NEW YORK--(BUSINESS WIRE)--Fitch Ratings has assigned a rating of 'AA-' to Denton County Electric Cooperative, Inc., Texas (dba CoServ Electric) $60 million first mortgage notes, series 2015A.
In addition, Fitch affirms the 'AA-' rating on the following outstanding notes:
--$508,505,000 first mortgage notes, series 2012A.
The Rating Outlook is Stable.
Proceeds will be used to pay down the $40 million outstanding balance under the CoBank revolving line of credit and provide $20 million of additional working capital. The notes will be privately placed.
SECURITY
The notes are secured by a first lien on substantially all of CoServ Electric's (CoServ) tangible and certain intangible electric assets, including its electric distribution facilities and interest in its wholesale power contract.
KEY RATING DRIVERS
GROWING DISTRIBUTION SYSTEM: CoServ is a growing electric distribution provider in the northern Dallas-Fort Worth Metroplex. It is the largest member of Brazos Electric Power Cooperative (Brazos; implied senior secured obligations rated 'A'/Outlook Stable), which supplies substantially all of its power needs pursuant to a long-term wholesale power contract through 2045.
SOUND SERVICE TERRITORY: The distribution cooperative's largely residential service territory exhibits strong economic indicators and predictable growth, which contributes to its stable operating performance.
LIMITED COMPETITIVE PRESSURE: Much of the service area is single certified, but customers can choose their electric distribution provider in multi-certified areas; accounting for about 40% of CoServ's service territory. Approximately three-quarters of new residential customers in multi-certified areas have selected CoServ since 2006, providing solid evidence of the reasonable cost and reliability of the utility's services.
COMPETITIVE RETAIL RATES: Retail rates are competitive with area providers and the rate structure allows for the timely pass through of all wholesale power costs, which account for about 70% of total system costs.
CONSISTENT FINANCIAL RESULTS: Cash flow metrics remain in line with management's targets, fitting within Fitch's 'AA-' rating category medians. Debt service coverage (DSC) has consistently exceeded 2.0x and equity to capitalization has increased from 32.6% to 42.9% over the past five years. Days cash on hand is intentionally low, resulting in a greater reliance on a CoBank $150 million unsecured line of credit for liquidity.
RATING SENSITIVITIES
OUTPACED BALANCE SHEET IMPROVEMENT: Outpaced improvement in CoServ Electric's financial metrics, particularly its balance sheet, could conceivably lead to a positive rating action.
CREDIT PROFILE
CoServ is a non-profit company organized to provide electric service at retail to mostly 195,000 residential and commercial accounts in a six-county area. In addition to its electric operations, the cooperative owns various subsidiaries, including a growing residential-based gas system. The service area demonstrates above-average wealth and favorable employment levels. Growth is strong, with electric meters increasing by around 5% per year. The majority of the developable land is single-certified, which lessens the risk of competition.
Power is provided by Brazos Electric Cooperative, a generation and transmission system that serves 16 distribution cooperatives and one municipality in Texas under wholesale power sales contracts that extend through Dec. 31, 2045. Wholesale rates are competitive and incorporate an abundance of low-cost natural-gas fired generation.
SOUND FINANCIAL PERFORMANCE
CoServ's financial metrics are favorable; however, cash and cash equivalents are kept intentionally low, with greater reliance placed on an unsecured line of credit with CoBank. This facility is primarily used to fund capital requirements and for working capital. The credit facility was recently increased from $125 million to $150 million and extended from July 2016 to July 2019. Annual capital expenditures are estimated at about $70 million to $85 million for the period 2015 through 2024, with approximately 70% of requirements to be internally funded. The credit facility is projected to grow to $200 million by 2023, and CoServ plans to use periodic long-term debt financings to pay down outstanding balances.
CoServ's unconsolidated net income amounted to $61.6 million in 2014, versus $54.7 million in 2013. These figures include non-cash patronage payments from Brazos, totaling about $25 million in 2014 and $19.7 million in 2013. For financial planning purposes, the cooperative focuses mostly on operating margins, rather than net margins, to exclude these non-cash items. Long-term financial targets for the electric system include: DSC around 2.0x (based on cash coverage); cash on hand of 50-75 days; liquidity on hand of 125-150 days and equity to capitalization of 50%-60%.
Additional information is available at 'www.fitchratings.com'.
Applicable Criteria
Revenue-Supported Rating Criteria (pub. 16 Jun 2014)
https://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=750012
U.S. Public Power Rating Criteria (pub. 18 May 2015)
https://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=864007
Additional Disclosures
Dodd-Frank Rating Information Disclosure Form
https://www.fitchratings.com/creditdesk/press_releases/content/ridf_frame.cfm?pr_id=994236
Solicitation Status
https://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=994236
Endorsement Policy
https://www.fitchratings.com/jsp/creditdesk/PolicyRegulation.faces?context=2&detail=31
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