Fitch Affirms Connecticut Muni Electric Energy Cooperative Power Supply System Rev Bonds at ‘A+’
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In addition, Fitch affirms the rating on the following bonds:
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The Rating Outlook is Stable.
SECURITY
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
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
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
RATING SENSITIVITIES
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
CREDIT PROFILE
CMEEC is a joint action agency in southern
CMEEC created
LOSS OF
The termination of the
After
POWER SUPPLY
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.
FINANCIAL PERFORMANCE
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
The CMEEC members historically exhibit strong financial profiles. CMEEC's revenue is concentrated in its largest participants - the cities of
Additional information is available at 'www.fitchratings.com'.
--'U.S. Public Power Peer Study --
--'U.S. Public Power Peer Study Addendum -
--'Revenue Supported Rating Criteria' (
--'U.S. Public Power Rating Criteria' (
--'2015 Outlook: U.S. Public Power and Electric Cooperative Sector' (
U.S. Public Power Peer Study --
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=749789
U.S. Public Power Peer Study Addendum --
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=861490
Revenue-Supported Rating Criteria
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=750012
U.S. Public Power Rating Criteria
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=740841
2015 Outlook: U.S. Public Power and Electric Cooperative Sector (Steady as She Goes)
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=831228
Additional Disclosure
Solicitation Status
http://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=982257
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