Fitch Ratings affirms the 'BBB+' rating on Vermont Electric Cooperative's (VEC) implied senior secured obligations. VEC's rating takes into account approximately $62.4 million of secured debt privately held by lenders including National Rural Utilities Cooperative Finance Corp. (CFC) and CoBank ACB. However, the rating is assigned to implied obligations, since none of the outstanding debt is publicly held.
The Rating Outlook is Stable.
SECURITY
VEC's senior secured obligations are secured by a mortgage interest in substantially all net electric plant assets.
KEY RATING DRIVERS
STABLE SERVICE AREA: VEC serves a heavily residential and well-diversified customer base throughout northern Vermont. Economic indicators of the state (rated 'AAA', Stable Outlook) are on par, or outperform those of the nation. Fiscal 2012 saw an increase in energy sales, primarily due to continued economic recovery.
STRONG FINANCIAL METRICS: Financial metrics continued to improve, with stronger coverage ratios (DSC of 2.66x in fiscal 2012, based on unaudited financials) and increased equity (46.6% equity/capitalization at year-end 2012). Both metrics are above rating category medians.
LOW CASH RESERVES: Cash liquidity remains weak at only seven days cash on hand (DCOH) at year-end 2012. While this is an improvement from a low of one DCOH at year-end 2010, cash levels are still very low. Overall liquidity is notably stronger at 110 days, due to available lines of credit.
POWER SUPPLY CONTINUES TO STABILIZE: A new long-term contract with NextEra Energy Resources, which supplies capacity from the Seabrook nuclear unit, provides additional stability to VEC's power supply. Favorably, 90% of VEC's power supply needs are contracted through 2016.
POSITIVE RELATIONSHIP WITH REGULATORS: The cooperative is subject to state regulatory oversight, which could limit rate and financial flexibility. Positively, the Vermont Public Service Board (VPSB) has been supportive of VEC's recent rate requests and of increased targeted times interest earned ratios (TIER).
SUBSTANTIAL CAPITAL PLAN: VEC's current 10-year capital plan (2008-2018) is sizable and requires additional debt financing, which may strain certain financial metrics over the near term. Going forward, DSC and equity/capitalization ratios should approximate 2.0x and 40%, respectively, but remain in line with the rating category.
RATING SENSITIVITIES
Adverse Regulatory Decisions: Regulatory decisions that undermine the financial initiatives adopted by VEC and strain the relationship between VEC and the regulators would be viewed negatively and could put pressure on the rating.
Cash Reserve Increases: Maintenance of cash reserves more consistent with sector medians would be viewed positively.
CREDIT PROFILE
VEC is a not-for-profit distribution cooperative providing electric service to approximately 34,000 small, rural members in northern Vermont. The service territory encompasses all or portions of the state's northernmost counties, including those along the U.S.-Canadian border. The area is mountainous and very rural, with an average of only 14 customers per line mile.
Energy sales have grown annually over the last three years. Fiscal 2012 saw a 1.7% increase in sales, primarily due to economic recovery and improvements in commercial centers. While VEC forecasts sales remaining relatively flat for the next several years (modest growth offset by conservation), economic growth is anticipated in the Northeast Kingdom Area due to an economic revitalization initiative.
Vermont is one of the few states where municipal and cooperative electric utilities, including VEC, are subject to state regulatory oversight. Fitch generally views regulation as somewhat limiting in regards to rate and financial flexibility. Positively, the VPSB has supported VEC's recent requests to recover higher purchased power costs, as well as its current capital plan. VEC's rate design does not include an automatic fuel or purchased power adjustment clause, which contributes to the cooperatives frequent rate requests.
Diverse Power Supply
VEC does not own generation assets but instead purchases all of its member energy requirements through a series of reasonably well-diversified power purchase agreements. The cooperative uses a mix of long- and short-term power supply arrangements. Favorably, 90% of VEC's power supply needs are contracted through 2016.
Strong financial performance
VEC's financial metrics are strong and outperform the 'BBB+' medians, with the exception of its very low liquidity level. Financial performance has strengthened over the past five years, due to the VPSB in 2009 allowing VEC to target a TIER of 2.18x (increased from a 1.5x target). The higher allowance has given VEC the ability to improve margins and increase cash levels. Unaudited fiscal 2012 financials show improved DSC of 2.66x and TIER of 3.25x.
Fitch expects a slight weakening of financial metrics from the high levels achieved in fiscal years 2011 and 2012, but performance should remain in-line with the current rating category. Overall, the cooperative's future performance is expected to be more consistent with its VPSB approved guidelines.
The cooperative's cash level decreased slightly at fiscal year-end 2012, from $1.9 million to $1.2 million, but is within VEC's target of six DCOH. Fitch continues to view VEC's cash reserves as weak. Additional liquidity is provided by lines of credit with CFC and CoBank ACB that aggregate $20 million. At year-end 2012, $17.5 million was available under these facilities, bringing total days liquidity to a stronger 110 days, which is more consistent with the current rating.
Additional information is available at 'www.fitchratings.com'. The ratings above were solicited by, or on behalf of, the issuer, and therefore, Fitch has been compensated for the provision of the ratings.
In addition to the sources of information identified in Fitch's Revenue-Supported Rating Criteria, this action was additionally informed by information from Creditscope.
Applicable Criteria and Related Research:
'U.S. Public Power Rating Criteria', Dec. 18, 2012;
'Revenue-Supported Rating Criteria', June 12, 2012;
'U.S. Public Power Peer Study', June 20, 2012.
Applicable Criteria and Related Research
U.S. Public Power Peer Study -- June 2012
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=6...
U.S. Public Power Rating Criteria
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=6...
Revenue-Supported Rating Criteria
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=6...
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Fitch Ratings 3.12.2013