Lincoln Electric System, NE, 2018 Revenue Bonds Rated #AA#; Other Ratings Affirmed

Stocks and Financial Services Press Releases Thursday May 31, 2018 09:00
NEW YORK--31 May--S&P Global Ratings

NEW YORK (S&P Global Ratings) May 30, 2018--S&P Global Ratings has assigned its 'AA' rating to Lincoln Electric System (LES), Neb.'s series 2018 revenue bonds. The outlook is stable. At the same time, S&P Global Ratings affirmed its 'AA' rating on the system's bonds outstanding and its 'A-1+' rating on LES' commercial paper (CP) program.

The following factors, in our view, are credit strengths:
  • An economically strong and stable service area, anchored by the state government and University of Nebraska. The local economy has outperformed that of the nation over the past five years;
  • A diverse and low-cost generation portfolio that includes coal-based resources across several units and continue to exhibit solid performance characteristics;
  • Competitive rates, despite recent modest increases; and
  • Good coverage of fixed costs and strong liquidity.
Offsetting credit factors include the following:
  • LES has a substantial carbon footprint, but we expect that the recent addition of renewable resources and the termination of their contract with the coal fired Sheldon Station in 2017 will help the utility achieve a more balanced energy portfolio. Nevertheless, despite recent efforts to undo the Clean Power Plan, LES remains exposed to environmental regulation.
  • Financial projections suggest slightly lower coverage levels (in the 1.4x-1.5x range), which we would consider minimally adequate for the rating.
  • Bond provisions, which include a 1x rate covenant, are weak, although the utility has adopted policies and a demonstrated track record of producing financial metrics that well exceed these minimum levels, mitigating the risk.

We expect the 2018 bonds to have a par value of about $120 million. Bond proceeds will reimburse LES for previously incurred capital expenditures, pay a portion of LES' CP notes outstanding, and refund LES' obligations outstanding under the U.S. Bank N.A. revolving credit agreement.

We view the system's service area and customer base as credit strengths. LES serves a population of nearly 280,000 and has a customer base of approximately 138,500. As the state capital and home to the University of Nebraska, Lincoln provides a stable service area. The area's demographics support the rating, with household income at 95% of the national average and unemployment at a low 2.7% in 2017. Approximately 88% of LES' customers are residential--accounting for about 44% of retail revenue in 2016, which in our view helps to stabilize demand during economic downturns.

"The stable outlook reflects LES's proven ability to manage rates to provide strong coverage and liquidity, and our belief that this strong financial management will continue in the near term," said S&P Global Ratings credit analyst Jeff Panger.

The potential for an upgrade is limited during our two-year outlook horizon, largely due to the system's reliance on coal-fired generation against the backdrop of environmental regulation.

While we do not expect to lower the rating over the next two years, we could do so if financial metrics fall substantially below projected levels, or if environmental regulation suggests meaningful cost exposure to the utility.

Certain terms used in this report, particularly certain adjectives used to express our view on rating relevant factors, have specific meanings ascribed to them in our criteria, and should therefore be read in conjunction with such criteria. Please see Ratings Criteria at www.standardandpoors.com for further information. Complete ratings information is available to subscribers of RatingsDirect at www.capitaliq.com. All ratings affected by this rating action can be found on S&P Global Ratings' public website at www.standardandpoors.com. Use the Ratings search box located in the left column.


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