NEW YORK--()--Fitch Ratings affirms the 'A-' rating on Western Farmers Electric Cooperative's (WFEC) implied senior secured obligations. The WFEC rating is assigned to implied obligations as none of the cooperative's debt is publicly held.
The Rating Outlook is Stable.
The senior secured obligations are secured by a mortgage indenture established on April 8, 2011, which replaced the existing joint mortgage with Rural Utilities Service (RUS), CoBank and National Rural Utilities Cooperative Finance Corporation (CFC). The indenture preserves access to RUS guaranteed financing.
KEY RATING DRIVERS
LONG-TERM WHOLESALE CONTRACTS: WFEC acts as wholesale electric supplier to electric distribution cooperatives (the members) located throughout Oklahoma and New Mexico and to Altus Air Force Base, pursuant to all-requirements contracts with 21 of 23 members (83% of cooperative sales) that extend through 2050. The addition of four New Mexico members in 2010 expands WFEC's position as a regional supplier of electricity.
ENERGY DEMAND GROWING: Demand for electricity throughout the WFEC members' service territory is growing, reflecting new investment in oil and natural gas infrastructure. Demand is projected to rise by up to 5% a year over the next several years.
DIVERSIFYING GENERATION RESOURCES: WFEC's resource portfolio has become more diversified with the addition of newly owned and purchased capacity, including competitively priced renewable resources. The cooperative's current resources should be adequate to meet near-term member demand but will have to be expanded as the historical supplier of power to the New Mexico cooperatives reduces its contractual power commitment and oil and gas loads grow.
LOW FINANCIAL RATIOS: Cash flow coverage targets are designed to achieve debt service coverage (DSC) and margins for interest (MFI) requirements of 1.1 times (x), which are low for the rating category. Board policy has been to balance financial protection with lower rates. WFEC's board has committed to increase cash reserves to more acceptable levels.
RELIANCE ON ENERGY SECTORS: Tempering the rating is the service territory's increased reliance on the oil and natural gas sectors, which has the potential to meaningfully increase capital requirements and add to system operating variability.
WHAT COULD TRIGGER A RATING ACTION
INABILITY TO IMPROVE CASH LIQUIDITY: Maintenance of the 'A-' rating assumes WFEC will meet its goal of adding to cash reserves, which will help to bolster financial liquidity and support plans for the development and funding of new generation and transmission resources.
WFEC is a not-for-profit generation and transmission (G&T) cooperative that provides wholesale electric service to 23 distribution cooperatives (members), as well as Altus Air Force Base. The service territory covers more than 60% of the land area of Oklahoma, small portions of Kansas and Texas and, with the recent addition of four new members, a portion of southeastern New Mexico. Member consumer meters served total 323,028 and population equals 532,000. Population growth has not been significant, but management believes additional services needed to support the oil and gas sectors will bolster electric demand.
NEW MEXICO LOAD STRATEGY
Under the terms of a legacy power supply agreement, Southwestern Public Service Company will supply all of the New Mexico member requirements through 2011 and a declining portion thereafter through 2026, affording WFEC time to find adequate generation and transmission capacity to serve the new load. One potential concern regarding the New Mexico members is that the cooperatives' operations (including retail rates) are subject to regulation by the New Mexico Public Regulation Commission. Future rate decisions by the commission will be monitored by Fitch.
STABLE ASSETS AND OPERATIONS
WFEC has five generating facilities and a total power capacity of 1,725 megawatts (MW) when purchased hydropower is included. Generation resources include owned facilities and capacity and energy provided through purchase power agreements. In 2011, generation for these sales came from a mix of resources including: coal (36%), natural gas (16%), renewable resources (17%) and economy and contract purchases (31%). Member cooperative load forecasts show the need for additional capacity in the 2017 time frame. Various options are being explored.
Members were billed an average price of $53.93 per MWh in 2011, compared with $52.73 per MWh in 2010. WFEC's average wholesale rate to members in 2012 is assumed at $52.88 per MWh and for 2013 is budgeted at $55.13 per MWh. Member rates are competitive for the region. At year-end 2011, Oklahoma and New Mexico member rates ranged from $0.0659 cents to $0.1086 cents, with an average price of $0.0852.
FINANCIAL RESULTS ADEQUATE
Calendar year 2011 set weather records with heavy snows and a very hot summer. As a result, MWh sales increased by 5.8%, with total operating revenues at $463 million. Net margins equaled $10.5 million, compared with $24 million in 2010, with the 2010 number including about $16.5 million of deferred revenue from prior years. WFEC calculated DSC in 2011 and 2010 was 1.13 times (x) and 1.20x, respectively, exceeding the 1.10x minimum required target. A minimum MFI of 1.10x is also mandated.
The equity-to-assets ratio was 16.7% and 15.5% at year-end 2011 and 2010, respectively. WFEC has a goal of not allowing this ratio to fall below 15% through 2017, as a substantial multi-year capital expenditure program is implemented. Fitch calculated debt service coverage was slightly higher in 2011 at 1.18x, but remained below the median for the Fitch rating category. Cash reserves remained modest at 24 days and fall to only 2 days if cushion of credit funds are excluded. Total liquidity has improved meaningfully to 246 days with an increase in borrowing capacity available to WFEC.
Future targets include MFI and DSC ratios of greater than 1.10x, with an equity ratio of 15% in 2017. The longer term equity goal is 20%.
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.