AUSTIN, Texas--(BUSINESS WIRE)--Fitch Ratings affirms the 'A-' rating on Western Farmers Electric Cooperative's (WFEC) implied senior secured obligations.
The Rating Outlook is Stable.
The rating takes into account $821 million of non-publicly held parity secured debt (not rated). WFEC's rating is assigned to implied obligations, since none of the secured debt is publicly held.
The senior secured obligations are secured by a mortgage interest in substantially all of WFEC's tangible and certain of its intangible assets. A mortgage indenture was established on April 8, 2011.
KEY RATING DRIVERS
OKLAHOMA G&T COOPERATIVE: WEFC is a generation and transmission (G&T) power cooperative serving Altus Air Force Base and 21 distribution cooperative members in Oklahoma and New Mexico, with small service area portions in Texas and Kansas. Revenues are provided through long-term, all-requirements power sales contracts with the 21 members that extend through at least 2050.
LOW LOAD GROWTH: Load growth at member systems is limited although there was some positive growth in 2014 related to oil and gas development when commodity prices were high. Future load growth is expected to be minimal although WFEC continues to absorb periodic increases in the amount of load it serves to the New Mexico members as the legacy contract used to serve those new members (added in 2010) steps down through 2026.
TRADITIONAL GENERATION IN SPP MARKET: WFEC has 2,426 MW of owned and purchased generation capacity made up of coal and gas-fired resources and a small hydro allocation. Resources have been supplemented by a growing collection of wind and solar contracts and economic purchases within the SPP integrated market. WFEC does not anticipate needing additional generation capacity until 2024.
IMPROVED BUT MODEST FINANCIAL PROFILE: WFEC improved its financial margins in the last three years although coverage remains at modest levels and slightly below Fitch's sector medians. Financial ratios are in compliance with WFEC targeted debt service coverage of 1.2x (target increased from 1.1x in 2013). Cash liquidity is minimal and operating liquidity is provided by lines of credit. Future financial performance is expected to remain around 1.2x coverage, 20% equity and current liquidity levels.
ENERGY SECTOR IMPORTANCE: WFEC's service territory continues to have a large portion of its activity that relates to the oil and gas sector. Changes in commodity prices drive investment in this sector and can result in fluctuations in load growth forecasts and energy demand over time.
FAILURE TO MAINTAIN FINANCIAL TARGETS: Maintenance of the 'A-' rating assumes Western Farmers Electric Cooperative and its members successfully manage the current limited growth forecast and continue to achieve financial targets. Any weakening in WFEC's financial metrics below the cooperative's stated targets would result in negative rating pressure.
WFEC is a not-for-profit generation and transmission (G&T) cooperative that provides wholesale electric service to 21 distribution cooperatives (members), Altus Air Force base and other power users. The members are located primarily in Oklahoma and New Mexico, with some service territories extending into portions of Texas and Kansas.
The members serve estimated populations of 490,000 in Oklahoma and 53,000 in New Mexico. Population growth in the service area is minimal and load growth has typically been flat although stronger oil and gas prices can result in growth in select member service territories periodically. The recent decline in those commodity prices has weakened projected load growth. Of the member systems, the four New Mexico cooperatives are state commission rate regulated by the New Mexico Public Regulation Commission (NMPRC), while 16 of the 17 Oklahoma members are not rate regulated.
ALL-REQUIREMENTS CONTRACTS; FOUR NEW MEMBERS ADDED IN 2010
WFEC serves its members and Altus AFB through all-requirements wholesale power contracts. The contracts require each member to purchase all of their energy from WFEC or to seek WFEC permission to self-provide or purchase from an alternate provider. WFEC has been working to extend the contracts from an expiration date in 2050 to 2065. Seventeen contracts now extend through 2065 with four others still expiring in 2050. Altus AFB has a contract that expires in 2023; Altus AFB accounts for less than 1% of energy sales so the short contract expiration is not a credit concern.
There is diversity among WFEC's membership in that only three members account for over 10% of WFEC's sales and no member accounts for more than 12%. However, some members' sales have very limited residential components, with less than 10% of sales being provided to residential customers.
WFEC added the four New Mexico members in 2010. The members have a transition agreement with WFEC through 2026 that includes a gradual take-over by WFEC of providing the all-requirements of the members. The four New Mexico cooperatives had a legacy power supply agreement with the Southwestern Public Service Company (SPS) that declines in four increments through 2026. In 2014, the contract was assigned to WFEC and WFEC began delivering energy to those members.
SUFFICIENT GENERATION; NEW MARKET OPERATIONS IN SPP
WFEC's strategy is to own sufficient resources to meet member demand. In 2016, with the consolidation of the Anadarko Units 7&8 into WFEC with the merger of the previously wholly owned WFEC GenCo that held the asset, WFEC has 2,426 MW of firm capacity through its owned and contracted resources. In addition, WFEC has increased its variable energy resources considerably in recent years, and now has another 652 MW of wind and solar resources through 14 different contracts. Peak coincident demand was 2,077 in summer 2015. WFEC has sufficient generation to serve the New Mexico distribution cooperatives' increasing load requirements through 2024, as it replaces Southwest Public Service Company's (SPS) power supply commitment.
The implementation of Southwest Power Pool's (SPP) integrated market in 2014 has changed the resource needs as well. The integrated market turned over resource dispatch to SPP, created one balancing authority across the 14 states served by SPP and opened a day-ahead energy market. As a result of low natural gas prices and a high saturation of wind and solar within the SPP market, WFEC finds that purchases are displacing older coal and gas units in order to serve member load with the lowest cost resource. ACES acts as WFEC's agent to bid WFEC's resources into the day-ahead market and purchase all energy needed through the market, as required, to meet member loads.
IMPROVED FINANCIAL PERFORMANCE
The board and management have developed a strategic plan to strengthen WFEC's long-term financial position, which Fitch views favorably. Under this plan, steps have been taken to reduce costs and increase operating margins, support key financial ratios and improve financing flexibility through adoption of a trust indenture. Financial goals include: (i) debt service coverage (DSC) target greater 1.2x, (ii) margin for interest ratio (MFI) greater than 1.1x, (iii) operating margin greater than $0, (iv) equity to assets of 20% after capacity additions and (v) an increased cash reserve position.
Since 2013, WFEC has been in compliance with these targets with Fitch-calculated DSC of 1.3x in fiscal 2015 and 29% equity to capitalization. Cash and investments of $6.4 million at the end of fiscal 2015 (four days cash on hand) are modest compared with comparable rated wholesale power systems. WFEC has traditionally kept minimal unrestricted cash on hand. When available borrowing from the $300 million in combined credit facilities is included, the Days Liquidity ratio appears more acceptable at 157 day cash on hand, although still below Fitch's category median.
WFEC has used cash provided by its slightly stronger margins since 2013, proceeds from the asset sale of a gas pipeline in 2014 and interest income to boost restricted contingent cash reserves (CCR) from $23.9 million in fiscal 2012 to $43.7 million in fiscal 2015. The CCR balance is included in the funds WFEC holds in the Cushion of Credit account (unapplied advance payment) with the RUS, which restricts the funds for the use only in the payment or prepayment of debt borrowed through the RUS loan program. The balance in the Cushion of Credit account was $49.3 million at the end of fiscal 2015.
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Revenue-Supported Rating Criteria (pub. 16 Jun 2014)
U.S. Public Power Rating Criteria (pub. 18 May 2015)
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