NEW YORK--(BUSINESS WIRE)--Fitch Ratings has affirmed Associated Electric Cooperative, Inc.'s (Associated or AECI) 'AA-' rating on its implied senior secured obligations. AECI's rating takes into account approximately $1.8 billion of secured debt obligations, but is implied since none of the debt is publicly held.
The Rating Outlook is Stable.
SECURITY
AECI's senior secured obligations are secured by a lien on all of the owned tangible and certain of the intangible assets of the cooperative.
KEY RATING DRIVERS
WELL POSITIONED POWER SUPPLY SYSTEM: Associated is a large generating and transmission (G&T) cooperative located in the Southwestern U.S. The utility has a heavy reliance on coal-fired generation but, more recently, has added significantly to its natural-gas fleet, improving fuel diversity. Combined with an expansive high-voltage transmission system, this allows AECI to meet the long-term energy needs of its members, while having good flexibility to market excess power.
SOUND FINANCIAL METRICS: Financial ratios have moderated from historical levels, but remain sound, with current debt service coverage and equity ratios in line with rating medians. While cash on hand is low, available lines of credit are substantial, and together provide substantial financial liquidity. Capital expenditures continue to fall, following the completion of several major projects.
CONSERVATIVE FINANCIAL POLICIES: Financial policies are well defined and conservatively based, providing solid support for bondholders.
COMPETITIVE ELECTRIC RATES: After a period of sizeable rate increases (2006-2009), used to fund new capital projects and pay for higher fuel and operating costs, rates to members have stabilized. Higher off-system power sales and improved power prices have added to recent financial performance. AECI's wholesale charges remain very competitive with other regional utilities and are among the lowest of the G&T cooperative sector.
RATING SENSITIVITIES
POTENTIAL IMPACT OF ENVIRONMENTAL REGULATIONS: As a largely coal-based system, with units that are not currently scrubbed, passage of more rigorous Federal environmental legislation has the potential to pressure AECI's financial ratios and electric rates.
CREDIT PROFILE
Associated is part of a three-tiered electric system that is owned by six G&Ts. These six G&Ts are in turn owned by 51 local distribution cooperatives in Missouri, southeast Iowa and northeast Oklahoma, and are responsible for providing electric service to 875,000 member consumers. AECI and its members have all-requirements contracts that extend through May 2050.
AECI's load is largely residential, with the members' economies having some concentration in agriculture and agribusiness. For calendar year 2013, members contributed 75% of AECI's energy sales and nonmembers accounted for 25%. AECI estimates that the complete loss of all off-system sales, which is highly unlikely, would have only a modest impact on system rates. Average annual energy growth is forecasted at about 1% per year for the period 2014 to 2032, which is well below historical trend.
COAL-BASED SYSTEM; EXCESS CAPACITY
AECI has generating capacity totaling 5,787 megawatts (MW), more than 9,800 miles of transmission lines and 196 interconnections. In 2013, the fuel mix to serve member load consisted of: coal (79%); natural gas (4%); hydro (6%); wind (10%); and purchases (1%). The well-seasoned coal-fired Thomas Hill Energy Center and New Madrid Power Station contribute the major share of energy. New Madrid unit 1, completed in 1972, is owned by the city of New Madrid, and AECI operates this plant under a 50-year agreement which entitles it to all of the output of the plant, except for the amount reserved for the city's use. Associated is considering purchasing the unit.
Commercial operation of the 540 MW Chouteau 2, combined-cycle gas plant in June 2011 was intended to add more balance to AECI's fuel mix, following the addition of the 580 MW, Dell gas plant in 2007. Contracts for wind energy were signed in 2011, which has resulted in the doubling of wind resources to 600 MW currently. Associated also has a long-term contract with the Southwestern Power Administration for 478 Mw of hydroelectric peaking power.
Surplus capacity was substantial at 742 MW as of 2013, including a 13% reserve margin. While well above normal needs, management believes the excess capacity provides a hedge for unforeseen events and allows for excess power sales. Given the slower growth rate forecasted, current capacity should be adequate until around 2027. Transmission assets are substantial. Interconnections to adjacent regions include MAPP, MISO, SPP and SERC, but at the present time, AECI has not aligned itself with any single regional transmission organization.
