NEW YORK--()--Fitch Ratings affirms the 'A' rating on Central Iowa Power Cooperative's (CIPCO or the cooperative) implied senior secured obligations.
CIPCO's rating takes into account approximately $314.2 million of secured debt privately held by lenders including the Federal Financing Bank, Rural Utilities Service, National Rural Utilities Cooperative Finance Corp. and CoBank but is assigned to implied obligations since none of the outstanding debt is publicly held.
The Rating Outlook is Stable.
CIPCO's senior secured obligations are secured by a lien on substantially all of CIPCO's assets.
FAVORABLE CONTRACTS: CIPCO provides power to 12 rural electric distribution cooperatives (RECs) and South Iowa Municipal Electric Cooperative Association (SIMECA) through all-requirement contracts. The REC contracts are long-term through 2045, while CIPCO is in the process of extending the SIMECA agreement (contract expires December 2013).
INCREASINGLY DIVERSIFIED POWER SUPPLY: A relatively low-cost power supply supports CIPCO's operations. Coal accounts for a sizable portion of CIPCO's power resource mix, however, the cooperative has entered into a number of wind power purchase contracts to further diversify its energy supply.
CONSISTENTLY STRONG FINANCIAL PERFORMANCE: CIPCO continues its trend of strong financial performance, as evidenced by Fitch-calculated debt service coverage (DSC) of 1.72x in fiscal 2011, as compared to the 'A' median of 1.43x. Healthy metrics are achieved through sound financial policies and targets and assume no off-system sales.
STABLE MEMBERSHIP: The 13 members exhibit stable financial operations and average to above-average regional demographics. Aggregate operating margin for 2011 was a moderate 8.2% and interest coverage, on a combined basis, was an acceptable 1.37x.
ABOVE-AVERAGE MEMBER RETAIL RATES: Member cooperative rates continue to be higher than others in the region as a result of the rural nature of the service territory, which could limit CIPCO's rate flexibility going forward.
INVESTMENT RISK: A sizable portion of CIPCO's unrestricted assets are held in riskier asset classes, which creates uncertainty in regards to investment returns and market volatility. CIPCO's strong liquidity position is somewhat tempered by this increased risk.
CIPCO is Iowa's largest cooperative energy provider, supplying power to 12 RECs and SIMECA, an association of 15 small municipal electric utilities. The CIPCO members, in turn, provide power through a 300 mile service territory that spans diagonally across central and southern Iowa. The members serve over 117,261 retail customers and a population of approximately 320,000 residents.
The RECs purchase power from CIPCO pursuant to take-or-pay, all-requirement contracts that extend through 2045. SIMECA's contract is similar to the RECs, in that it is all-requirements, net of small purchases from the Western Area Power Administration and other renewable projects. CIPCO and SIMECA are in negotiations to extend the power supply contract, which is scheduled to expire on Dec. 31, 2013.
FAVORABLE POWER SUPPLY RESOURCES
Owned generation accounts for approximately 71% of CIPCO's resource capacity. The current power supply mix is weighted toward coal, however, CIPCO has been proactively targeting non-carbon resources to diversify its power supply mix. The addition of wind purchase agreements and the potential retirement of one of its coal plants will continue this diversification.
STABLE FINANCIAL PERFORMANCE
CIPCO exhibits historical and continued strong financial performance and outperforms peer medians. Fitch-calculated DSC increased from a healthy 1.45x in fiscal 2007 to 1.72x in fiscal 2011 and compares favorably to other 'A' rated wholesale systems, which had a median 2011 DSC ratio of 1.43x. CIPCO targets, and sets member rates based on, a 1.20x DSC ratio based only on operating margin and exclusive of investment returns, which Fitch views as a credit strength.
Fitch-calculated DSC is expected to remain in the 1.7x range for fiscal 2012, due an effort to increase equity in the cooperative. Equity to capitalization increased from 20% at fiscal year-end 2007 to a strong 28.1% at fiscal year-end 2011 and is expected to increase further at fiscal year-end 2012.
Liquidity, as measured by days cash (and investments) on hand, is robust at 193 days. However, a little over 80% of these unrestricted assets are invested in equities, real estate investment trusts and hedge funds, which creates some uncertainty in regards to the amount of and return on investments. Fitch views CIPCO's investment strategy as somewhat risky, given the impact unpredictable income can have on financial metrics. The cooperative's policy of targeting 1.2x DSC excluding investment income partially mitigates this risk.
CIPCO maintains three lines of credit totaling $145 million. The cooperative uses these lines primarily for working capital purposes, but may also use them to fund capital expenditures prior to long-term financing.
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' (Jan. 11, 2012);
--'U.S. Public Power Peer Study - June 2012' (June 15, 2012);
--'U.S. Public Power Distribution Systems' (Nov. 17, 2011).
Applicable Criteria and Related Research:
U.S. Public Power Rating Criteria
U.S. Public Power Peer Study -- June 2012
U.S. Public Power Distribution Systems