Fitch Affirms CMEEC and Transco Revenue Bonds at ‘A+’; Removes Negative Watch

New England states ramp up offshore wind efforts
June 10, 2019
Reports say U.S. electric utilities targeted by cyber hacking group
June 17, 2019
Show all

Fitch Affirms CMEEC and Transco Revenue Bonds at ‘A+’; Removes Negative Watch

FITCH AFFIRMS CMEEC AND TRANSCO REV
BONDS AT ‘A+’; REMOVES NEGATIVE WATCH
Fitch Ratings-New York-13 June 2019: Fitch Ratings has affirmed Connecticut Municipal Electric
Energy Cooperative’s (CMEEC) Issuer Default Rating (IDR) at ‘A+’. Fitch has also affirmed
the following CMEEC and Connecticut Transmission Municipal Electric Energy Cooperative
(TRANSCO) bonds at ‘A+’:
–$58.4 million power supply system revenue bonds, 2013 series A;
–$31.9 million 2012 transmission services revenue bonds.
–$20.8 million 2012 series A transmission system revenue bonds.
Fitch has also removed the ratings from Rating Watch Negative and assigned a Stable Rating
Outlook.
ANALYTICAL CONCLUSION
The removal of the Rating Watch Negative and revision of the Outlook to Stable reflects the
conclusion of CMEEC’s internal legal investigation following the November 2018 federal
indictment of former CMEEC officials and board members. The federal charges of alleged
conspiracy and misuse of federal funds were filed against the then CEO and CFO of CMEEC
and three former board members. CMEEC, the utility, was not charged in the indictment. In
March 2019, CMEEC completed an independent legal investigation of the allegations and
concluded there was cause to proceed with terminating the prior CEO (Rankin; the CFO retired in
January). After a termination hearing, Mr. Rankin was terminated on May 9, 2019. Additionally,
an independent forensic accounting examination was completed and resulted in constructive
recommendations aimed at strengthening CMEEC’s internal controls. The board has adopted most
of the recommendations.
The affirmation of the ‘A+’ IDR and long-term debt ratings for CMEEC and TRANSCO reflects
the utility’s solid financial position, limited projected capital needs, strong liquidity and declining
debt burden, as well as closure on CMEEC’s material legal and accounting investigations.
CREDIT PROFILE
CMEEC is a joint action agency (JAA) that provides power to six municipal distribution
system members in southern Connecticut: Groton Utilities, Bozrah Light & Power, Jewett City
Department of Public Utilities, Norwich Public Utilities, and the city of Norwalk’s Second (South
Norwalk) and Third (East Norwalk) Taxing Districts. The members are provided service pursuant
to long-term, full requirement replacement power sales contracts (RPSCs) through at least 2053,
beyond the final maturity of CMEEC’s utility revenue bonds. CMEEC also provides wholesale
power supply to a number of regional users pursuant to contracts of varying tenor.
CMEEC created TRANSCO in September 2009, a separate, legal joint action agency to acquire a
portion of the transmission assets of Connecticut Light & Power to provide transmission service
to CMEEC’s members. TRANSCO is comprised of the same six members as CMEEC, plus the
Town of Wallingford. WED is not obligated to make payments on TRANSCO debt. CMEEC is
obligated to pay all of TRANSCO’s obligations on a take-or-pay basis, including debt service.
The transmission-related agreements extend through 2052, beyond the final maturity of the
transmission debt (2042). CMEEC’s payments to TRANSCO are paid as an operating expense,
ahead of the utility’s own debt service. TRANSCO is a blended component unit of CMEEC, and its
financial performance is reported on a CMEEC combined basis.
KEY RATING DRIVERS
Revenue Defensibility: ‘aa’; Unconditional Long-Term Contracts; Strong Member Credit Quality
CMEEC and TRANSCO’s strong revenue defensibility reflects the unconditional contractual
agreements between CMEEC and TRANSCO and their member purchasers which support the
revenue base, coupled with the high-credit quality of the largest member systems. Additionally,
CMEEC and its members benefit from the independent authority to set their own electric rates
to support cost recovery. Industrial customer concentration at a few of the member city systems
(Groton and Bozrah) moderately affects the purchaser credit quality.
Operating Risk: ‘a’; Low Electric Operating Costs
Fitch considers CMEEC’s operating cost burden low, as measured by annual total operating
costs per mwh sold. Unlike most other JAAs, CMEEC’s power supply strategy requires active
management of varied power purchases primarily from the New England power market (as
administered by the Independent System Operator – New England [ISO-NE]), which exposes
CMEEC to fluctuating market prices and limits operating cost flexibility. CMEEC’s power supply
strategy should remain cost-competitive over the near-to-intermediate term given projected
adequate reserve margins for the NE region and CMEEC’s ownership of moderate peaking
resources to partially mitigate market risk.
Financial Profile: ‘aa’; Strengthening Financial Performance; Leverage Declining