ENVIRONMENTAL RISKS
AECI continues to evaluate potential risks and risk management strategies dealing with environmental compliance. Management has no current plans for major modifications to its coal-fired plants and has not included large capital outlays in its financial forecast for this possibility. A large amount of high efficiency gas generation, with the addition of Chouteau 2, should provide an important offset to the coal generation.
COMPETITIVE UTILITY RATES
AECI's member revenue averaged $48.93 per MWH in 2013, compared with $49.21 per MWH in 2012 and $45.75 per MWH in 2010. This places AECI as one of the lowest cost utilities among the top 50 G&T cooperatives systems. Non-member rates in 2013 approximated $34.89 per MWH, a positive 7.3% increase over 2012. After 20 years of no rate increases, power costs increased in each year between 2006 and 2009. The increases reflect a large rise in natural gas prices in 2008, the addition of NOx controls and construction of new gas-fired generating capacity. Major capital items are now complete, which should result in future power costs remaining more stable.
Total rate increases assumed in AECI's business forecast for the period 2014 through 2019 are a reasonable 10%. These rate increases include the use of accumulated deferred revenues. As of 2012, the Missouri cooperative residential average retail price for electricity was 10.17 cents per kilowatt-hour (KWH), which is generally in line with most municipal and investor-owned systems.
SOUND FINANCIAL PRACTICES
Current financial ratios are sound, with 2013 debt service coverage (DSC) approximating the utility's target of 1.30 times (x). Management expects to hold DSC around current levels, and should see some improvement in equity levels helped by a moderation of capital expenditures. While the cooperative could face cost pressures related to its coal concentrated generating portfolio, AECI has been aggressive in passing through rate increases and diversifying its asset mix. Net margins for the three months ended March 31, 2014 were tracking projected year-end margins.
Accumulated deferred regulatory credits are significant, exceeding $200 million at calendar year end 2013. Approximately $72 million of this figure is allocated for rate stabilization purposes. Management expects to use the full amount of the rate stabilization funds during the years 2014-2016. The largest portion is maintained in a generation, environmental and insurance reserve fund. These funds are considered to be an important management tool, helping to provide rate flexibility and stability, meet future capital needs and be available to pay unexpected operating expenses. Management expects to maintain reserves totaling about $100 million on a recurring basis.
Most of AECI's long-term debt is issued by the RUS and extends to 2046. Pursuant to AECI calculations, on a stand-alone basis, in 2013 AECI's equity as a percentage of capitalization totaled 22% and TIER and DSC were 1.47 times (x) and 1.36x, respectively. Distribution members produced equity as a percentage of assets of 43%. Members' TIER and DSC were 2.49x and 1.97x, respectively. Pursuant to Fitch calculations, AECI's equity to capitalization equaled 21.7% and DSC equaled 1.29x in 2013.
AECI maintains sufficient liquidity, consisting of both cash and unsecured lines of credit. Cash and equivalents tend to be low, equal to $90 million (36 days); but the utility has numerous lines of credit available from various financial providers totaling $500 million at year-end 2013. In addition, included in other restricted and designated assets are investments in the Rural Utilities Services (RUS) Cushion of Credit for future RUS/FFB debt service payments, which at Dec. 31, 2013, totaled $301.9 million. Approximately $30 million is paid quarterly from this fund to pay principal and interest payments.
Additional information is available at 'www.fitchratings.com'.
This rating action was informed by information identified in Fitch's Revenue Supporting Criteria and U.S. Public Power Rating Criteria.
Applicable Criteria and Related Research:
--'U.S. Public Power Peer Study -- June 2014' (June 13, 2014);
--'U.S. Public Power Peer Study Addendum - June 2014' (June 13, 2014);
--'U.S. Public Power Rating Criteria' (March 18, 2014);
--'2014 Outlook: U.S. Public Power and Electric Cooperative Sector' (Dec. 12, 2013).
Applicable Criteria and Related Research:
U.S. Public Power Peer Study - June 2014
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=749789
U.S. Public Power Peer Study Addendum - June 2014
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=750283
U.S. Public Power Rating Criteria
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=740841
2014 Outlook: U.S. Public Power and Electric Cooperative Sector (Calm Under Pressure)
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=725447
Additional Disclosure
Solicitation Status
http://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=842874
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