Fitch Affirms Massachusetts Clean Energy Cooperative Corp's 2013 Revs at 'A+'; Outlook Stable

NEW YORK--()--Fitch Ratings affirms the 'A+' rating on the following outstanding bonds issued by Massachusetts Clean Energy Cooperative Corporation (MCECC):

--$49.9 million Massachusetts clean energy cooperative revenue bonds, series 2013.

The Rating Outlook is Stable.

SECURITY

The bonds are special obligations of MCECC payable from revenues received from the Massachusetts Municipal Wholesale Electric Company (MMWEC; revenue bonds rated 'A+' by Fitch, with a Stable Outlook) pursuant to a power sales contract (PSC). MMWEC's obligation is limited to the funds it receives from HG&E under a corresponding power purchase agreement (PPA).

KEY RATING DRIVERS

CONTRACTUAL FINANCING ARRANGEMENT: MCECC is a municipal lighting plant cooperative created by HG&E and MMWEC for the sole purpose of financing upgrades to HG&E's Hadley Falls Station.

HG&E CREDITWORTHINESS DRIVES RATING: HG&E's creditworthiness underpins MCECC's rating, as funds provided by HG&E ultimately flow through the financing structure to repay the bonds.

STRONG HG&E FINANCIAL POSITION: HG&E continues to exhibit healthy cash flow and solid balance sheet metrics which mitigate weak economic indicators in the service territory. Debt service coverage and cash on hand are well above Fitch's 'A+' rating category medians, at an average of 2.66x and 368 days, respectively, for fiscal year 2013. Figures for 2014 are expected to weaken but remain acceptable for the rating category.

HG&E ASSETS PROVIDE RATE STABILITY: HG&E's high proportion of hydroelectric energy (67% in 2013), particularly for the northeast, provides for stable and very low electric rates for the region, which is important for a lower income constituency.

TAKE-OR-PAY OBLIGATION: Pursuant to the PPA, HG&E's obligation to MMWEC is absolute and unconditional, as is MMWEC's obligation to MCECC. Favorably, HG&E's payment is an operating expense of the department and includes 1.1x the debt service requirement as a measure of cushion. A reserve account and reserve and contingency fund provide additional bondholder protection.

RATING SENSITIVITIES

CHANGES TO HG&E'S CREDIT PROFILE: Changes to HG&E's credit profile would trigger a review of MCECC's rating. The department's margins are expected to tighten through at least 2016, when total debt service obligations and capital expenditures peak, but coverage should remain adequate for the rating category at just under 2x annually. Coverage below this level would be a credit concern, given HG&E's countervailing service territory characteristics.

CREDIT PROFILE

HG&E UNDERPINS RATING

HG&E provides gas and electric service to retail customers principally in Holyoke, MA. The department's creditworthiness supports MCECC's rating, as HG&E is the ultimate source of funds for repayment of the bonds. Fitch does not maintain a public rating on HG&E.

MMWEC is essentially a pass-through entity in this structure. While MMWEC's obligation pursuant to the PSC is absolute and not conditioned on the cooperative's performance, its obligation is limited to the funds it receives from HG&E pursuant to the PPA.

HADLEY FALLS CAPITAL PROJECTS' MOVING FORWARD

The MCECC bond proceeds are being used by HG&E to overhaul its Hadley Falls Station hydroelectric generator Unit 1. The capital projects include a new substation, increased plant generating capacity, and an upgrade to fish passage facilities. Through 2014, HG&E has completed the new North Canal substation which connects to the Hadley Falls facility. Project design for the modernization of the Hadley Falls Unit 1 is completed and construction is slated to begin in May 2015. The modernized unit is projected to come on-line in January 2016.

Additionally, the design for the fish passage (lift) facilities is also completed and construction is set to begin in March 2015, with a projected on-time completion of December 2015. Positively, each of the planned Hadley Falls projects have thus far proceeded as planned and within budget.

