Fitch Ratings has affirmed the following ratings for
Issuer Default Rating (IDR).
The Rating Outlook is Stable.
RATING ACTIONS
Entity / Debt
Rating
Prior
LT IDR
AA-
Affirmed
AA-
LT
AA-
Affirmed
AA-
Page
of 1
VIEW ADDITIONAL RATING DETAILS
ANALYTICAL CONCLUSION
The 'AA-' long-term bond ratings and IDR for CMEEC and
While operating income declined in fiscal 2022, resulting in an increase in leverage ratio for the year, the weaker results stemmed from several non-recurring items including a restatement of the debt amortization associated with the refunded 2013 power supply bonds, a transmission revenue-true up credit for the year, and legal fees. Going forward, Fitch expects operating income and overall financial performance to return to pre-2022 levels, which should stabilize the leverage ratio at roughly 6.0x, a level supportive of the current rating.
Operating costs are low, although energy supply is concentrated in near-to-medium term market power purchases, subjecting CMEEC to variability in market pricing. In 2022, higher fuel costs and market energy prices led to a higher cost burden, but CMEEC's comprehensive hedging policy helps mitigate this risk, and costs have decreased in 2023. Capital plans are limited to minor maintenance with no new debt requirements projected through 2027.
CREDIT PROFILE
CMEEC is a joint action agency (JAA) that provides power to six municipal distribution system members in southern
The members are provided electric service pursuant to long-term, full requirement replacement power sales contracts that extend through 2053, which is well beyond the final maturity of CMEEC's bonds. CMEEC also provides electricity to the
CMEEC created
CMEEC is obligated to pay all of
CMEEC and
KEY RATING DRIVERS
Revenue Defensibility: 'aa'
Unconditional Long-Term Contracts; Strong Member Credit Quality
The very strong revenue defensibility reflects the strong, unconditional contractual agreements between CMEEC and
Operating Risk: 'a'
Low but Rising Operating Costs
CMEEC's operating cost burden is low, as measured by annual total operating costs per MWh sold. Unlike most other joint action agencies, CMEEC's power supply strategy requires active management of varied power purchases primarily from the
A rise in market prices and purchased power costs in 2022 led to an increase in the cost burden to just over
Financial Profile: 'aa'
Stable Historical Financial Performance; Very Low Leverage Ratio
The financial profile remains very strong despite weaker 2022 operating income. Prospectively, with modest member sales growth and minimal capital requirements, CMEEC's leverage profile should remain supportive of the overall rating. Financial performance is anticipated to be stable according to CMEEC's financial pro forma, and financial metrics are expected to remain supportive of the rating even through Fitch's Analytical Stress Test (FAST) stress scenario.
Asymmetric Additional Risk Considerations
There are no additional asymmetric additional risk considerations
RATING SENSITIVITIES
Factors that could, individually or collectively, lead to positive rating action/upgrade:
A decline in CMEEC's consolidated leverage ratio, either through higher cash flow or reduced outstanding debt, to levels consistently below 5.0x through Fitch's base and stress case.
Factors that could, individually or collectively, lead to negative rating action/downgrade:
Sustained consolidated leverage of 8.0x or more in Fitch's base or stress case;
Material decline in the largest members' credit quality;
A rise in the operating cost burden or shift to higher lifecycle investment needs that leads to a lower operating risk assessment.
Best/Worst Case Rating Scenario
International scale credit ratings of Sovereigns, Public Finance and Infrastructure issuers have a best-case rating upgrade scenario (defined as the 99th percentile of rating transitions, measured in a positive direction) of three notches over a three-year rating horizon; and a worst-case rating downgrade scenario (defined as the 99th percentile of rating transitions, measured in a negative direction) of three notches over three years. The complete span of best- and worst-case scenario credit ratings for all rating categories ranges from '
SECURITY
CMEEC's power supply system revenue bonds are secured by a pledge of net revenues of CMEEC, which is derived from power sales contracts with its six member systems.
The
Revenue Defensibility
CMEEC and
The member contracts include an unlimited step-up provision, which allows CMEEC to adjust wholesale rates as needed to fully recover costs, particularly if a member defaults. The unlimited step-up provision, in effect, limits bondholder exposure to any single member. CMEEC also provides electricity to MTUA pursuant to a long-term wholesale contract through 2031.
Rate Flexibility
CMEEC's very strong rate flexibility is based on its independent legal authority to adjust power supply rates to members as needed. Members are billed monthly and rates are not subject to external or regulatory approval, allowing for timely cost recovery.
CMEEC's wholesale rate averaged roughly
Purchaser Credit Quality
CMEEC's purchaser credit quality is strong as measured by Fitch's Purchaser Credit Index (PCI) score of 1.6 for its two largest member utilities:
The city of
The town of
Both city-utility systems are financially strong, with solid liquidity and low leverage. All of the member cities benefit from independent rate setting authority and maintain rate stabilization funds to help mitigate rate adjustments. The member cities all maintain purchase power adjustment factors to automatically pass-through CMEEC power cost changes.
