Fitch Ratings has assigned an initial long-term rating of 'BBB' to the implied senior unsecured obligations of Southern Illinois Power Cooperative (SIPC). The rating takes into account $95 million of parity debt at Dec. 31, 2012, but is assigned to implied obligations, because none of the outstanding unsecured debt is publicly held.
The Rating Outlook is Stable.
In addition, Fitch affirms the rating of 'BBB' on SIPC's implied senior secured obligations. The rating takes into account $715 million of long-term parity debt at Dec. 31, 2012.
SIPC's unsecured obligations are general corporate obligations of the cooperative. Secured obligations are secured by a mortgage interest in substantially all of SIPC's tangible and certain of its intangible assets.
KEY RATING DRIVERS
MID-SIZED GENERATION AND TRANSMISSION COOPERATIVE: SIPC supplies wholesale power to seven member distribution cooperatives who serve predominantly rural territories throughout southern Illinois. Power is supplied pursuant to long-term, all-requirements take-or-pay wholesale power contracts (WPC) that extend through 2043.
RATINGS REFLECT LIKELIHOOD OF DEFAULT: Fitch's analysis incorporates the creditworthiness of SIPC and does not make any distinction between the ratings of SIPC's senior secured and senior unsecured obligations as ratings assigned to public finance obligations only reflect the obligations' vulnerability to default. The ratings do not reflect any measure of recovery given default.
SUFFICIENT POWER SUPPLY RESOURCES: SIPC's power supply is generally sufficient to meet anticipated native load growth through 2017, with the recent addition of the Prairie State Energy Campus (PSEC). This obviates the immediate need for significant future construction activity or additional debt. The environmental compliance risks related to its coal-dominated portfolio are lessened by PSEC being among the cleanest coal burning plants in the U.S.
LIMITED RATE MAKING FLEXIBILITY: The addition of PSEC, while expected to yield long-term cost benefits, has substantially added to costs and eroded SIPC's rate making flexibility in the near term. Wholesale member power charges were 5.8 cents/kWh in 2007, and have recently risen to 7.8 cents/kWh after a 22% rate increase was implemented in 2012 to capture costs associated with the project.
GROWING INDUSTRIAL LOAD: About half of member retail load is from residential customer requirements. The addition of Norris Electric Cooperative (Norris) as a customer in 2013 is viewed constructively, but its industrial load concentration from oil well and coal mine development, offsets some of this benefit.
PSEC COMMERCIAL OPERATION: The rating reflects the commercial operation of both PSEC units as of November 2012. SIPC's participation in PSEC will reduce its reliance on purchased power and provide long-term cost stability to its members albeit at a higher initial price.
MARGINAL FINANCIAL METRICS: SIPC's historical financial metrics are weak compared to other Fitch-rated generation and transmission (G&T) cooperatives, with debt service coverage (DSC) and equity to capitalization ratios having averaged 1.18x and 9.6%, respectively. Beginning in 2013, SIPC's financial metrics are expected to be pressured, as the substantial debt associated with PSEC begins to amortize. As a result, board policies regarding financial measures and the willingness to adjust rates as needed, will take on greater significance.
MEMBER CREDIT QUALITY: Sustaining reasonable operating and financial metrics of the member cooperatives, which are the ultimate off-takers of SIPC's power supply, will be a key factor in future rating decisions.
LOSS OF NORRIS: The loss of Norris as a customer, after its five-year contract ends would be a concern, leaving SIPC with excess power to remarket or contract over the long term.
DESIGN OF SOUND BUSINESS PLAN: SIPC's ability to construct and execute a well-designed business plan to meet member and investor requirements could result in a positive rating action.
DEBT OBLIGATIONS BOTH SECURED AND UNSECURED
The majority of SIPC's long-term debt obligations are secured by a mortgage interest in substantially all of SIPC's tangible and certain of its intangible assets.
SIPC also has unsecured obligations, the majority of which is in the form of a four-year syndicated revolving line of credit agreement that expires on May 24, 2016. The facility is in the amount of $65 million and is not drawn upon at this time.
The line of credit is available for short-term needs including working capital and general business operations. SIPC projects a $15 million draw on the line in 2014 to fund the overhaul of four turbines at the Marion plant, and is expected to carry this amount for several years.
The syndicate is led by the National Rural Utilities Cooperative Finance Corporation (CFC), and includes KeyBank National Association, and the Bank of Tokyo-Mitsubishi UFJ.
For additional information on SIPC's credit profile, please see Fitch's release dated Jan. 17, 2013.
Additional information is available at 'www.fitchratings.com'.
Applicable Criteria and Related Research:
--'U.S. Public Power Rating Criteria' (Dec. 18, 2012);
--'Revenue-Supported Rating Criteria' (June 12, 2012).
Applicable Criteria and Related Research
U.S. Public Power Rating Criteria
Revenue-Supported Rating Criteria
Michael Mohammed Murad, +1 212-908-0757
Fitch Ratings, Inc.
One State Street Plaza
New York, NY 10004
Alan Spen, +1 212-908-0594
Christopher Hessenthaler, +1 212-908-0773
Elizabeth Fogerty, +1 212-908-0526
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