Fitch Affirms East Kentucky Power Coop Bonds at 'BBB+'; Outlook Positive
OREANDA-NEWS. Fitch Ratings affirms the 'BBB+' underlying rating on East Kentucky Power Cooperative's (EKPC) $5,500,000 Pulaski County, KY solid waste disposal revenue bonds series 1993B.
In addition, Fitch affirms the 'BBB+' rating on EKPC's implied senior unsecured obligations. The rating takes into account $89.36 million of unsecured debt at Dec. 31, 2014, but is assigned to implied obligations, since none of the outstanding unsecured debt is publicly held.
The Rating Outlook is Positive.
Senior secured obligations are secured by a mortgage interest in substantially all of EKPC's tangible and certain of its intangible assets.
KEY RATING DRIVERS
GENERATION AND TRANSMISSION COOPERATIVE: EKPC is a generation and transmission (G&T) cooperative that supplies power to 16 member-owner distribution systems, who serve predominantly rural territories in 87 counties in central and eastern Kentucky. Wholesale power agreements extend through Jan. 1, 2051, and require members to serve their entire load through purchases from EKPC, with minor exception.
IMPROVING FINANCIAL PROFILE: EKPC's financial profile has improved considerably in recent years, reflecting the adoption of a comprehensive strategic plan designed to achieve a minimum equity ratio of 15% and debt service coverage (DSC) of 1.25x-1.35x. Member rates and financial ratios provide support for the current rating and Positive Outlook.
SUBSTANTIAL POWER SUPPLY: The G&T's generation fleet is reasonably diverse, but heavily reliant on coal-fired units. Owned power supply, participation in the PJM Interconnection LLC (PJM) and planned unit additions should be sufficient to meet members' peak energy demands going forward. Environmental compliance risks are reduced through the use of emissions control equipment at major EKPC units.
RATE REGULATED: Wholesale electric rates and those of its members are regulated by the Kentucky Public Service Commission (PSC). The PSC has a history of being supportive of EKPC; but regulatory oversight creates a level of risk.
ACHIEVING GOALS: East Kentucky Power Cooperative's success in achieving financial objectives outlined in its strategic plan, including a 15% equity ratio and DSC above 1.25x at year-end 2015, is likely to result in a rating upgrade to 'A-'.
SHIFT IN REGULATORY POLICY: A downward shift in public service commission regulatory policy, that negatively affects EPKC's financial results, would be viewed unfavorably.
The PSC previously ordered a comprehensive management audit of EKPC and publicly questioned the cooperative's commitment to 'reversing its declining financial condition.' The management audit was officially closed on Feb. 18, 2013, and appears to have helped strengthen EKPC's planning and oversight functions, while restoring financial stability. EKPC's strategic planning initiatives, which are viewed positively by Fitch, are largely borne of the management audit.
BETTER BALANCE/EFFICIENCY IN POWER SUPPLY
EKPC boasts a diverse generating fleet, with coal accounting for roughly 70% of generating capacity and megawatt-hours (MWH) produced. Coal-fired plants total 1,882 megawatts (MW) of baseload capacity and natural gas/oil peaking units equal 1,032 MW, compared with a normal winter peak of around 3,000 MW. Power plants have performed well from a cost and availability standpoint.
Viewed favorably is EKPC's strategy to temper its exposure to coal and keep production costs low through optimization of its asset portfolio and flexible generation dispatching. As natural gas prices have declined, EKPC has been able to better utilize its gas-fired generation along with wholesale market purchases to hold down costs.
ENVIRONMENTAL COMPLIANCE ADDRESSED
Management believes that it is well positioned to meet the increasingly stringent emissions requirements proposed by the Environmental Protection Agency (EPA). An investment of $1.75 billion in emissions-control and clean-coal technologies has previously been expended. Additional modest expenditures for environmental modifications are planned in the 2015 - 2019 timeframe; but estimates exclude any necessary Clean Power Plan investments.
SOUND FINANCIAL PERFORMANCE
Results in 2014 continued the positive trend in EKPC's financial turnaround. Operating revenue totaled $952.7 million, with net margins a solid $64.8 million, exceeding budget by $12.4 million. The increase in revenues reflected a net rise in member sales, due to more favorable weather conditions, and an increase in off-system sales. Estimated operating revenue for 2015 totals $928.2 million, with net margin at $60.1 million, ahead of budget. Fitch calculated DSC for 2014 was 1.31x, versus 1.34x in 2013.
EKPC's long-term financial forecast assumes stable annual net margins, which are sufficient to provide annual DSC of approximately 1.25x - 1.35x and a TIER of 1.35x. Equity as a percentage of capitalization is expected to exceed 15% in 2015, rising to about 23% by 2020. A $500 million unsecured credit facility, used for operating expenses and capital construction projects, provides ample liquidity.