HEALTHY RATE AND FINANCIAL FLEXIBILITY

HG&E continues to maintain among the lowest average retail electric bills in the state. Notwithstanding its low electric rates, HG&E's debt service coverage has exceeded a robust 3.0x annually since 2009, including 4.0x in 2013. All-in coverage, including modest purchased power expenses and the department's PILOT, has likewise been strong at upwards of 2.0x annually. In comparison, Fitch's 'A+' retail system median coverage of full obligations is 1.37x (June 2014).

Financial margins are projected to contract 2014-2015 as some of the department's hydroelectric capacity temporarily goes offline for the modernization work. HG&E projects additional tightening through at least 2016, which is the peak year of total debt service obligations (approximately $8 million). However, projected debt service coverage should remain adequate for the rating category at just under 2.0x coverage during the period. Coverage below this level could become a credit concern, given the balance of a weaker service territory.

Favorably, in fiscal 2017 financial coverage should improve as a portion of HG&E's power supply costs will decline with anticipated lower purchased power charges from MMWEC. A portion of the MMWEC nuclear project debt begins to retire in 2017 and those debt cost reductions will flow through to their project participants, including HG&E.

HG&E's robust cash reserves lend additional support. Cash on hand has exceeded 200 days since 2009 and reached 368 days for fiscal 2013, which is more than double Fitch's 'A+' rating category median. Equity-to-total capitalization is solid at 48%, including the off balance sheet MCECC debt obligation. HG&E plans to maintain its solid reserves for the foreseeable future.

WEAK ECONOMIC INDICATORS

In recent years, Holyoke has been experiencing a gradual contraction of its manufacturing sector and related industries, which has weighed on the city's economy, weakening wealth and employment indicators. According to the U.S. Census Bureau data, per capita income ($20,294) represents just 57% of the Commonwealth's level ($35,763) for 2013. The city's unemployment rate has improved, from a high of 11.4% in 2010 down to 8.7% in January 2015, but it continues to lag the state (5.6%) and nation (6.1%). Delinquent accounts have trended to an above average, but still manageable 1% of total operating revenues in recent years.

Energy sales declined in fiscal 2014 (-1.39%), although primarily due to weather. Sales are anticipated to return to modest growth in fiscal 2015.

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

This rating action was informed by information identified in Fitch's U.S. Public Power Rating Criteria and Revenue-Supported Rating Criteria.

Applicable Criteria and Related Research:

--'U.S. Public Power Rating Criteria' (March 2014);

--'Revenue-Supported Rating Criteria' (June 2014);

--'U.S. Public Power Peer Study -- June 2014' (June 2014);

--'U.S. Public Power Peer Study Addendum -- February 2015' (February 2015);

--'Fitch Rates Massachusetts Muni Wholesale Electric Co's Rev Bds 'A+'; Outlook Stable' (September 2013).

Applicable Criteria and Related Research:

U.S. Public Power Rating Criteria

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=740841

Revenue-Supported Rating Criteria

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=750012

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 -- February 2015

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=861490

Additional Disclosure

Solicitation Status

http://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=982521

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Contacts

Fitch Ratings
Primary Analyst
Lina Santoro
Analytical Consultant
+1 212-908-0522
Fitch Ratings, Inc.
33 Whitehall St.
New York, NY 10004
or
Secondary Analyst
Dennis Pidherny
Managing Director
+1 212-908-0738
or
Committee Chairperson
Alan Spen
Senior Director
+1 212-908-0594
or
Media Relations:
Elizabeth Fogerty, +1 212-908-0526
elizabeth.fogerty@fitchratings.com

Contacts

Fitch Ratings
Primary Analyst
Lina Santoro
Analytical Consultant
+1 212-908-0522
Fitch Ratings, Inc.
33 Whitehall St.
New York, NY 10004
or
Secondary Analyst
Dennis Pidherny
Managing Director
+1 212-908-0738
or
Committee Chairperson
Alan Spen
Senior Director
+1 212-908-0594
or
Media Relations:
Elizabeth Fogerty, +1 212-908-0526
elizabeth.fogerty@fitchratings.com