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
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
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.
Additional information is available at 'www.fitchratings.com'.
Revenue-Supported Rating Criteria (pub. 16 Jun 2014)
U.S. Public Power Rating Criteria (pub. 18 May 2015)
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