Fitch Affirms PowerSouth Energy Cooperative's (AL) Revs at 'A-'; Outlook Stable

NEW YORK--()--Fitch Ratings has affirmed the 'A-' rating on the following PowerSouth Energy Cooperative revenue bonds issued through the Industrial Development Board of the Town of Chatom, Alabama (outstanding amounts as of Dec. 31, 2013):

--$19,200,000 pollution control revenue refunding bonds, series 2000C;

--$239,485,000 gulf opportunity zone revenue bonds, series 2007A, 2008A, and 2010A;

--$14,655,000 solid waste disposal facilities refunding bonds, series 2010B.

The 'A-' rating considers PowerSouth's $1.4 billion of total obligations at Dec. 31, 2013, including $746 million of borrowings pursuant to the Rural Utilities Service loan program.

The Rating Outlook is Stable.

SECURITY

The bonds are secured by a mortgage interest in substantially all of PowerSouth's tangible, and certain of its intangible, assets.

KEY RATING DRIVERS

BROAD SERVICE TERRITORY: PowerSouth is a midsized generation and transmission cooperative serving 20 members (424,000 retail customers) in a broad region of Alabama and the northwest Florida panhandle. Long-term, all-requirements member contracts through 2050 underpin the cooperative's credit quality.

IMPROVED G&T FINANCIAL METRICS: PowerSouth's financial metrics have come in line with Fitch's 'A-' rating category medians. Debt service coverage has averaged 1.28x over the past five years - above the 1.2x that rates are typically designed to produce - and steady operating margins have helped grow the cooperative's equity to capitalization ratio to 17.1% in 2013 from 11.2% in 2009. Forecast metrics continue positive trends.

MIXED MEMBER ECONOMICS: The members' below-average wealth and employment indicators could limit the practical extent of PowerSouth's revenue-raising flexibility. However, a well above-average residential member load (71%) provides for greater overall revenue stability, and member collection rates have been strong.

GOOD MEMBER FINANCIALS: Solid member financial metrics include aggregate debt service coverage of 2.2x in 2013 and an over 50% equity to capitalization ratio. While the current ratio is above 1x, the members' aggregate cash on hand is below average at just 39 days. Currently low liquidity coupled with higher write-offs would be of greater concern.

COMPETITIVE RATES: PowerSouth's wholesale rates remain competitive with neighboring suppliers at $74.49/MWh (2013), despite having increased by three-quarters since 2000. The headroom provided by its rates should help absorb a modest amount of more expensive capacity in the Municipal Electric Authority of Georgia's (MEAG; revenue bonds rated 'A+'/Outlook Stable by Fitch) nuclear expansion project expected online in 2017-2018. Its 20-year, take-or-pay purchase power agreement with MEAG is forecast to meet 10% of PowerSouth's long-term energy requirements.

DIVERSE POWER SUPPLY: The cooperative's diverse power supply by number and fuel type, coupled with the flexibility to increase market purchases for power and energy, ultimately benefits its member rate as fuel and market prices change. The addition of nuclear capacity expected in 2017-2018 will further diversify the cooperative's generating resources and should add stability, albeit at a higher cost.

RATING SENSITIVITIES

FINANCIAL GAINS: Continued financial improvement that positions the cooperative to buffer more expensive nuclear capacity will be an important consideration in future rating reviews.

ADVERSE NUCLEAR DEVELOPMENTS: Adverse financial developments in the nuclear expansion project could lead to downward pressure on PowerSouth's Outlook or rating. Unplanned or outpaced rate increases that challenge its members' financial wherewithal could ultimately impact PowerSouth's own financial stability.

CREDIT PROFILE

PowerSouth is a generation and transmission cooperative providing wholesale electric service to 16 retail electric distribution cooperatives and four municipal electric systems pursuant to long-term, all-requirements contracts through 2050 that underpin its credit quality. The cooperative's members serve 424,000 customers and nearly 1 million people in the southeastern half of Alabama and the northwest Florida panhandle.

RESOURCE DIVERSITY AND RATES

PowerSouth's flexible power supply strategy ultimately benefits its member rate, which is competitive with regional providers. The cooperative owns all or portions of seven generating facilities totaling 2,218MW of winter capacity; is able to shift between fuel sources, as prices dictate; and purchases an increasing proportion of member requirements totaling nearing one-third of the total.

