Fitch Ratings has affirmed the 'AA-' rating on the following Pedernales Electric Cooperative, Inc.'s (PEC) first mortgage bonds:
--$80,000,000 First Mortgage Bonds Series 1993
--$43,789,000 First Mortgage Bonds Series 1995
--$378,300,000 First Mortgage Bonds Series 2002
The Rating Outlook is Stable.
The mortgage bonds are secured equally and ratably by a lien on substantially all of the cooperative's assets. The indenture requires PEC to maintain rates that will produce net revenues at least equal to 1.15 times (x) aggregate annual debt service.
KEY RATING DRIVERS
REVISED GOVERNANCE STRUCTURE: Major changes to senior management and the Board of Directors took place starting in 2008 after financial improprieties were uncovered at the cooperative. The new management team has made significant progress, initiating a more open policy and in-depth financial planning, budgeting and reporting.
GROWING SERVICE AREA: PEC's service territory is large and diverse, including both rural and suburban areas, and is near Austin, the state capital. The rapid growth of the past decade has moderated in recent years, providing some relief to the system's capital demands.
COMPETITIVELY PRICED POWER SUPPLY: Lower Colorado River Authority (LCRA), rated 'A+' by Fitch Ratings, supplies the majority of the cooperative's energy needs, at reasonable rates, under a long-term contract extending through 2041.
SOLID FINANCIALS: Although financial results have fluctuated and been less predictable in recent years, debt service coverage has remained consistently at or above 1.75 times (x) and PEC's new management seems committed to maintaining coverage at high levels and membership equity (as a percentage of assets) at over 30%.
HIGHLY LEVERAGED: Debt ratios are high and cash liquidity is low for an electric distribution system. This reflects the rapid growth and vastness of the service area, capital requirements to support the high level of new customers and the previous decision to rely more on debt financing than cash from operations. Also, PEC has sizeable debt maturities coming due in 2043 and 2044 that the cooperative plans to restructure.
WHAT COULD TRIGGER A RATING ACTION
LESS STABILITY OF FINANCIAL RESULTS: A meaningful decline or excessive variability in financial results could result in a rating downgrade or negative outlook.
PEC is a rural electric cooperative based in Johnson City, Texas. It is the largest distribution cooperative in the U.S., based on number of meters served. PEC doesn't generate any of its own power needs; it purchases and delivers electricity to rural and suburban areas within an 8,100 square mile territory in Central Texas. The service territory is diverse and is home to many cities that are within 20 to 30 minutes commute of government offices in Austin, several colleges and technology based companies. System reliability has historically been very strong.
LCRA is PEC's primary wholesale electric provider, supplying 79.4% of the co-op's power needs in 2011. LCRA is largely dependent on natural gas and coal as a fuel source. Its average wholesale power cost is competitive.
SLOWING, BUT SOLID GROWTH
As of Dec. 31, 2011, there were 242,331 active member accounts and approximately 17,061 miles of energized line at PEC. Meters per mile averaged 13.96, illustrating the sparseness of the service area. Over the past five years, average annual growth in member customers was 2.7%, which is well below historical levels, reflecting the impact of a slower economy. Forecasted growth is assumed at between 2%-3% per year, which should help lessen pressure on additional capital requirements. Customer rates average around 11.67 cents per kilowatt-hour.
STABILIZING FINANCIAL PERFORMANCE
During the period starting in calendar-year 2005 through 2011, net margins varied considerably at PEC, from a low of $16.9 million to a high of $62.0 million. Debt service coverage ranged from a low of 1.73x to a high of 2.58x. The volatility was reflective of a period of management and Board changes, few rate increases, inconsistent use of the Power Cost Adjustment mechanism and slower growth in energy demand.
With the addition of a new financial team and the implementation of more focused financial policies and practices, bottom line results have improved and PEC forecasts more stable debt service coverage at around 2.0x or greater in the future. Membership equity as a percentage of total assets has increased from 20% in 2007 to around 30% in 2011; and is forecasted to rise to close to 35% by 2016.
PEC has approximately $502 million of first mortgage bonds and $230 million, of a $300 million medium term facility, currently outstanding. The medium term facility is interest rate only, with sizeable debt (bullet) maturities due in 2043 to 2044. PEC has no plans to drawdown on the remaining $70 million and is looking at ways to restructure the term facility
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 and U.S. Public Power Rating Criteria, this action was informed by information from CreditScope.
Applicable Criteria and Related Research:
--'U.S. Public Power Rating Criteria' (Jan. 11, 2012);
--'Revenue-Supported Rating Criteria' (June 20, 2011).
Applicable Criteria and Related Research:
U.S. Public Power Rating Criteria
Revenue-Supported Rating Criteria
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