Fitch Rates Lakeland Electric (FL) Bds 'A+', Maintains Negative Outlook.

NEW YORK -- Fitch Ratings has assigned a rating of 'A+' to the City of Lakeland, FL's (Lakeland Electric) $188.11 million energy system revenue and refunding bonds, Series 2006. The $344.52 of outstanding debt is affirmed at 'A+'. The Rating Outlook remains Negative. Proceeds of the 2006 issuance will refund a portion of Lakeland Electric's Series 1999B bonds, its 2001A and 2003 bonds, and fund capital improvements to the electric system. The 2006 issuance will include $48.84 million fixed rate bonds and $139.28 of periodic auction rate securities. The bonds are expected to price the week of August 1, 2006 with Goldman Sachs as lead underwriter.

Fitch initially placed Lakeland Electric on Negative Outlook on February 28, 2005. The Negative Outlook reflects credit metrics that, while comparable with other electric utility systems in the 'A+' rating category, have declined from Lakeland Electric's historical profile, and takes into account the following ongoing constraints on the system's liquidity and free cash flow:

--Continued cost pressure associated with an out of the money wholesale power sales contract with the Florida Municipal Power Agency (FMPA) and exposure to above average natural gas price volatility;

--Ownership of a 370 mw natural gas-fired generating unit, McIntosh Unit 5, which has underperformed over the past few years, due to the dispatch of alternate units in the Florida Municipal Power Pool (FMPP), coupled with a recent operating history of unplanned outages.

Key credit underpinnings center on the utility's solid demographics, characterized by a steadily growing and largely residential customer base, and good fiscal policies that lend financial stability. In particular, Fitch recognizes management's demonstrated willingness and ability to use frequent fuel rate adjustments to offset currently elevated natural gas prices, providing adequate operating margins despite recent cost pressures. As such, debt service coverage has remained about two times (x) over the past five years, a reasonable level for the rating category. While management projects a slight decline in debt service coverage for 2006, it is Fitch's anticipation that coverage will return to historical levels soon thereafter, following the run-off of the FMPA contract, and Lakeland Electric's sound cost recovery mechanisms.

FMPA Contract: The contract requires Lakeland Electric to provide up to 100mw of generation annually to FMPA at set fuel prices that are consistently below market. Losses are projected to total $85 million for the life of the contract, which began December 15, 2000 and terminates December 15, 2007. Management has indicated that these losses have not been passed on to customers and that in years where losses under the contract were over $15 million, those losses have been absorbed by the utility through the draw-down of unrestricted cash. Even so, Fitch believes the contract on its own should not materially impact Lakeland's ability to meet debt service coverage targets for the remainder of the contract. While the utility's cash balances could temporarily weaken under certain extreme natural gas price stress scenarios (in both a high and low price environment), liquidity should stay above 60 days of annual operating expenses. This is because fuel costs associated with the contract have been 90% hedged (at an average $8.61/mmbtu) through the life of the contract, which should mitigate against further losses beyond management's projections. Although considered unlikely, it should be noted that in the event that this type of stress arises and financial metrics fall below forecasted levels, a negative rating action could result.

Capital Improvement Plan: Lakeland Electric expects to effectively double annual capital expenditures for transmission and distribution (T&D) and upgrades to its existing generation fleet over the next 5 years, due to the substantial growth in residential housing within the service territory. Constructively, it is Fitch's anticipation that these expenditures (about $46 million annually; totaling $229 million) will be funded 59% with internally generated cash flow. Finally, management is pursuing future partnership opportunities to improve the operating performance at McIntosh Unit 5 and to diversify its power resource fuel mix. Fitch will monitor the progress of these initatives as they develop.

Lakeland Electric is the third largest municipal electric utility in Florida, providing electric service to a customer base of 117,500 predominantly residential and commercial users. Approximately 42% of the utility's power supply is generated from its coal-fired McIntosh Unit 3 power plant, 18% from the gas-fired McIntosh Unit 5, 9% from other oil and gas-fired generators that Lakeland Electric operates, and 31% from purchases from the FMPP, derived primarily from gas-fired units. As of May 2006, the utility's residential rates were about 9% above the state average for investor owned utilities.

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.