Fitch Affirms Vermont Electric Cooperative's Sr. Secured Rating at 'BBB+'; Outlook Stable

FRANKFURT, Germany & BEIJING--()--Fitch Ratings has affirmed the 'BBB+' rating on Vermont Electric Cooperative, Inc.'s (VEC) implied senior secured obligations.

VEC's rating takes into account approximately $69.5 million of secured debt privately held by lenders, inclusive of National Rural Utilities Cooperative Finance Corp. (FC) and CoBank ACB. However, the rating is assigned to implied obligations, since none of the outstanding debt is publically held.

The Rating Outlook is Stable.

SECURITY

VEC's senior obligations are secured by a mortgage interest in substantially all net electric plant assets. Under the mortgage indenture, VEC is required to maintain a minimum debt service coverage (DSC) ratio of 1.35 times (x) and a times interest earned ratio (TIER) of 1.5x.

KEY RATING DRIVERS

GROWING SERVICE AREA: The Vermont Electric Cooperative (VEC) serves a heavily residential and well-diversified customer base throughout northern Vermont. While the region is very rural, economic indicators are strong, and the service territory continues to see notable growth.

STRONG FINANCIAL METRICS: Financial metrics remain stable in 2013, as evidenced by strong Fitch-calculated DSC of 2.17x and ample equity (46.1% equity to capitalization in 2013). Both metrics are above rating category medians.

LOW CASH RESERVES: VEC's strong financial metrics are somewhat tempered by low unrestricted cash reserves. Liquidity remains weak at only nine days cash on hand (DCOH) at year-end 2013. Overall liquidity is notably stronger at 103 days, due to available lines of credit.

POWER SUPPLY CONTINUES TO STABILIZE: A new long-term agreement with NextEra Energy Resources, which is a unit contingent contract that 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 and approximately 70% are contracted through 2020.

REGULATOR RELATIONSHIP REMAINS SOUND: The cooperative is subject to state regulatory oversight, which has the potential to limit rate and financial flexibility. Positively, the Vermont Public Service Board (VPSB) has been supportive of VEC's recent rate requests and of its increased targeted times interest earned ratios (TIER).

SUBSTANTIAL CAPITAL PLAN: VEC's current 10-year capital plan is sizable and requires additional debt financing, which may strain certain financial metrics over the near term. DSC and equity/capitalization ratios going forward should approximate 2.0x and 40%, respectively, which will support the current rating.

RATING SENSITIVITIES

ADVERSE REGULATORY DECISIONS: Regulatory decisions that undermine the financial stability and initiatives adopted by VEC 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 that provides electric service to approximately 38,000 retail meters in northern Vermont. Its service territory includes 74 primarily rural towns throughout an area that encompasses all or portions of the state's northernmost counties, including those along the U.S.-Canadian boarder. VEC's customer base is mainly residential and small commercial users, and is geographically dispersed, as evidenced by the cooperative's average of only 14 customers per line mile.

Energy sales have grown annually over the last four years. Strong energy sales growth continued in 2013, 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, spurred by 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 approved VEC's recent rate requests as presented. VEC's rate design does not include an automatic fuel or purchased power adjustment clause, which contributes to the cooperative's 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 and approximately 70% are contracted through 2020.

STRONG FINANCIAL PERFORMANCE

VEC's financial metrics are strong and outperform the 'BBB+' medians, with the exception of its very low liquidity level. A VPSB approved increase to VEC's target TIER (from 1.5x to 2.18x) has allowed the cooperative to strengthen its financial position since 2008 by improving margins and increasing its cash level. Unaudited 2013 financials show DSC of 2.17x, down somewhat from the high level achieved in 2012 but still strong. Fitch expects financial metrics to remain inline with 2013 results.

The cooperative's cash level increased slightly at fiscal year-end 2013, from seven DCOH to nine DCOH, which is close to VEC's target of six DCOH. Liquidity is anticipated to remain at seven DCOH. Fitch continues to view VEC's cash reserve as weak. Additional liquidity is provided by lines of credit with CFC and CoBank ACB that aggregate $20 million. At year-end 2013, $17 million was available under these facilities, bringing total days liquidity to a strong 100 days, which is more consistent with the current rating.

Additional information is available at 'www.fitchratings.com'.

Applicable Criteria and Related Research:

--'U.S. Public Power Peer Study Addendum - February 2014' (Feb. 7, 2014);

--'U.S. Public Power Peer Study -- June 2013' (June 13, 2013);

--'U.S. Public Power Rating Criteria' (Dec. 18, 2012).

Applicable Criteria and Related Research:

U.S. Public Power Peer Study Addendum -- February 2014
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=735601

U.S. Public Power Peer Study -- June 2013
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=710397

U.S. Public Power Rating Criteria
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=696027

Additional Disclosure

Solicitation Status
http://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=822971

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Contacts

Fitch Ratings
Primary Analyst
Stacey Mawson, +1-212-908-0678
Associate Director
Fitch Ratings, Inc.
One State Street Plaza
New York, NY 10004
or
Secondary Analyst
Lina Santoro, +1-212-908-0522
or
Committee Chairperson
Dennis Pidherny, +1-212-908-0738
Managing Director
or
Media Relations, New York
Elizabeth Fogerty, +1-212-908-0526
elizabeth.fogerty@fitchratings.com

Sharing

Contacts

Fitch Ratings
Primary Analyst
Stacey Mawson, +1-212-908-0678
Associate Director
Fitch Ratings, Inc.
One State Street Plaza
New York, NY 10004
or
Secondary Analyst
Lina Santoro, +1-212-908-0522
or
Committee Chairperson
Dennis Pidherny, +1-212-908-0738
Managing Director
or
Media Relations, New York
Elizabeth Fogerty, +1-212-908-0526
elizabeth.fogerty@fitchratings.com