Fitch Ratings has affirmed the rating on Southern Illinois Power
Cooperative's (SIPC) implied senior secured obligations and implied
senior unsecured obligations at 'BBB'.
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.
SECURITY
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.
RATING SENSITIVITIES
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.
CREDIT PROFILE
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.
Additional information is available at 'www.fitchratings.com'.
Applicable Criteria
Revenue-Supported Rating Criteria (pub. 16 Jun 2014)
https://www.fitchratings.com/site/re/750012
U.S. Public Power Rating Criteria (pub. 18 May 2015)
https://www.fitchratings.com/site/re/864007
Additional Disclosures
Dodd-Frank Rating Information Disclosure Form
https://www.fitchratings.com/creditdesk/press_releases/content/ridf_frame.cfm?pr_id=1011845
Solicitation Status
https://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=1011845
Endorsement Policy
https://www.fitchratings.com/jsp/creditdesk/PolicyRegulation.faces?context=2&detail=31
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