicators are positive, especially in comparison to some other Texas municipalities, the relationship of the electric utility as a city department has resulted in the need for some corrective action to bolster electric utility finances, as well as weakened liquidity and expenditure reductions in the general fund.

Two major economic indicators, unemployment and taxable assessed valuation, are performing well, with the latest unemployment rate registering 3.2% for May 2003, about half the rate of both the state and nation. Taxable assessed valuation growth has continued with a 6.3% increase for the current tax year and an expectation of 5.6% additional growth in the forthcoming year.

Correspondingly, the growth in values of building permits issued has continued, with both fiscal 2001 and 2002 averaging about $305 million, which is about a 50% higher level than the $200 million recorded in fiscal 2000. Consequently property tax revenues for the general and debt service fund have grown, as have modest increases in sales tax revenues. The latest report available shows year-to-date sales tax growth being slightly higher than the same period last year. City officials anticipate achieving the budgeted 4% increase in sales tax collections for this fiscal year.

Another important revenue source for the general fund historically has been a transfer from the electric fund for various purposes, including indirect cost reimbursement, street lighting, and related infrastructure costs. However, although the LP&L has the majority of the market in Lubbock, it faces direct competition from a private provider, Xcel Energy. This has limited the utility's ability to pass through natural gas cost increases in a timely manner and yet maintain a competitive rate structure and market share. As such, the financial operating environment for the city's electric utility has been strained and required support from the general fund, as well as the waterworks and solid waste fund.

General fund financial operations have been sound; however, its liquidity position over the past few years has been affected, in part, by advances to the electric utility. The general fund recorded a $17.4 million undesignated fund balance for fiscal 2002, although cash and investments for the year totaled $3.8 million, as compared to the $10.8 million recorded in fiscal 1998.

For fiscal 2002, financial operating shortfalls in the electric fund resulted in amounts due to other funds of $2.7 million to the general fund, $6 million to the waterworks fund, and $4 million to the solid waste fund. In order to stabilize LP&L finances, the city forgave the $7.3 million budgeted transfer to the general fund for fiscal 2003 and consequently embarked on $9.6 million in revenue enhancements and expenditure reductions in the general fund to offset the loss of the transfer. For the fiscal 2004 budget, an initial proposal is to reduce the overall property tax rate, and the current outlook is for further general fund reductions.