The Lincoln Electric System plans to ask later this year for a rate increase of 5 percent or 6 percent in 2008.
RICHARD PIERSOL / Lincoln Journal Star | Posted: Monday, April 30, 2007 7:00 pm
The Lincoln Electric System plans to ask later this year for a rate increase of 5 percent or 6 percent in 2008.
The utility says it needs the money to meet rising fuel prices, restore its rate stabilization fund and maintain its stellar bond rating. And the increase might be enough to replace revenue LES will lose when the winter storm damage surcharge expires Dec. 31.
That 5.5 percent surcharge is supposed to pay for $9 million to $10 million in additional power costs caused when transmission lines were knocked out New Year’s weekend, and accounts for an extra $3.87 on the average customer’s monthly bill.
LES had warned in 2006 — when it got a 9 percent increase — it would need another in 2008.
Now LES and its customers face a financing decision that could be: pay now or pay even more later.
The bond rating is important because it determines how much LES will pay on borrowed money. A high bond rating means customers pay less for debt service.
LES, like other utilities, borrows heavily in public bond markets and has more than half a billion dollars of outstanding debt.
LES Administrator Terry Bundy said last week LES was expecting to go to market this week or next to issue about $100 million in bonds, primarily to finance its part in a new coal-fired generation unit in Iowa and several projects around the city.
And depending on market conditions, LES may issue up to $200 million in bonds to refinance some outstanding debt at a lower interest rate, Bundy said in an e-mail.
The combined $300 million has been approved by the LES Administrative Board and City Council.
Earlier this year, LES said a variation by as little as a quarter of a percentage point in the interest rate paid on that $100 million could cost LES more than $3 million over 20 years.
That’s why a bond rating is so important.
And its rating is still unsurpassed among U.S. utilities. But it’s in jeopardy, where it’s been for a couple of years.
LES is among a handful of utilities, including those owned by the cities of Los Angeles and San Antonio, with AA ratings on debt.
“LES is among the elite of municipally-owned utilities,” said Peter Block of Standard & Poor’s, one of the world’s biggest financial research companies and one of a few that evaluate risk for the financial markets.
There isn’t a single municipally-owned utility in the U.S. with a bond rating higher than the AA LES has, Block said.
But LES needs to improve its financial position to stay there, to salvage the low interest rates it gets to pay on more than half a billion in debt, Block said.
Last week, Standard & Poor’s issued a report that maintained a negative economic outlook on LES and its debt, assigned a AA rating on the new debt and refinancing and reaffirmed AA ratings on existing debt.
“Weaknesses include rising operating costs stemming from natural gas price volatility, coal freight disruption, and Western drought—all of which have weakened financial metrics over the last several years — along with a five-year, $320 million capital plan that requires about $137 million of debt for generation, transmission, and distribution projects,” the rating agency said.
Not to mention the costs of the ice storm, which forced LES to buy costly power on the open market and impose the rate surcharge.
LES’ weakened finances are inconsistent with an AA rating — even though they’re expected to improve over time. So its long-term rating outlook is negative.
In other words, it’s on probation.
Standard & Poor’s acknowledged the utility’s efforts to strengthen its financial health. “But in an environment of rising costs, these measures have been insufficient to preserve its financial ratios and previously solid debt service coverage levels.”
Debt service coverage means how much money you have coming in compared to how much you owe.
“If the electric system fails to achieve projected targets, the ratings could be lowered,” Block said.
LES has shown Standard & Poor’s projections that indicate its numbers will turn around starting next year and for the next five years.
“We are choosing to wait until we see more proof the numbers have turned around,” Block said.
The utility’s economic outlook remains stable — not negative — at two other rating agencies, Fitch and Moody’s. Those agencies make some of the same comments about LES’ finances, Bundy said.
“Both of them point out that they would like to see us have some kind of a power cost adjustment, mechanism, a kind of an automatic adjustment that comes between rate increases to cover wholesale (electric) market volatility, but they don’t go as far as moving us to a negative outlook,” Bundy said.
The Lincoln City Council denied LES that option in January after big industrial and commercial users objected.
Standard & Poor’s has been watching LES pull money from its rate stabilization fund (its cushion for unpredictable costs) for several years, Bundy said.
“The fact we’re reducing the cushion and don’t have an automatic adjustment clause provides them some concerns. It’s not so much if our forecasts turn out be right, their concern is that we don’t have much room to react to adverse situations.”
LES is expecting to present its case for a rate increase later this year, for approval by the LES board and City Council.
“We’ll know more exactly in the fall, when we see how this year is going, based on our estimates,” Bundy said.
Reach Richard Piersol at 473-7241 or at dpiersol@journalstar.com.