Jan 30 - Fitch Ratings affirms Arkansas Electric Cooperative Corporation's
(AECC) implied senior secured obligations at 'A+'. Fitch also affirms AECC's
'F1' rating on its $250 million commercial paper program.
The Rating Outlook is Stable.
AECC's long-term rating takes into account approximately $557.5 million in
parity secured debt that is privately held by: Cobank ($94 million); Federal
Financing Bank ($263.1 million); Rural Utilities Service (RUS; $0.4 million);
and a private placement of first mortgage bonds ($200 million). However, AECC's
long-term rating is assigned to 'implied' obligations since none of the
outstanding debt is publicly held.
Pursuant to AECC mortgage indenture, effective June 1, 2009, the senior
obligations are secured by a first lien on essentially all AECC assets, owned
and intangible, including its electric generation and transmission facilities.
AECC's commercial paper notes are unsecured (subordinate) obligations.
SOLID COOPERATIVE FUNDAMENTALS: AECC's credit strengths stem from its long-term
(2042) all-requirements contracts with its 17 member distribution cooperatives,
low cost power resources, competitive wholesale rates and sound member customer
STRONGER MARGINS AND CASH FLOW: AECC's net margins and cash flow have notably
improved with the rebound in industrial sales following the recent recession,
and a 4% wholesale rate increase in November 2009. Fitch-calculated coverage of
full obligations was close to 1.50x for 2010-2012, which is well above the same
coverage reported in 2007-2009 (average of 1.08x) and the Fitch rating category
median of 1.12x.
STATE REGULATORY OVERSIGHT: AECC and its members are subject to rate regulation
by the Arkansas Public Service Commission (APSC). Partially mitigating this
concern is the long history of constructive regulatory treatment by the APSC;
the favorable fuel/purchased power cost pass-through for AECC and its members;
and existing legislation which allows for an expedited, streamlined rate review
process since 2009.
LEVERAGE RISING BUT MANAGEABLE: AECC's capital program totals $800 million
through 2016, primarily for coal plant environmental upgrades related to more
stringent emission standards. Positively, AECC has built up equity over the past
20 years and more recently increased rates twice, in anticipation of the higher
capital spending beginning in fiscal 2012. AECC is projecting modest rate
GROWING MEMBER SALES: AECC's members are spread throughout the state. With AECC
providing 100% of Arkansas Valley Electric Cooperative Corporation's power
requirements beginning June 2011 (sales increase of 5.5%), AECC now provides
power to all the distribution cooperatives' consumers in Arkansas. The members'
customer base is heavily residential, accounting for 60% of member revenues.
COMMECIAL PAPER LIQUIDITY ADEQUACY: AECC's maximum $250 million commercial paper
(CP) program is supported by an equally sized unsecured revolving credit
facility, with a syndicate of 10 banks (expiring April 28, 2014), as well as
AECC's broader liquidity that includes $90 million in unrestricted cash (as of
Oct. 31, 2012). Other increasing member demand obligations at AECC, however, are
WHAT COULD TRIGGER A RATING ACTION
STRONG FINANCIAL METRICS THROUGH CAPEX CYCLE: The continuance of strong cash
flow and liquidity through the current cycle of higher capital expenditures and
related borrowings could support a higher rating going forward.
STRONG CREDIT FUNDAMENTALS
AECC provides generation and transmission service to a customer base of 495,700
users via its 17 member retail electric cooperatives. The members provide
electric service to approximately 31% of the state's consumers. AECC power
supply is competitive cost, with AECC's average wholesale rates among the lowest
of its peer G&T cooperative providers. AECC's power supply is predominantly
coal-fired, representing 60% of energy requirements. This carbon exposure, is
somewhat offset by AECC stronger than average balance sheet (34% equity to total
capitalization as of Oct. 31, 2012) and competitive rates, which combined
provide added rate and financial flexibility prospectively.
RATE REGULATED BUT FAIR TREATMENT
Unlike most of its cooperative brethren in other states, AECC is subject to rate
and regulatory oversight by the APSC. Positively, AECC has a long history of
constructive APSC decisions, including the use of a fuel and purchased power
cost pass-through mechanism for AECC and its members; approval of investment in
the Turk Power Plant (ultra super critical coal-fired facility); and support for
the legislation which created an expedited rate review process (five month
versus a 12-month review). AECC has utilized the expedited rate process twice
since implementation in 2009, for an aggregate 9% wholesale rate increase. The
expedited rate process, while limited to rate increases of 5% or less in a
single year, adds greater rate certainty in a regulated environment.
SIZEABLE CAPITAL PLAN
AECC is in the midst of funding (primarily with debt) environmental upgrades at
its jointly owned coal facilities, due to more stringent U.S. Environmental
Protection Agency (EPA) emission and regional haze mandates. AECC estimates its
share of the emission control upgrades is approximately $536.4 million through
2019. Positively, AECC has secured low cost RUS financing to fully fund these
equipment upgrades as needed. Given that these coal plants (Flint Creek, White
Bluff, and Independence System Electric Station) are fully depreciated, the
added fixed costs related to the environmental upgrades should be manageable.
AECC is also entering this higher capex cycle with a strong balance sheet. AECC
built up equity capitalization to more than 40% by fiscal 2007 in anticipation
of the higher capital expenditures beginning in fiscal 2012. Equity currently
stands at 34% - well above Fitch's peer rating category median of 11.5% for
2011. Going forward, AECC's Fitch-calculated equity will fall to approximately
30% by 2016 (including Notes Payable to Members as debt), which is still very
strong in comparisons to other G&T cooperatives and our Fitch peer medians.