Fitch Affirms Vermont Electric Cooperative's Sr. Secured Rating at 'BBB+';
NEW YORK -- March 12, 2013
Fitch Ratings affirms the 'BBB+' rating on Vermont Electric Cooperative's
(VEC) implied senior secured obligations.
VEC's rating takes into account approximately $62.4 million of secured debt
privately held by lenders including National Rural Utilities Cooperative
Finance Corp. (CFC) and CoBank ACB. However, the rating is assigned to implied
obligations, since none of the outstanding debt is publically held.
The Rating Outlook is Stable.
VEC's senior secured obligations are secured by a mortgage interest in
substantially all net electric plant assets.
KEY RATING DRIVERS
STABLE SERVICE AREA: VEC serves a heavily residential and well-diversified
customer base throughout northern Vermont. Economic indicators of the state
(rated 'AAA', Stable Outlook) are on par, or outperform those of the nation.
Fiscal 2012 saw an increase in energy sales, primarily due to continued
STRONG FINANCIAL METRICS: Financial metrics continued to improve, with
stronger coverage ratios (DSC of 2.66x in fiscal 2012, based on unaudited
financials) and increased equity (46.6% equity/capitalization at year-end
2012). Both metrics are above rating category medians.
LOW CASH RESERVES: Cash liquidity remains weak at only seven days cash on hand
(DCOH) at year-end 2012. While this is an improvement from a low of one DCOH
at year-end 2010, cash levels are still very low. Overall liquidity is notably
stronger at 110 days, due to available lines of credit.
POWER SUPPLY CONTINUES TO STABILIZE: A new long-term contract with NextEra
Energy Resources, which supplies capacity from the Seabrook nuclear unit,
provides additional stability to VEC's power supply. Favorably, 90% of VEC's
power supply needs are contracted through 2016.
POSITIVE RELATIONSHIP WITH REGULATORS: The cooperative is subject to state
regulatory oversight, which could limit rate and financial flexibility.
Positively, the Vermont Public Service Board (VPSB) has been supportive of
VEC's recent rate requests and of increased targeted times interest earned
SUBSTANTIAL CAPITAL PLAN: VEC's current 10-year capital plan (2008-2018) is
sizable and requires additional debt financing, which may strain certain
financial metrics over the near term. Going forward, DSC and
equity/capitalization ratios should approximate 2.0x and 40%, respectively,
but remain in line with the rating category.
Adverse Regulatory Decisions: Regulatory decisions that undermine the
financial initiatives adopted by VEC and strain the relationship between VEC
and the regulators would be viewed negatively and could put pressure on the
Cash Reserve Increases: Maintenance of cash reserves more consistent with
sector medians would be viewed positively.
VEC is a not-for-profit distribution cooperative providing electric service to
approximately 34,000 small, rural members in northern Vermont. The service
territory encompasses all or portions of the state's northernmost counties,
including those along the U.S.-Canadian border. The area is mountainous and
very rural, with an average of only 14 customers per line mile.
Energy sales have grown annually over the last three years. Fiscal 2012 saw a
1.7% increase in sales, primarily due to economic recovery and improvements in
commercial centers. While VEC forecasts sales remaining relatively flat for
the next several years (modest growth offset by conservation), economic growth
is anticipated in the Northeast Kingdom Area due to an economic revitalization
Vermont is one of the few states where municipal and cooperative electric
utilities, including VEC, are subject to state regulatory oversight. Fitch
generally views regulation as somewhat limiting in regards to rate and
financial flexibility. Positively, the VPSB has supported VEC's recent
requests to recover higher purchased power costs, as well as its current
capital plan. VEC's rate design does not include an automatic fuel or
purchased power adjustment clause, which contributes to the cooperatives
frequent rate requests.
Diverse Power Supply
VEC does not own generation assets but instead purchases all of its member
energy requirements through a series of reasonably well-diversified power
purchase agreements. The cooperative uses a mix of long- and short-term power
supply arrangements. Favorably, 90% of VEC's power supply needs are contracted
Strong financial performance
VEC's financial metrics are strong and outperform the 'BBB+' medians, with the
exception of its very low liquidity level. Financial performance has
strengthened over the past five years, due to the VPSB in 2009 allowing VEC to
target a TIER of 2.18x (increased from a 1.5x target). The higher allowance
has given VEC the ability to improve margins and increase cash levels.
Unaudited fiscal 2012 financials show improved DSC of 2.66x and TIER of 3.25x.
Fitch expects a slight weakening of financial metrics from the high levels
achieved in fiscal years 2011 and 2012, but performance should remain in-line
with the current rating category. Overall, the cooperative's future
performance is expected to be more consistent with its VPSB approved
The cooperative's cash level decreased slightly at fiscal year-end 2012, from
$1.9 million to $1.2 million, but is within VEC's target of six DCOH. Fitch
continues to view VEC's cash reserves as weak. Additional liquidity is
provided by lines of credit with CFC and CoBank ACB that aggregate $20
million. At year-end 2012, $17.5 million was available under these facilities,
bringing total days liquidity to a stronger 110 days, which is more consistent
with the current rating.
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.
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:
*'U.S. Public Power Rating Criteria', Dec. 18, 2012;
*'Revenue-Supported Rating Criteria', June 12, 2012;
*'U.S. Public Power Peer Study', June 20, 2012.
Applicable Criteria and Related Research
U.S. Public Power Peer Study -- June 2012
U.S. Public Power Rating Criteria
Revenue-Supported Rating Criteria
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