Purchaser Credit Quality - Industrial Customer Concentration Risk
There is moderate industrial customer concentration for two of CMEEC's members:
BL&P, a smaller member providing electric service to approximately 3,000 customers, provides service to
While the members' industrial customer concentration is an asymmetric risk that moderately affects Fitch's assessment of the purchasers' credit quality, it does not constrain the overall strength of CMEEC's revenue defensibility assessment, as the large industrial users are long-standing customers of their respective member systems and they continue to benefit from competitive electric rates. Additionally, CMEEC can reduce its power purchases to mitigate the revenue impact of a loss of load, as it effectively managed the exit of its former wholesale customer, Wallingford Electric Division, in 2013.
Operating Risk
CMEEC's operating cost burden remains low despite an increase in purchased power expenses in 2022. As CMEEC's power supply portfolio is predominantly power contracts of three years duration or less, the wholesaler was able to take advantage of the historically low market power prices. From 2017-2021, the cost burden averaged roughly
Operating Cost Flexibility
CMEEC's flexibility to manage its power supply costs is considered weaker given the heavy reliance of the JAA's resource portfolio on short-to-intermediate term market purchases, which exposes CMEEC and its members to variability in market pricing. CMEEC mitigates this risk somewhat through a comprehensive enterprise risk management policy that applies a measured approach to procuring power supply at various amounts and intervals in time.
Environmental Considerations and Clean Energy Transition
CMEEC began working on a formal decarbonization policy starting in 2021 as part of management's long-term strategic initiatives to lower emissions. In 2022, CMEEC signed a long-term purchased power agreement for hydropower generated energy equivalent to about 10% of expected load through 2036. This agreement reduces CMEEC's market exposure while providing intermediate-term carbon reduction benefits. A more formal decarbonization policy is expected to be adopted later this year as CMEEC looks to further reduce its carbon footprint.
The state of
Capital Planning and Management
CMEEC's capital planning and management assessment is very strong. Following the completed sale of the 84MW Pierce generating project which lowered accumulated depreciation, the average age of CMEEC facilities declined to just nine years in 2021, which was considerably lower than plant age recorded previously. The age of plant increased in 2022 to 15 years due to a decline in annual depreciation expense over 2021 levels, although CMEEC's limited capital reinvestment needs and primarily wires-based infrastructure continue to support the 'aa' assessment.
Capital expenditures are projected to total just
Financial Profile
CMEEC's historical financial performance has been sound despite a gradual decline in off-market contracted sales over the past few years. CMEEC's flexible and fairly short-term portfolio of power purchases allowed it to largely offset the revenue impact associated with the load loss by reducing power purchases.
Fitch-calculated COFO has been somewhat variable with ratios of less than 1.0x in three of the past five years as members opted to utilize rate stabilization fund (RSF) transfers to support revenue requirements. Fitch considers the use of rate stabilization as a non-operating source of income and deducts these amounts from operating cash flows available for coverage metrics. The weaker COFO is not a credit concern given CMEEC's robust liquidity and the anticipated use of rate stabilizations funds. Overall, Fitch views CMEEC's liquidity profile as an important rating factor given the JAA's exposure to variable market prices.
CMEEC's consolidated net leverage had been trending lower since 2018 with a decline in debt outstanding. The leverage ratio was a very low 5.9x in fiscal 2021, but increased to 8.5x in 2022 due to several one-time cash expenses and deferral items that lowered operating income and funds available for debt service for the year. The liquidity profile is neutral to the assessment. Days cash and investments on hand totaled 165 days in 2022, which is lower than previous years but still considered supportive of the assessment. CMEEC's total liquidity cushion, which incorporates a
Fitch Analytical Stress Test - Base and Stress Cases
Fitch's forward-looking FAST model indicates CMEEC's financial leverage will improve from current levels in both the base and stress cases. The base case is informed by financial projections provided by CMEEC and includes limited sales growth and modest capital spending, and a decline in power purchase costs through the forward-look. The base case also incorporates expected debt principal amortization of roughly
The base case indicates stable financial performance with adjusted funds available for debt service (FADS) of no less than
The FAST stress model incorporates a two-year decline in energy sales in 2023 and 2024 totaling 13.3% in aggregate, followed by a recovery of 6.6% in the subsequent three years. Under this stress case, CMEEC's leverage rises modestly to 6.0x in years one and two, and before declining to 5.6x by 2026. CMEEC's ability to reduce power purchases to offset the load and revenue loss is a key reason the large decline in sales in the stress case does not result in a comparable decline in revenues.
Debt Profile
The debt profile is neutral to the assessment. All of CMEEC and
In addition to the sources of information identified in Fitch's applicable criteria specified below, this action was informed by information from
REFERENCES FOR SUBSTANTIALLY MATERIAL SOURCE CITED AS KEY DRIVER OF RATING
The principal sources of information used in the analysis are described in the Applicable Criteria.
ESG Considerations
Unless otherwise disclosed in this section, the highest level of ESG credit relevance is a score of '3'. This means ESG issues are credit-neutral or have only a minimal credit impact on the entity, either due to their nature or the way in which they are being managed by the entity. For more information on Fitch's ESG Relevance Scores, visit www.fitchratings.com/esg.
Additional information is available on www.fitchratings.com
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