OREANDA-NEWS. Fitch Ratings has assigned an 'AA' rating to the following city of Lincoln, NE Lincoln Electric System (LES) bonds:

--Approximately \$162 million revenue and refunding bonds, series 2015A.

The bonds are scheduled to price via negotiation on March 11, 2015. Proceeds will be used to refund a portion of LES's outstanding series 2007A and 2007B bonds and reimburse the system for approximately \$66 million of capital improvements.

In addition, Fitch has affirmed the following LES ratings:

--\$611 million electric revenue bonds at 'AA' (par amount as of Dec. 31, 2014);
--\$150 million electric system revenue commercial paper (CP) note program at 'F1+';
--\$150 million electric system revenue CP bank note at 'AA'.

The rating on the bank note, which is a promissory note evidencing LES's obligation to the Bank of Tokyo-Mitsubishi UFJ, Ltd. (Fitch IDRs of 'A/F1') for any draws made on a \$150 million revolving liquidity facility, is based on LES's long-term rating.

The Rating Outlook is Stable.

SECURITY

The revenue bonds are secured by a first lien on LES's net revenues.

The CP notes and bank note are secured by system net revenues, junior to the prior payment of LES's long-term debt.

KEY RATING DRIVERS

STRONG SERVICE TERRITORY: LES is a vertically integrated, retail electric provider to 133,292 customers in a strong, growing service territory.

RATES PROVIDE FINANCIAL FLEXIBILITY: Very low electric rates provide considerable revenue-raising flexibility to meet planned or unforeseen needs. A history of measured rate increases suggests a constructive relationship with city council, which must approve any such changes.

STRONG STABILITY AND MANAGEMENT: Extraordinarily stable cash flow metrics evidence LES's overall strong financial position and management, which includes extensive risk management and planning. Debt service coverage has remained nearly unchanged at an average of slightly more than 2x annually over the past five years.

BELOW AVERAGE BALANCE SHEET: Balance sheet metrics, including lower cash balances under a new liquidity target instituted in 2012, are below Fitch's 'AA' rating category medians. However, monthly minimums for cash on hand and the historical stability of LES's financial and asset operations provide some comfort.

GROWING RENEWABLE PORTFOLIO: An increasing proportion of renewable resources better positions the utility to meet existing and proposed environmental regulations. LES most recently added an additional 173MW of wind capacity through two, 25-year purchase power agreements, as well as a 5MW community solar project.

STRONG LONG-TERM RATING AND LIQUIDITY: LES's 'AA' long-term rating and its sufficient internal liquidity sources, including a \$150 million revolving liquidity facility, support the 'F1+' rating on its CP note program.

RATING SENSITIVITIES

BALANCE SHEET WEAKNESS: Stalled improvement in balance sheet metrics could drive longer-term rating action. Forecast metrics remain below rating category medians.

TIGHTER LIQUIDITY: While minimum liquidity thresholds make it unlikely, any sustained compression in LES's CP coverage below 1.25x could ultimately lead to negative rating action.

CREDIT PROFILE

STRONG SERVICE TERRITORY

LES is a vertically integrated retail electric provider to 133,292 customers in a strong service territory exhibiting some of the lowest unemployment rates in the country (2.4% in December 2014). Lincoln is the state capital and home to the flagship campus of the University of Nebraska, both of which create considerable economic activity in the region.

RATE FLEXIBILITY

The headroom provided by its very low retail rates, coupled with a demonstrated willingness to raise rates midyear or with short notice, provides good indication of LES's capacity to generate revenues. Moreover, a \$22.5 million rate stabilization fund (RSF) requiring just LES administrative board approval - not city council - is available to balance rates.

LES's rate structure does not include a fuel cost or purchased power adjustment. Such automatic adjustments can be a valuable tool to ensure the timely recapture of variable costs. However, LES's assets have provided predictable costs over time and its participation in the Southwest Power Pool Integrated Marketplace provides additional pricing efficiencies through a broader pool of resources.

EXCEPTIONALLY STABLE CASH FLOWS

LES's cash flow metrics are exceptionally stable and in line with Fitch's 'AA' rating category medians. Management sets a debt service coverage target of 2x, which it rarely misses. Moreover, forecast coverage through the 2019 planning period, assuming 1.4% average annual energy growth, remains in line with this goal.

BELOW-AVERAGE BALANCE SHEET METRICS

In contrast to its strong cash flow metrics, LES's balance sheet ratios are weaker than rating category medians and remain so through the forecast period. LES's rate-raising capacity and the historical stability of its financial and asset operations provide comfort. However, a stalled trend of improving balance sheet metrics could drive longer term rating action. Equity ratios may be pressured by additional debt-financed costs of environmental retrofits.

LES's 2014 cash on hand by Fitch's calculation was 148 days (unaudited) compared with the rating category median 183 days. The system's 2015 modeled liquidity threshold totals 74 days cash on hand, or \$55.8 million. This represents a one-third decrease from the 2014 level. However, LES does not intend to reduce certain cash balances to near the minimum levels until its RSF (\$22.5 million) reaches a \$28.5 million goal, likely in 2018. LES's liquidity model instituted in 2012 prudently sets minimum cash balances for each month.

The 2014 ratio of equity to capitalization was 29.9% (unaudited) compared with the rating category median of 49.7%. Equity ratios have improved only modestly over the past five years since LES's prior building cycle and remain largely stable during the planning period.

CHANGING RESOURCE PORTFOLIO

LES is positioning its resource portfolio for an operating environment that is increasingly focused on reducing carbon and other emissions. Existing and planned wind and solar resources coming online next year increase LES's renewable generation portfolio to the equivalent of nearly half of total sales. Moreover, LES forecasts the attractive pricing of such resources to save the system \$429 million over the next 25 years. This is a measurable change from historical precedent; LES has traditionally relied on approximately 80% coal-fired generation.

LES's rates should provide flexibility to manage environmental costs of retrofitting owned and participatory coal-fired assets over the next several years. While total costs remain uncertain, a January 2014 Environmental Protection Agency ruling on the Laramie River Station currently suggests upwards of \$82.5 million in additional costs to LES, which LES includes in forecasts.

COMMERCIAL PAPER PROGRAM

LES's strong long-term credit characteristics, coupled with its available liquidity sources, support the 'F1+' rating on its \$150 million CP program. The program has been an inexpensive source of interim financing of capital projects, reflecting, in part, LES's credit quality. The program currently has \$55 million of available capacity.

Liquidity sources include a \$150 million revolving liquidity facility provided by the Bank of Tokyo-Mitsubishi UFJ, Ltd., as well as the system's own cash and investments. A bank note obligates LES for the full repayment of any draws on the credit facility.

Total available sources provided 1.9x the maximum borrowable amount of CP at Dec. 31, 2014. This comfortably exceeded Fitch's expected metric of 1.25x the maximum program size for the 'F1+' rating. Stronger coverage compared with LES's typical 1.3x-1.6x range in prior months reflects the addition of a three-year, \$50 million revolving credit agreement with a separate bank.