NEW YORK--(BUSINESS WIRE)--Fitch Ratings affirms the 'A' rating on the following Old Dominion Electric Cooperative (ODEC) bonds:
--$156,247,000 first mortgage and indenture bonds, 2003 series A;
--$187,500,000 first mortgage and indenture bonds, 2002 series B.
In addition, Fitch affirms the 'A' rating on the implied senior unsecured obligations of ODEC.
The Rating Outlook is Stable.
SECURITY
The senior secured bonds are secured under the mortgage indenture, which creates a lien on substantially all of ODEC's assets.
KEY RATING DRIVERS
SOUND FINANCIAL METRICS: ODEC's financial metrics are stable, with a times interest earned ratio (TIER) formulaically set, and accepted by the Federal Energy Regulatory Commission (FERC), at 1.20x. Equity as a percentage of capitalization currently exceeds 30%, and liquidity is sufficient, bolstered by a $500 million credit facility.
DIVERSIFIED POWER SUPPLY: ODEC's generation portfolio is diverse, consisting of an ownership share in the North Anna nuclear station (units 1 & 2), a 50% interest in the coal-fired Clover generating station, full ownership of natural gas peaking units and a diverse mix of power purchase agreements. The cooperative is also a member of the PJM Interconnection.
SOLID SERVICE AREA: Wholesale power is supplied to distribution cooperatives in Virginia, Delaware and Maryland. Although recent load growth has been modest at best, reflecting the slowdown in the economy, the longer-term outlook remains constructive.
RATE REGULATED: ODEC is subject to FERC regulation. The generation and transmission utility (G&T) charges members pursuant to a formula rate, accepted by FERC, that permits recovery of costs, plus an additional amount up to 20% of total interest charges, and additional equity contributions as approved by the board. Member systems in Virginia and Maryland are rate regulated, but are allowed to pass through changes in their wholesale power costs. FERC and state regulation has historically been supportive.
CONSTRUCTING NEW GENERATING PLANT: ODEC is planning to develop a new 1,000 megawatt (MW) power plant (Wildcat Point), scheduled for operation around 2017. The project will be used to replace expiring purchase power contracts and meet future growth needs. Permitting, funding and constructing will be the most pressing issues facing the utility in the near term.
RATING SENSITIVITIES
ABILITY TO MAINTAIN SUPPORTIVE METRICS: The construction of this major gas-fired plant will increase leverage considerably. Although Fitch understands that ODEC's financial metrics will weaken as a result of the additional financing, the timely implementation of needed rate increases and the maintenance of financial ratios in-line with Fitch's rating category medians will be important to maintaining the current rating.
CREDIT PROFILE
MIX OF OWNED GENERATION AND CONTRACTS
ODEC's power supply consists of owned generation and contract purchases. For the nine months ended Sept. 30, 2013, owned-generation provided 39% of the total, with purchases making up 61%. The most significant owned resources include the coal-fired Clover plant (22.4% of MWHs) and the North Anna nuclear station (13.1%). Power purchase arrangements can range from over 10 years to spot purchases. ODEC's generating facilities are under dispatch control of PJM.
ODEC's average total cost to member distribution cooperatives (per MWH) was $65.57 for the 12 months ended Dec. 31, 2013. The demand charge accounted for about 38% of this figure with the energy component amounting to 62%. Fitch expects wholesale rates to rise to incorporate costs associated with the new Wildcat Point facility. Members' residential revenues per kilowatt-hour (KWH) sales averaged 11.76 cents in 2012, which is competitive for the region.
NEW GENERATING PROJECT IN DEVELOPMENT
On April 23, 2013, ODEC announced its intention to seek approval to develop and construct a natural gas-fueled generation facility at the existing Rock Springs peaking facility in Cecil County, Maryland. The project, known as the Wildcat Point generation facility, will be approximately 1,000 MW and 100% owned by ODEC. The preliminary cost estimate, which excludes certain costs and financing charges, is $675 million. ODEC currently anticipates that construction of the facility will begin in late 2014 and the plant will become commercially operable in mid-2017. On May 20, 2013, an application was made to the Maryland Public Service Commission for a Certificate of Public Convenience and Necessity, and the cooperative continues to pursue permits and contracts related to the construction of the facility.
ODEC has established an internal target to meet approximately 50% to 70% of its future energy supply needs from owned and long-term contracted power resources. This incorporates PJM's reserve margin requirement of about 15%. Once the plant is commercially operable, it is expected to account for a meaningful percentage of ODEC's total energy resources.
SUPPORTIVE RATE REGULATION NECESSARY
FERC's formula rate allows ODEC to collect revenues to meet all costs, expenses and financial obligations, plus additional board-approved equity contributions, and to change rates in accordance with the formula, without seeking further FERC approval. Despite the collective oversight, the ability of ODEC and its member distribution cooperatives to collect revenues sufficient to meet all of its obligations has never been compromised.
SOUND FINANCES
Management collects revenues sufficient to cover all expenses and sets margins sufficient to maintain a 1.20x TIER. The equity ratio currently exceeds 30%, virtually unchanged from the prior two years' figures. Fitch expects that the equity ratio will decline over the next several years, reflecting heavy borrowing for the new Wildcat Point project, before showing improvement. ODEC expects to have several financing options available to fund the new project, even though it is no longer a Rural Utilities Service borrower.
MEMBER PROFILE
Approximately 95% of ODEC's total energy sales are to member distribution cooperatives, with 5% to non-members. ODEC's 11 electric distribution cooperative members provide electric service to residential, commercial and industrial customers throughout a service area that covers portions of Virginia, Delaware and Maryland. All retail customers in Delaware and Maryland, including retail customers of ODEC's member systems located in those states, are permitted to purchase power from the registered supplier of their choice. As of March 1, 2013, no entity had registered to be an alternative power supplier in any of the member systems' service territories. As a result, none of their retail customers have switched to an alternative power supplier.
Historical growth has been above average, reflecting the growing suburban areas between Washington D.C. and Richmond, VA. For calendar year 2012, the 11 members' consolidated debt service coverage and TIER were 2.10x and 1.96x, respectively. Equity to assets averaged 38.1% and equity as a percentage of capitalization was 43.2%. Ratios are below levels of the previous few years, but remain acceptable.
Additional information is available at 'www.fitchratings.com'.
The rating action was informed by information from Fitch's Revenue-Supported Rating Criteria and U.S. Public Power Rating Criteria
Applicable Criteria and Related Research:
--'U.S. Public Power Peer Study Addendum - February 2014' (Feb. 7, 2014);
--'U.S. Public Power Peer Study -- June 2013' (June 13, 2013);
--'U.S. Public Power Rating Criteria' (Dec. 18, 2012).
Applicable Criteria and Related Research:
U.S. Public Power Rating Criteria
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=696027
U.S. Public Power Peer Study -- June 2013
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=710397
U.S. Public Power Peer Study Addendum -- February 2014
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=735601
Additional Disclosure
Solicitation Status
http://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=822122
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