July 31 - Fitch Ratings assigns an initial rating of 'AA-' to the following
Denton County Electric Cooperative, Inc., Texas (d/b/a CoServ Electric) notes:
--Approximately $475 million first mortgage notes, series 2012B.
Proceeds of the private placement, which are expected to price in mid-August
2012, will be used to refinance all of the cooperative's existing debt with the
National Rural Utilities Cooperative Finance Corporation.
The Rating Outlook is Stable.
The notes are secured by a first priority lien on substantially all of CoServ's
tangible and certain intangible electric assets, including its electric
distribution facilities and interest in its wholesale power contract.
KEY RATING DRIVERS
LOW-RISK DISTRIBUTION SYSTEM: CoServ is a low-risk electric distribution
provider in the growing, northern Dallas-Fort Worth Metroplex. It is the largest
member of Brazos Electric Power Cooperative, which supplies substantially all of
the cooperative's power needs pursuant to a long-term wholesale power contract
STRONG SERVICE TERRITORY: The cooperative's largely residential service
territory exhibits sound economic indicators that contribute to its relative
operating stability. In addition, minimal bad debts improved in each of the past
three years to a negligible 0.17% of 2011 total operating revenues, reflecting a
resiliency of the area economy to the recent economic recession.
CONSISTENT FINANCIAL OPERTAIONS: Cash flow metrics are sound and in line with
management's targets, despite being slightly below Fitch's 'AA-' rating category
medians. Debt service coverage and operating margins averaged 2.1x and 11.6%,
respectively, over the last four years with little deviation.
MODEST, IMPROVING BALANCE SHEET: Balance sheet metrics are below average but
trending stronger. Cash on hand has averaged 39 days since 2008, but improved to
57 days in 2011; the ratio of equity to capitalization was 35.6%. Rating
category medians were 128 days and 54.9%, respectively.
COMPETITIVE RETAIL RATES: Rates are competitive with area providers and allow
for the timely pass through of all wholesale power costs. A fixed monthly
component of CoServ's distribution charges representing about one-third of the
total enhances the cooperative's revenue predictability.
LIMITED COMPETITIVE PRESSURE: Customers can choose their retail electric
provider in about 40% of CoServ's service territory that is multi-certified.
However, existing customers rarely switch providers, and the cooperative has
been successful in gaining about three-quarters of new residential customers in
these areas since 2006. This provides good evidence for the reliability of the
cooperative's electric service.
CoServ provides low-risk electric distribution service to approximately 164,000
meters in a growing, six-county area of the northern Dallas-Fort Worth
Metroplex. Financial metrics are solid, if not slightly below Fitch's 'AA-'
rating category medians. However, the service territory's strong economic
indicators allow for relative operating stability that provides comfort at the
'AA-' rating level.
STABLE CASH FLOW METRICS
CoServ's cash flow metrics are steady and healthy. Debt service coverage
remained in a tight range of 2.1x-2.3x from 2008-2011, evidencing the stability
of CoServ's financial operations that benefit from a strong service territory
and the timely pass through of costs. Management has traditionally targeted a
debt service coverage ratio of 2.0x. However, coverage is forecasted at about
2.5x annually through the cooperative's 2022 planning period.
MODEST, IMPROVING BALANCE SHEET
Liquidity metrics are below rating category medians, but improved. Cash on hand
averaged 39 days in the four years to 2011, when it reached 57 days. The
cooperative added to its electric and gas facilities an above-average 190% of
annual depreciation during the period, principally through cash funding; this
limited the growth of cash balances. The rating category median for
capex/depreciation is 139.5%.
Equity levels grew by three quarters from 2008 to $222 million in 2011, as the
cooperative continued to expand and mature from its legacy bankruptcy filing
over 10 years ago. Limited debt-financing plans are expected to help the
cooperative reach a goal of 50% equity to capitalization by 2019.
STRONG SERVICE TERRITORY
CoServ operates largely in Denton County (65% of revenues) and Collin County
(33% of revenues). The service territory exhibits strong economic
characteristics, including well above-average wealth and employment levels that
contribute to the cooperative's stable overall financial position. In addition,
CoServ serves a largely residential base representing a high 69% of kWh sales
that further enhances revenue predictability. Meter growth has slowed from the
early 2000s, but remains healthy at an average of about 3.5% annually.
A strong area economy left bad debts largely immaterial through the recent
recession. The cooperative's bad debt expense has declined in each year since
2008 to 0.17% in 2011.
SOLID POWER SUPPLIER
CoServ is the largest of Brazos Electric Power Cooperative's 16 distribution
cooperative members, representing nearly one third of its total megawatt hour
sales. Brazos' implied senior secured rating is 'A', with a Stable Outlook.
Additional information is available at 'www.fitchratings.com'. The ratings above
were solicited by, or on behalf of, the issuer, and therefore, Fitch has been
compensated for the provision of the ratings.
This action was informed by information identified in Fitch's Revenue-Supported
Rating Criteria and U.S. Public Power Rating Criteria.
Applicable Criteria and Related Research:
--'Brazos Electric Power Cooperative, Texas' (June 15, 2012);
--'Revenue-Supported Rating Criteria' (June 12, 2012);
--'U.S. Public Power Rating Criteria' (Jan. 11, 2012).
Applicable Criteria and Related Research:
Brazos Electric Power Cooperative, Texas
Revenue-Supported Rating Criteria
U.S. Public Power Rating Criteria