Fitch affirms PowerSouth Energy Cooperative’s revenue bonds

Fitch Ratings has affirmed the ‘A-‘ rating on the following PowerSouth Energy Cooperative revenue bonds issued through the Industrial Development Board of the Town of Chatom, Alabama (outstanding in amounts as of Dec. 31, 2011):

–$1,300,000 pollution control revenue bonds, series 1984M;

–$19,200,000 pollution control revenue refunding bonds, series 2000C;

–$50,000,000 Gulf Opportunity Zone revenue bonds, series 2007A;

–$120,115,000 Gulf Opportunity Zone revenue bonds, series 2008A;

–$74,645,000 Gulf Opportunity Zone refunding Bonds, series 2010A;

–$26,445,000 solid waste disposal facilities refunding bonds, series 2010B.

The Rating Outlook is Stable.

SECURITY

The bonds are secured by a mortgage interest in substantially all of PowerSouth’s tangible, and certain of its intangible, assets.

KEY RATING DRIVERS

BROAD SERVICE TERRITORY: PowerSouth Energy Cooperative is a fairly large generation and transmission cooperative serving 20 members (419,000 retail customers) in a broad region of Alabama and the Florida panhandle. The cooperative’s members have long-term, all-requirements contracts through 2050.

MIXED MEMBER ECONOMICS: The members exhibit below-average economic indicators. However, member load is nearly three-quarters residential, which provides for greater overall revenue stability; write-offs at the member level are within range of industry benchmarks at 0.43% of operating revenues (2011).

GOOD MEMBER FINANCIALS: The members’ aggregate financial metrics are sound, including debt service coverage of 2.4x and a ratio of equity to capitalization approaching 50% in 2011. Current and quick ratios are above 1x, but cash on hand is below-average at just 39 days. Weak liquidity levels coupled with higher write-offs would be a greater concern.

IMPROVING G&T FINANCIAL METRICS: PowerSouth’s financial metrics continue to improve, given its plan to generate $170 million of additional equity by 2019. Debt service coverage has averaged 1.36x over the past three years – above the 1.2x that rates are typically designed to produce – and steadily improving operating margins have helped grow the ratio of equity/capitalization to 14% from 10.1% in 2007. However, both metrics remain slightly below Fitch’s ‘A-‘ rating category medians of 1.34x and 16.9%, respectively.

COMPETITIVE RATES: PowerSouth’s wholesale rates have doubled since 2000 but remain competitive with regional suppliers at $76.41/MWh. Rates are forecast to increase at a more moderate 2% annually through 2031, given expectations for limited new generation, as well as low purchased power and fuel costs.

DIVERSE POWER SUPPLY: The cooperative’s generation facilities are well diversified both in number and fuel type, which provides flexibility as fuel prices change. The addition of nuclear capacity in 2016 will further diversify the cooperative’s resources.

CREDIT PROFILE

IMPROVING, BUT MODEST FINANCIAL METRICS

PowerSouth’s financial metrics have improved, but remain below Fitch’s ‘A-‘ rating category medians. In 2008, the cooperative adopted a plan to raise an additional $170 million of equity by 2016, in part, to fund capital projects. The goal has since been pushed out to 2019 because of the recent economic recession. However, the gradual improvement in PowerSouth’s financial position is clear.

Strengthened operating margins have helped increase debt service coverage to an average of 1.36x over the past three years versus 1.27x in the past five years. Cash on hand has grown to 96 days from 39 in 2007; a $350 million syndicated loan established in 2011 provides ample liquidity on hand equal to 224 days. In addition, the cooperative’s ratio of equity to capitalization has improved to 14% from 10.1% in 2007, given a near doubling of equity to $229 million.

While PowerSouth’s financial position has steadily improved, Fitch’s ‘A-‘ rating category medians for debt service coverage and equity are stronger at 1.34x and 16.9%. Fitch’s medians for ‘A’ rated generation and transmission systems are 1.46x and 23.3%.

DIVERSE RESOURCE MIX

PowerSouth’s resource portfolio is reasonably diverse in number and fuel type. This provides the cooperative with flexibility as fuel prices change, which should ultimately provide for a more stable wholesale rate.

The cooperative owns all or portions of six generating facilities totaling 2,086MW of capacity versus a 2011 peak demand of 2,211MW. Two-thirds (1,408MW) of owned capacity is natural gas fired; coal-fired generation (670MW) and hydroelectric facilities (8MW) represent the remainder. The cooperative’s facilities met 78.6% of 2011 energy requirements; purchased power from the Southeastern Power Administration and Georgia Power met the balance of needs. In aggregate, just over half of the cooperative’s energy comes from natural gas-fired sources.

PowerSouth does not expect to build any new generation until 2020. However, the addition of nuclear capacity in 2016 will further diversify its resources. (The cooperative has a 20-year purchase power agreement with the Municipal Energy Authority of Georgia for 125 MW of capacity from the Plant Vogtle nuclear expansion project.) As a result of its limited near-term capital needs, debt levels are forecast to remain stable for the next several years. This should benefit the cooperative’s already improving balance sheet ratios.

BROAD SERVICE TERRITORY

PowerSouth is a generation and transmission cooperative providing wholesale electric service to 16 retail electric distribution cooperatives and four municipal electric systems pursuant to long-term, all-requirements contracts through 2050. The cooperative’s members serve a customer base of roughly 419,000 and a population of nearly 1 million in the southeastern half of Alabama and the Florida panhandle.

Nearly three-quarters of the members’ kWh sales are residential. This helps offset the below-average economic indicators in the service territory, as the diversity provided by a high proportion of residential sales lends itself to greater revenue stability.

Per capita income levels in the service territory – weighted by the members’ customer counts – are equal to 93% and 78% of state and national levels, respectively, and the unemployment rate is slightly high at 9.2% (July 2012). However, write-offs at the member level are within range of industry benchmarks at 0.43% of 2011 operating revenues.