NEW YORK–(BUSINESS WIRE)–
Fitch Ratings affirms the ‘A+’ rating on Connecticut Municipal Electric Energy Cooperative’s (CMEEC) following bonds:
–$69.5 million power supply system revenue bonds, 2013 series A&B;
–$28.5 million CMEEC transmission services revenue bonds, 2012 series A.
In addition, Fitch affirms the rating on the following bonds:
–$20.7 million Connecticut Transmission Municipal Electric Energy Cooperative (TRANSCO) 2012 series A transmission system revenue bonds at ‘A+’.
The Rating Outlook is Stable.
The CMEEC power supply system revenue bonds are secured by a pledge of net revenues derived from the power sales contracts and from the operation of CMEEC. The TRANSCO bonds are secured by net revenues received by TRANSCO from CMEEC.
KEY RATING DRIVERS
STATUS OF PURCHASERS: CMEEC supplies power to five member distribution systems (the members) and various wholesale customers. Members exhibit stable financial operations and demographics. The expiration of CMEEC’s purchase contract with the Town of Wallingford has put some strain on the utility, due to decreased energy sales and an ongoing legal dispute. An additional degree of risk is added by the Mohegan Tribal Utility Authority’s (MTUA) concentrated sales to financially challenged Mohegan Sun casino.
DIMINISHED FINANCIAL PERFORMANCE: 2014 saw a fall in CMEEC’s financial performance from its historically very stable level. Fitch calculated debt service coverage (DSC) was below 1.0x, primarily as a result of management’s decision to use a portion of its rate stabilization fund (covenant calculation above 1.1x). However, CMEEC’s financial forecast indicates performance should return to a more historic level in 2015 as new purchase contracts are added.
SOLID LONG-TERM CONTRACTS: Supporting CMEEC’s creditworthiness are long-term all-requirements power supply contracts with its five members that extend through 2053. Non-member wholesale participants purchase power through varying shorter term contracts.
POWER SUPPLY RISK: Active management of power supply through primarily short and intermediate contracts makes CMEEC somewhat vulnerable to fluctuating power prices. Positively, CMEEC’s power purchasers all have automatic rate adjustments that capture changes in the cost of power, which ensures timely cost recovery.
CUSTOMER CONCENTRATION A CONCERN: CMEEC’s largest purchasers are exposed to varying degrees of industrial customer concentration. While retail customers are unable to purchase power from other utilities, loss of load due to self-generation or business closings is a risk.
COST BENEFIT OF TRANSCO: The creation of TRANSCO, a legally separate joint action agency, has allowed CMEEC to maximize the financial return on its ownership of transmission lines, which is ultimately used to reduce net transmission costs.
IMPROVED FINANCIAL METRICS EXPECTED: Fitch expects improved financial performance based on CMEEC’s current financial forecast, which incorporates the addition of new purchasers. It is anticipated that new contracted purchasers will bolster financial performance and corresponding metrics to a level commensurate with the current rating category. Absent any measured improvement in financial metrics over the next one to two years, negative rating action would likely occur.
OUTCOME OF MEMBER DISPUTE: Financial pressure resulting from the ongoing Wallingford contract dispute would also be viewed negatively.
CMEEC is a joint action agency in southern Connecticut, providing electric service to five member distribution systems (municipal electric systems serving the cities of Groton and Norwich, the borough of Jewett City and the second and third taxing districts of the city of Norwalk) and three wholesale customers (Wallingford, Bozrah Light & Power and MTUA). Together, the participants serve an aggregate retail customer base of approximately 76,200.
CMEEC created TRANSCO in 2009 in order to acquire transmission assets that provide full transmission service to CMEEC’s participants, while also maximizing the net benefits of transmission ownership.
LOSS OF WALLINGFORD
Wallingford was previously CMEEC’s largest wholesale customer, but its contract expired on Dec. 31, 2013 and the town transitioned to a different wholesale supplier. Energy sales to Wallingford decreased in 2014, as forward purchase contracts rolled off. Wallingford is contracted to receive hedged energy from CMEEC through 2017, at diminishing amounts, and is contracted to remain in CMEEC’s generation projections for specified periods of time.
The termination of the Wallingford contract places a higher cost burden on the remaining members, which will need to be absorbed through future rate increases or new customer contracts. Fitch viewed Wallingford’s participation in CMEEC as providing meaningful depth, breadth and diversity to CMEEC’s participants, which supported CMEEC’s credit quality. However, the remaining members all exhibit sound credit worthiness.
After Wallingford transitioned to the new supplier, a legal dispute arose between Wallingford and CMEEC. Wallingford is disputing the payment of administrative and general expenses associated with the three contracts remaining in effect as of Dec. 31, 2014. Fitch will continue to monitor the dispute and assess the impact of the outcome once it’s finalized.
The majority of CMEEC’s power supply is purchased through short and intermediate term contracts, on average one to three years. CMEEC’s power supply strategy has largely been effective, as evidenced by its wholesale cost of power being consistently lower than nearby investor owned utilities.
In 2012 CMEEC updated its risk management policy so that any commitment with a term greater than five years, whether a long-term power purchase agreement or a generation asset, must be fully subscribed prior to execution. Fitch views this change favorably, as it reduces CMEEC’s exposure to being long on power.
CMEEC’s financial performance declined substantially in 2014 partially due to costs incurred under new short-term purchase contracts that will be billed in 2015. DSC was 0.59x in 2014, prompting the utility to rely on unrestricted fund balances to support operations. Including RSF transfers, coverage was 0.97x, below their average of 1.3x in recent years.
Forecasts show performance should improve in 2015, bringing DSC up to a more historic level of 1.10x. The rebound is due to the new contracted sales, which provide a more robust margin than the lost Wallingford load. Wallingford contracts will completely roll off by year-end 2017.
The CMEEC members historically exhibit strong financial profiles. CMEEC’s revenue is concentrated in its largest participants – the cities of Groton and Norwich and the town of Wallingford – which account for almost 60% of CMEEC’s energy sales. Groton Utilities’ financial performance strengthened in recent years, after weakening in 2010 and 2011 from lessened energy sales. 2013 saw the first year of increased energy sales and 2014 sales remained relatively flat. Norwich, South Norwalk and East Norwalk have shown stable financial performance, with strong liquidity levels and no outstanding electric system debt. Revenues have fluctuated with the cost of power, but margins have remained relatively constant.
Additional information is available at ‘www.fitchratings.com‘.
Applicable Criteria and Related Research:
–’U.S. Public Power Peer Study — June 2014′ (June 13, 2014);
–’U.S. Public Power Peer Study Addendum – February 2015′ (Feb. 9, 2015);
–’Revenue Supported Rating Criteria’ (June 16, 2014);
–’U.S. Public Power Rating Criteria’ (March 18, 2014);
–’2015 Outlook: U.S. Public Power and Electric Cooperative Sector’ (Dec. 10, 2014).
Applicable Criteria and Related Research:
U.S. Public Power Peer Study — June 2014
U.S. Public Power Peer Study Addendum — February 2015
Revenue-Supported Rating Criteria
U.S. Public Power Rating Criteria
2015 Outlook: U.S. Public Power and Electric Cooperative Sector (Steady as She Goes)
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