Fitch Affirms San Miguel Electric Cooperative, TX at 'A-'; Outlook Revised to Positive
Fitch Ratings has affirmed the 'A-' underlying rating on the following
San Miguel Electric Cooperative's (SMEC) senior secured debt:
-- $77.2 million Atascosa County Industrial Development Corporation
variable rate pollution control refunding revenue bonds (San Miguel
Electric cooperative, Inc. Project) series 2008.
The rating on SMEC's senior secured debt takes into consideration
approximately $91.5 million of parity secured obligations under the
Mortgage Indenture that are not publicly held.
In addition, Fitch has affirmed the 'A-' rating on SMEC's implied senior
unsecured obligations. The rating is implied because SMEC's $35 million
of outstanding senior unsecured obligations are not publicly held.
The Rating Outlook has been revised to Positive from Stable.
SMEC's senior secured obligations are secured by a mortgage interest in
substantially all of SMEC's tangible and certain intangible assets.
The series 2008 variable rate bonds are unconditionally guaranteed by
National Rural Utilities Cooperative Finance Corporation (CFC; Issuer
Default Rating of 'A').
KEY RATING DRIVERS
STEC CREDIT QUALITY DRIVES RATING: The Positive Outlook reflects the
improving credit quality of South Texas Electric Cooperative (STEC;
rated 'A-'/ Positive Outlook), which is now obligated for all of SMEC's
operating expenses, including debt service, through 2037 pursuant to its
wholesale power contract.
CONTRACTUAL OBLIGATIONS AMENDED: SMEC historically served two customers
equally: Brazos Electric Cooperative (Brazos; implied senior secured
obligations rated 'A'/Stable Outlook) and STEC. However, as of Dec. 31,
2015, STEC assumed 100% of the obligation for SMEC's project output and
costs, including debt service, when Brazos assigned its wholesale power
contract to STEC. The SMEC project will be used to meet a portion of
STEC's resource requirements and is scheduled as a baseload unit in 2016.
STABLE FINANCIAL POSITION: The underlying rating and Outlook are also
supported by SMEC's financial metrics, which remained adequate even with
the lower sales experienced in 2014 and 2015 as Brazos scheduled lower
output from its share of the project. Financial performance is in line
with Fitch's medians for 'A' rated G&T cooperatives. Management expects
equity to increase from 20.5% at the end of fiscal 2014.
PROJECT RATE COMPETITIVENESS RISK: SMEC's forecasted rate in the range
of $50/MWh - $54/MWh through 2020 should provide STEC with price
stability, even though in recent years market energy prices within ERCOT
have softened (average price of $30/MWh in 2015) as a result of lower
natural gas prices and renewable development.
UPWARD MOVEMENT IN STEC's RATING: Continued healthy financial
performance at South Texas Electric Cooperative (STEC), as additional
peaking capacity and purchased power costs are absorbed, could support
higher ratings for STEC and San Miguel Electric Cooperative.
CHALLENGES ABSORBING NEW RESOURCES: Lower than anticipated financial
performance at STEC as a result of the cooperative's ability to absorb
the additional SMEC capacity in addition to new generation resources on
its own balance sheet could return the rating Outlook to stable.
San Miguel electric cooperative operates a single lignite-fired
generation plant in south Texas. The plant entered commercial operation
in 1982 and has a license to operate to 2037. Consultant reports
indicate that the useful lives of the generating unit and mine resources
extend through the term of the customer contract. Environmental
retrofits for existing regulations have been completed. The project also
includes operation of the nearby lignite mine.
SMEC's rating is driven by the credit quality of STEC as the departure
of Brazos results in STEC becoming the sole purchaser of the SMEC
project capacity and energy. The wholesale power agreement between STEC
and SMEC, which extends to December 2037 (as amended in 2009), obligates
STEC for SMEC's total costs, including all debt (or similar)
obligations, without limitation. The SMEC project is expected to become
a more meaningful component of STEC's overall power supply planning and
will account for approximately 33% of STEC's power generation capacity
in 2016, up from 15% in 2012.
BOARD AND CUSTOMER CHANGES AS BRAZOS DEPARTS SMEC
Brazos and SMEC were in litigation in 2014 regarding Brazos' minimum
scheduling requirements under its wholesale power contract. The
litigation was settled by Brazos, SMEC and STEC in fall of 2015. The
settlement permits Brazos to exit SMEC by making a final payment to SMEC
that is designed to cover its remaining debt, plant and mine
decommissioning costs. In return, SMEC has assigned royalties from its
oil and gas leases equally to STEC and Brazos. These revenues will no
longer move through SMEC and offset the wholesale power rate in fiscal
Effective Dec. 31, 2015, Brazos assigned all of its rights and
obligations under its wholesale power contract to STEC. Brazos and its
16 electric distribution cooperative members have withdrawn their
membership from SMEC and no longer have members on the Board of
Directors. A membership meeting occurred on Jan. 5, 2016, consisting of
STEC and its eight members, to elect a new Board of Directors and adopt
amended articles of incorporation and by-laws. The new 17-member Board
of Directors is made up of two representatives each from STEC's eight
member cooperatives and one representative from STEC.
STEC EXHIBITS STRONG FINANCIALS WHILE MANAGING HIGH GROWTH
STEC is a G&T wholesale provider to eight distribution cooperative
members in the growing south Texas region. STEC's eight distribution
cooperative members serve approximately 260,000 customers in 42
counties. Growth in the past four years has been exceptionally strong
given the economic growth in the region related to the Eagle Ford shale
development. STEC's overall MWh sales have averaged 9% annual growth
over the past five years, with much of this growth in the large
commercial and industrial load sector (27% over the past five years).
Lower oil and natural gas prices have raised the potential for slower
growth to occur within the service area, although STEC reports its
members continue to work through a backlog of requests for new service.
STEC's overall financial metrics have been strong during a period of
very rapid growth with debt service coverage of between 1.4x and 1.5x in
the past three years and equity of 17.8%, nearing the cooperative's
target of 20%.
SOLID FINANCIAL METRICS
SMEC's own financial position remains stable and is in line with Fitch's
'A' category medians for the sector. Fitch-calculated debt service
coverage remained at 1.36x and 1.25x in fiscals 2014 and 2013,
respectively, although sales were lower than historical years due to
unit outages, lower scheduling and lower real-time market energy prices.
Debt service coverage is expected to increase in fiscal 2015 and beyond
given decreasing debt service payments as multiple amortizing loans have
just been repaid. Management has an internal 1.2x debt service coverage
Debt levels at year-end 2015 are moderate with approximately $149
million debt outstanding, net of a $55 million deposit in the RUS
cushion of credit funded with the cash settlement payment received by
Brazos. While the cash received from Brazos will not immediately repay
outstanding debt, the deposit to the RUS cushion of credit can only be
used for future federal debt repayment.
A high amount of SMEC's debt is in the variable rate mode ($113.4
million at year end 2015) and has a bullet maturity in 2020 ($77.2
million), but the related risks are mitigated by the contractual
obligations of STEC, as well as its broader resource base. SMEC expects
to refinance the debt in 2020 to a final bullet maturity in 2037.
Liquidity has been modest with unrestricted cash and investments
declining to $2.3 million at year end 2014, or 8 days cash on hand.
However, two lines of credit provide a combined $185 million of
additional liquidity, or 487 days liquidity on hand at the end of fiscal
2014 with the available amounts. Management indicates that cash balances
at the end of fiscal 2015 increased to $9.7 million (unaudited).
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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