Fitch Affirms Southern Illinois Power Cooperative at 'BBB'; Outlook Stable
The rating is on implied obligations because none of SIPC's $634 million of outstanding long-term debt or short-term borrowings are publicly held.
The Rating Outlook is Stable.
SIPC's senior secured obligations benefit from a security interest in substantially all of the cooperative's tangible and certain of its intangible assets. Senior unsecured obligations are general obligations of the cooperative.
KEY RATING DRIVERS
G&T COOPERATIVE: SIPC is a medium-size generation and transmission (G&T) cooperative that supplies power to seven member distribution systems and two wholesale customers in predominantly rural parts of southern Illinois. Member power is supplied pursuant to all-requirements take-or-pay contracts that extend through 2043. Approximately 61% of member retail load comes from stable residential users.
ABUNDANT GENERATION; PRIMARILY COAL: SIPC's power supply portfolio, including its 7.9% share of the Prairie State Energy Campus (PSEC), a 1,600 MW coal-fired station, is more than sufficient to meet near-term load growth. Approximately 87% of the cooperative's energy supply is derived from coal-fired resources.
HIGH FIXED COSTS: PSEC's high fixed cost will burden the G&T and its members financially over the next several years. Although initial operating results fell short of expectations, PSEC's performance has improved and stabilized, and unit availability and capacity factors are now in line with industry averages. The total cost of energy from PSEC is expected to stabilize around $60/MWh over the near term but will remain heavily influenced by PSEC's operating performance.
RATE MAKING FLEXIBILITY CONSTRAINED: PSEC's high fixed cost will likely restrict rate setting flexibility over the short term. SIPC's wholesale rate stands at 7.7 cents per kilowatt-hour (KWh) for 2016 compared with 6.3 cents in 2011, prior to commercial operation of PSEC. Member rates are generally competitive with other area cooperatives, but above the state's investor-owned and municipal utilities.
TIGHT FINANCIAL METRICS: SIPC's financial metrics are modest compared with most other G&Ts. Fitch calculated debt service coverage (DSC) improved slightly to 1.17x in 2015, but further near-term improvement is unlikely. Liquidity and equity ratios are likely to remain at the lower end of Fitch medians.
RESPONSE TO CONTRACT EXPIRATION: Southern Illinois Power Cooperative's failure to preserve financial performance following the expiration of its contract with Norris Electric Cooperative in December 2017 could result in downward rating pressure on the cooperative.
IMPLEMENTATION OF STRATEGIC PLAN: Adoption of a revised strategic plan aimed at improving the cooperative's business risk and financial metrics, including cash on hand and debt service coverage would be viewed positively.
SIPC supplies wholesale power to seven member distribution cooperatives and two wholesale customers that serve predominantly rural territories throughout southern Illinois. Member cooperatives provide electricity to over 101,000 end-use customers, and a total population of approximately 250,000. The service area is primarily residential and agricultural, with some members experiencing growth from a resurgence in the region's low cost, high sulfur coal industry, due to demand from local, environmentally retrofitted power plants and overseas customers. System load growth is forecast at about 1% per year.
SIPC's largest member is SouthEastern Illinois Electric Cooperative, which accounts for 36% of system megawatt-hour (MWh) sales. The newest customer addition is Norris Electric Cooperative (Norris), a system that is purchasing all of its power requirements under a five-year contract that began on Jan. 1, 2013. Norris has notified SIPC that is will not be extending the contract. SIPC expects the impact of this loss will be relatively minor and should delay the need for additional power resources from about 2018 to 2022.
COAL GENERATION SIGNIFICANT
SIPC'S power supply is predominantly fueled by coal (68% of capacity and over 87% of energy) and consists of 560 MW of owned generation assets, including the Marion units and the recently operable PSEC, and 38 MW in power purchase agreements with Southeastern Power Administration and Pioneer Trail Wind Farm. SIPC's 7.9% undivided ownership interest in the PSEC project (125 MW) will reduce its reliance on purchased power.
The PSEC Units reported combined equivalent availability factors of 80.8% and 75.4%, and capacity factors of 77.7% and 71.9%, in 2015 and through the first six months of 2016 respectively. Year-to-date performance in 2016 currently lags as a result of two scheduled outages, but should improve to levels more consistent with 2015 performance and industry average. Positively, recent performance is notably improved over the initial performance of the units, which was hampered by both planned and unplanned maintenance issues.
SIPC's capital improvement plan has declined precipitously since the completion of PSEC and is forecast at a very manageable $5 million-$10 million per annum. Most of the expenditures are for transmission investment and limited environmental upgrades at the Marion Plant. SIPC expects to fund transmission expenditures with borrowings under the RUS loan program, and to fund remaining expenditures with funds from operations and borrowings under the cooperative's revolving credit facility.
GENERALLY COMPETITIVE RATES
Prior to 2012, base rates had not been raised since 2008. However, a 22% increase was implemented in 2012, raising rates to about 8 cents per KWh, which was intended to capture the increased debt service and operating costs related to PSEC. For 2013, the wholesale rate was reduced by about 6%, helped by better customer efficiency due to the addition of Norris; and on Jan. 1, 2014, rates were increased by 2%, as planned, to generate cash for planned maintenance outages at the Marion plant.
Wholesale power rates to members have remained largely unchanged at 7.65 cents per KWh since 2014, including the cooperative's monthly power cost adder, and are relatively competitive with other regional suppliers. SIPC expects the wholesale rate to drift upward slightly as operating costs increase, but has established a goal of maintaining the rate at 8 cents per kWh or less through 2018.
Members continue to face some rate pressure, due to costs associated with PSEC. Members' rates to customers are fairly competitive when compared with the universe of cooperatives in and around the state of Illinois, but remain solidly above the state's investor-owned and municipal utilities. Member residential rates ranged from 12.08 cents/kWh to 14.56 cents/kWh in 2014 and were comfortably above the state weighted average of 11.81 cents/kWh.
FINANCIAL METRICS CONSTRAINED
SIPC's historical metrics have tracked at the lower end of Fitch-rated G&T cooperatives. Although SIPC's large rate increase helped boost operating margins, the incremental revenue mainly served to pay for the PSEC project's costs and will provide limited improvement to near-term financial ratios. The G&T's longer-term goal is to achieve a 15% equity ratio, a times interest earned ratio (TIER) of around 1.25x and DSC of 1.20x by 2019. SIPC member cooperatives demonstrate adequate financial metrics.
Long-term debt has grown significantly since 2006, reflecting costs associated with PSEC, and totaled $634 million at Dec. 31, 2015. The cooperative also has a $65 million revolving line of credit with National Rural Utilities Cooperative Finance Corporation (CFC) and other bank participants, which runs until mid-2019. At 2015 year end, $22.5 million of the line was outstanding. The credit facility is intended to support working capital needs and provide added liquidity, given SIPC's limited cash balances. While Fitch views this facility as an offset to the utility's low cash position, overall liquidity remains weak in comparison to the universe of Fitch-rating cooperatives.