SAN FRANCISCO--(BUSINESS WIRE)--Fitch Ratings assigns its 'F2' rating to Sulphur Springs Valley Electric Cooperative (SSVEC), AZ's $40 million commercial paper (CP) notes program.
The CP program will be used to provide interim financing for capital needs and refinancing of outstanding loans.
The CP notes are general unsecured obligations of SSVEC.
KEY RATING DRIVERS
LONG TERM RATING AND ADEQUATE LIQUIDITY: The 'F2' short-term rating broadly reflects SSVEC's 'A-' long-term rating and adequate internal liquidity sources, including a $40 million revolving liquidity facility available to support the notes. SSVEC's total available liquidity sources provided pro forma coverage of 1.4x potential needs at June 30, 2013.
LIQUIDITY FACILITY SUPPORT: The liquidity facility provides essential support to the rating given SSVEC's limited cash on hand. However, the liquidity facility is subject to numerous provisions that could allow the provider, CoBank (rated 'AA-/F1+' by Fitch), to withdraw the support immediately and without notification, potentially exposing note holders to liquidity risk in the event of a failed rollover. Fitch views some of these provisions as broad, particularly given SSVEC's operating profile.
SOUND LONG TERM CREDIT QUALITY: SSVEC's financial position has improved since 2009 due to rate increases and growing kWh sales. Financial metrics are expected to decline modestly in fiscal 2013 but improve thereafter with a proposed rate increase for early calendar year 2014.
REDUCED LIQUIDITY: Any increased concerns regarding SSVEC's ability to access the liquidity facility, as a result of weakened financial performance or an event of default under the agreement, would likely result in negative rating pressure.
Long-Term Rating and Adequate Liquidity
The 'F2' rating on the notes reflects SSVEC's 'A-' long-term rating and adequate liquidity sources, including the $40 million liquidity facility provided by CoBank for the sole purpose of repaying the CP notes in the event of a failed rollover.
SSVEC's liquidity sources consist of a very limited amount of cash on hand (three days cash projected at the end of fiscal 2013), a $17.6 million revolving credit line available for general purposes (also provided by CoBank), and the $40 million liquidity facility dedicated to the CP notes. Total available sources covered SSVEC's maximum liquidity requirement 1.43x on a pro forma basis at June 30, 2013.
The liquidity facility is sized to the maximum authorized amount of the CP note program and covers principal payments on maturing notes if rollover proceeds are insufficient. The facility expires in July 2018, unless CoBank exercises its option to terminate the facility upon the occurrence of an event of default.
Events of default under the liquidity facility include a range of potential triggers, some of which Fitch views as broad and posing potential liquidity risks to bondholders, particularly given SSVEC's operating profile and regulated ratemaking. For example, the breach or default under any other credit document, potentially including issues beyond just non-payment, may be considered an event of default. Other examples include various representations and warranties along with financial covenants requiring a minimum of 1.35x annual debt service coverage (based on the average of the highest two from three consecutive years), a minimum equity/total assets ratio of 0.20 or greater, and debt to EBITDA equal to or less than 10.0.
SSVEC is projected to remain in compliance with these metrics over the next few years, but weaker than projected performance would be a concern.
For more information on SSVEC's 'A-' long-term credit rating, see Fitch's report dated March 25, 2013.
Additional information is available at 'www.fitchratings.com'.
In addition to the sources of information identified in Fitch's Revenue-Supported Rating Criteria and U.S. Public Power Rating Criteria, this action was 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);
--'Criteria for Assigning Short-Term Ratings Based on Internal Liquidity' (June 13, 2013).
Applicable Criteria and Related Research:
U.S. Public Power Rating Criteria
Revenue-Supported Rating Criteria
Criteria for Assigning Short-Term Ratings Based on Internal Liquidity