Fitch revises up Vermont Electric Cooperative’s outlook to positive

first_imgVermont Electric Cooperative, Inc,Fitch Revises Vermont Electric Cooperative’s Outlook to Positive; Affirms Sr. Secured at ‘BBB’ Fitch Ratings has affirmed Vermont Electric Cooperative’s (VEC) implied senior secured rating at ‘BBB’. The Rating Outlook has been revised to Positive from Stable. VEC’s senior secured rating is implied as none of the cooperative’s secured debt is publicly held. However, the rating takes into account approximately $58 million of secured debt privately held by lenders including National Rural Utilities Cooperative Finance Corp. and CoBank.RATING RATIONALE:–The Positive Outlook for VEC reflects the cooperative’s consistently strong financial metrics, including increased equity (42.3% at year-end 2010) and solid coverage ratios (debt service coverage [DSC] of 2.0 times [x] for 2010), and the expectation that the current levels will be maintained.–VEC’s improved financial performance is supported by the constructive regulatory decisions of the Vermont Public Service Board (VPSB) in each of VEC’s last five rate cases. VEC’s VPSB-approved Times Interest Earned Ratio (TIER) has steadily increased from 1.5x in 2007 to 2.18x.–The higher TIER level provides VEC some measure of financial cushion to sustain unexpected events, such as unexpected reductions in kwh sales (and revenues) and increases in fuel and purchased power expenses.–While VEC provides service to a well diversified customer base, its retail sales have declined by 6% since 2007, largely due to unfavorable weather, the economic recession and energy efficiency initiatives throughout the state.–VEC is in the midst of a considerable 10-year capital expenditure plan (approximately $100 million through 2018) which will require roughly 50% debt financing. However, given the VPSB’s approval of the capital plan and higher TIER level, equity capitalization should remain in excess of 40% level.–VEC’s retail rates are among the higher utility rates in the state but compare favorably to other utilities in the New England region.–Power supply is an ongoing concern for VEC, as it purchases power primarily under contractual arrangements with durations of no more than five years. VEC is presently negotiating to replace its largest power supply contract with Hydro Quebec (HQ; 37% of total energy) which terminates 2012-2014.–VEC maintained just $214,000 of cash (one day) on hand at Dec. 31, 2010, which is a significant concern and credit weakness. While additional liquidity is provided through lines of credit totaling $20 million ($16 million available at Dec. 31, 2010) reliance on credit facilities during periods of financial turmoil can be cause for concern.WHAT COULD TRIGGER A RATING UPGRADE?–Sustained regulatory support from the VPSB and maintenance of strong financial metrics could lead to a rating upgrade.–Successful management of its open power supply position, including an extension of the HQ supply contract, and full cost recovery (despite lack of a fuel adjustment surcharge) via annual rate requests to the VPSB.–Maintenance of cash reserves more consistent with sector medians.SECURITY:VEC’s senior secured obligations are secured by a pledge of substantially all net electric plant assets. Under the mortgage indenture, VEC is required to maintain a minimum DSC ratio of 1.35x and TIER of 1.5x.CREDIT SUMMARY:VEC is a not-for-profit distribution cooperative providing electric service to approximately 34,000 members in northern Vermont. Following a series of acquisitions and divestitures in recent years, VEC currently serves 74 primarily rural towns throughout a service territory that encompasses all or portions of the state’s northernmost counties including those along the U.S.-Canadian border. VEC’s customer base is heavily comprised of residential and small commercial users and is widely dispersed, as evidenced by the cooperative’s average of only 14 customers per line mile. VEC is Vermont’s third largest electric utility, behind the state’s two largest investor owned utilities.VEC owns no generating assets and purchases all of its member energy requirements through a series of reasonably well diversified power purchase agreements.VEC is one of only a relatively few municipal/cooperative utilities that are subject to state regulatory oversight, which Fitch generally views unfavorably. Positively, for VEC, the VPSB has supported the cooperative’s recent requests for rate adjustments, as well as its current capital plan.Additional information is available at ‘ is external)’.In addition to the sources of information identified in Fitch’s Revenue-Supported Rating Criteria, this action was additionally informed by information from Creditscope.Applicable Criteria and Related Research:–‘Public Power Rating Guidelines’, dated March 11, 2011;–‘Revenue-Supported Rating Criteria’, dated Oct. 8, 2010;–‘U.S. Public Power Peer Study’, dated June 16, 2010.For information on Build America Bonds, visit ‘ is external)’.Applicable Criteria and Related Research:Revenue-Supported Rating Criteria…(link is external)U.S. Public Power Peer Study, June 2010…(link is external)U.S. Public Power Rating Criteria…(link is external)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.Source: Fitch Ratings. NEW YORK–(BUSINESS WIRE)–4.5.2011last_img

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