A 20-year, take-or-pay purchase power agreement for 125MW of capacity from MEAG's 22.7% share of the Plant Vogtle units 3 and 4 nuclear expansion project will further diversify PowerSouth's fuel sources and enhance stability when the project comes online in 2017-2018 (expected), albeit at some cost. PowerSouth estimates the project power cost to be near $80/MWh in 2018, trending upwards to a peak of $100/MWh by 2036. The project accounts for 10% of the cooperative's forecast energy.

PowerSouth's current member rate should provide headroom to absorb the higher costs. However, its comparatively weaker member economic metrics and their above-average retail rates might limit the practical extent of the cooperative's longer term revenue-raising flexibility. Outpaced rate increases beyond the forecast plan that challenge its members' financial wherewithal could ultimately impact PowerSouth's own financial stability.

Management expects the member rate to grow by an average of 2.2% annually to 2018 ($83.11/MWh) when the cooperative begins taking power under the MEAG PPA.

IMPROVED FINANCIAL METRICS

PowerSouth's financial metrics have evidenced broad stability and some favorable changes over the past several years that largely bring them in line with Fitch's 'A-' rating category medians. The cooperative's member metrics have also remained solid. Healthy forecast metrics bolster PowerSouth's footing as it prepares for more expensive purchased power.

PowerSouth has exceeded its 1.2x debt service coverage target on average, over the past five years (1.28x). Coverage has moderated slightly in recent years, principally due to higher debt service requirements and uneven sales. However, debt service coverage and coverage of full obligations still met the cooperative's target at 1.19x and 1.14x, respectively, in 2013. An April 2014 fuel surcharge, increased in July, is expected to help the cooperative meet budgeted net margins at yearend.

Positive margins have pushed PowerSouth's ratio of equity to capitalization to 17.1% and its cash on hand to 54 days. Both are directly in line with Fitch's 'A-' rating category medians and essentially meet expectations from Fitch's prior review of the cooperative in 2012. However, imputing its portion of MEAG Project P financing related to the Vogtle expansion tempers PowerSouth's balance sheet ratios to some extent.

PowerSouth's member cooperatives also evidence stability and healthy financial metrics. Aggregate debt service coverage was 2.2x in 2013 - down slightly from 2.4x in 2011 - and individual ratios ranged no lower than 1.4x. Coverage of full obligations remained unchanged from 2011 at 1.4x. Equity ratios improved to over 50%, but cash on hand remained more modest at 39 days.

MIXED MEMBER PROFILE

Nearly three-quarters of the members' kWh sales are residential. This helps offset below-average economic indicators in the service territory, as the diversity provided by a high proportion of residential sales lends itself to greater overall revenue stability.

Per capita income levels - weighted by the members' customer counts - are equal to 95% and 77% of Alabama and national levels, respectively, and the unemployment rate is slightly above-average at 7.5% (July 2014). However, write-offs at the member level have been within range of industry benchmarks.

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

This rating action was informed by the sources of information identified in Fitch's U.S. Public Power Rating Criteria.

Applicable Criteria and Related Research:

--'Municipal Electric Authority of Georgia' (Aug. 5, 2014);

--'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).

Applicable Criteria and Related Research:

Municipal Electric Authority of Georgia

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=749793

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

Additional Disclosure

Solicitation Status

http://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=880154

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Contacts

Fitch Ratings
Primary Analyst:
Ryan A. Greene, +1-212-908-0593
Director
Fitch Ratings, Inc.
33 Whitehall Street
New York, NY 10004
or
Secondary Analyst:
Alan Spen, +1-212-908-0594
Senior Director
or
Committee Chairperson:
Dennis Pidherny, +1-212-908-0738
Managing Director
or
Elizabeth Fogerty, +1-212-908-0526
Media Relations, New York
elizabeth.fogerty@fitchratings.com

Contacts

Fitch Ratings
Primary Analyst:
Ryan A. Greene, +1-212-908-0593
Director
Fitch Ratings, Inc.
33 Whitehall Street
New York, NY 10004
or
Secondary Analyst:
Alan Spen, +1-212-908-0594
Senior Director
or
Committee Chairperson:
Dennis Pidherny, +1-212-908-0738
Managing Director
or
Elizabeth Fogerty, +1-212-908-0526
Media Relations, New York
elizabeth.fogerty@fitchratings.com