NEW YORK--(BUSINESS WIRE)--Fitch Ratings has upgraded the implied senior secured rating for Vermont Electric Cooperative (VEC) to 'A-' from 'BBB+'. The rating takes into consideration VEC's $69.5 million in outstanding senior secured obligations that are privately held as of Dec. 31, 2015. The Rating Outlook is Stable.
In addition, effective with this rating action, Fitch will withdraw VEC's rating, as it is no longer considered to be relevant for Fitch's coverage.
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 1.35x and a times interest earned ratio (TIER) of 1.5x.}
KEY RATING DRIVERS
IMPROVED UTILITY FUNDAMENTALS: VEC is an electric distribution cooperative providing service to 75 towns in northern Vermont. The rating upgrade primarily reflects a solid track record of supportive regulatory treatment and more sound financial and power supply positions, commensurate with 'A-' rated peers.
CONSTRUCTIVE REGULATORY TREATMENT: 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 rate requests, accounting treatment (i.e. ability to defer storm costs), and solid targeted TIER of 2.18x.
SOUND FINANCIAL PERFORMANCE: Cash flow metrics tightened moderately in fiscal 2014-2015, but remain solid for the rating category, as VEC prepares for a rate increase filing in 2017. DSC stood at 1.41x for fiscal year end (FYE) 2015, and equity-to-capitalization was 45.5%, in-line with 'A-' counterparts, despite two severe winter storms in 2013 and 2014, and no base rate increase in 2015 or 2016.
MORE STABLE POWER SUPPLY: Favorably, 90% of VEC's power supply needs are contracted-for pursuant to medium- and long-term supply agreements. VEC's purchased power mix is diverse, with 59.6% hydro, 3.2% natural gas, 17.9% renewable and 17% nuclear.
MAINTAIN LOW CASH RESERVES: Solid cash flow metrics are tempered by low cash reserves, providing six days cash on hand at YE 2015. Including available lines of credit, VEC's days liquidity is stronger at 62 days, although still below the 'A-' median of 114 days.
CONSIDERABLE CAPITAL PLAN: VEC estimates capital expenditures of $38 million through 2018, of which, 55%-60% will be debt-financed. Debt-to-FADS has been on the rise the past four years (from 5.07x in FY2011 to 8.50x in FY2015), with sizeable capital spending, costly storm events, and modest rate adjustments. Positively, VEC has adequately managed leverage, as equity capitalization has remained fairly stable for the past five years.
RATING SENSITIVITIES
Ratings Sensitivities are not applicable as the ratings have been withdrawn.
CREDIT PROFILE
VEC is the largest locally owned electric utility in Vermont. It is a not-for-profit distribution cooperative providing electric service to 38,565 retail meters (2015). The service territory includes 75 primarily rural towns throughout the state's northernmost counties, including those along the U.S.-Canadian border. The customer base is mainly residential and small commercial, and is geographically dispersed, as evidenced by the cooperative's average of 14 customers per line mile.
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=1008276
Solicitation Status
https://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=1008276
Endorsement Policy
https://www.fitchratings.com/jsp/creditdesk/PolicyRegulation.faces?context=2&detail=31
ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: HTTP://FITCHRATINGS.COM/UNDERSTANDINGCREDITRATINGS. IN ADDITION, RATING DEFINITIONS AND THE TERMS OF USE OF SUCH RATINGS ARE AVAILABLE ON THE AGENCY'S PUBLIC WEBSITE 'WWW.FITCHRATINGS.COM'. PUBLISHED RATINGS, CRITERIA AND METHODOLOGIES ARE AVAILABLE FROM THIS SITE AT ALL TIMES. FITCH'S CODE OF CONDUCT, CONFIDENTIALITY, CONFLICTS OF INTEREST, AFFILIATE FIREWALL, COMPLIANCE AND OTHER RELEVANT POLICIES AND PROCEDURES ARE ALSO AVAILABLE FROM THE 'CODE OF CONDUCT' SECTION OF THIS SITE. FITCH MAY HAVE PROVIDED ANOTHER PERMISSIBLE SERVICE TO THE RATED ENTITY OR ITS RELATED THIRD PARTIES. DETAILS OF THIS SERVICE FOR RATINGS FOR WHICH THE LEAD ANALYST IS BASED IN AN EU-REGISTERED ENTITY CAN BE FOUND ON THE ENTITY SUMMARY PAGE FOR THIS ISSUER ON THE FITCH WEBSITE.