CMEEC’s financial performance is very strong with a healthy liquidity cushion and a declining
debt burden. Prospectively, with modest member sales growth, expiry of the off-system
competitive power sales contracts and minimal capital requirements, CMEEC’s leverage is poised
to improve. CMEEC’s Fitch-calculated coverage of full obligations is somewhat volatile, but
liquidity is sound due to healthy cash and unrestricted reserve balances.
Asymmetric Additional Risk Considerations
Asymmetric risk in the near term related to the federal allegations against the five former CMEEC
officials constrains the rating at the ‘A+’ level.
RATING SENSITIVITIES
Assuming CMEEC’s leverage profile improves, adopted governance practices are adhered to, and
there are no new negative developments related to the prior charges and investigations, CMEEC
may be poised for further positive rating action.
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 distribution systems. The
TRANSCO bonds are secured by net revenues received by TRANSCO from CMEEC, which are
ultimately derived from separate take-or-pay contracts with the same six member systems.
Revenue Defensibility
Strong Revenue Source Characteristics
CMEEC and TRANSCO’s very strong revenue defensibility is supported by long-term, take-orpay
contracts for the sale of wholesale electric service to their six member distribution systems
that extend beyond the life of the outstanding revenue bonds. The contract fixed costs, which
include debt service, are absolute and unconditional, payable whether or not the power supply or
transmission service is provided. Members are obligated to pay CMEEC’s costs as an operating
expense of their respective utility systems, ahead of their own debt service. 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.
The Town of Wallingford Electric Division (WED), a prior full requirements participant of
CMEEC, opted to exit the JAA in 2013. WED remains responsible solely for its share of allocable
costs and net benefits related to CMEEC’s Pierce generating project through 2021, but WED has
the option to exit earlier. CMEEC’s revenues are roughly 84.5% power supply related, 11.9%
transmission, and 3.6% other (fund transfer) for fiscal year 2018.
CMEEC also provides electricity to the Mohegan Tribal Utility Authority (MTUA) pursuant to
a long-term wholesale contract which terminates December 2021 but is likely to be extended.
CMEEC lastly provides electric power to certain aggregated municipal loads in Massachusetts.
The final aggregated load contract expires in September 2019. CMEEC has decided to exit this
competitive supply market with the expiry of the final contract, which will result in about 89% of
CMEEC’s revenues attributable to member power supply sales.
CMEEC’s total mwh sales, which includes nonmember sales, has been declining the past few
years as its off-system competitive sales to aggregated loads in Massachusetts continue to roll off
through 2019.
CMEEC and TRANSCO’s revenue bonds are separately secured (do not have a combined revenue
pledge), but they are supported by the same six member distribution systems. Given that CMEEC
is the obligor on all of TRANSCO’s obligations, Fitch does not differentiate the debt ratings of the
two joint action agencies.
CMEEC’s very strong rate flexibility assessment is due to the wholesaler’s independent legal
authority to adjust its power supply rates to members as needed, with CMEEC Board approval.
CMEEC’s average wholesale revenue per mwh has averaged roughly $85/mwh over the past five
years; this is a competitive power supply price, as evidenced by members’ average retail revenue
per mwh, which remains below the EIA state average. CMEEC’s rates and its member cities’ rates
are not subject to the approval of any state, federal or regulatory authority.
TRANSCO’s rate is regulated by the Federal Energy Regulatory Commission (FERC). Positively,
TRANSCO earns the FERC-approved 11.74% return on equity, which results in positive net
margin on the TRANSCO asset that is used to offset the transmission cost to CMEEC’s members.
While a reduction in the regulated return on TRANSCO assets would reduce net margins, the net
effect on CMEEC would largely be offset by the resulting lower transmission rate for its members.
Solid Member Credit Quality
CMEEC’s purchaser credit quality is strong as measured by Fitch’s Purchaser Credit Index score
of 1.59, for its two largest member utilities: Groton Utilities and Norwich Public Utilities. These
two members represented approximately 42% of CMEEC’s 2018 total mwh sales, which takes
into account non-member sales. With respect to solely their CMEEC membership interest, their
combined member share in CMEEC was 66.9% for 2018.
The city of Norwich is located 40 miles southeast of Hartford, along the Thames River, with
a population base of 39,470 in 2017 (2.5% decline since the 2010 census). The economy is
stable, but growth is limited. Key employment sectors include: government, healthcare, trade,
transportation and manufacturing. The city is making a concerted effort to revitalize its downtown
area, the business park and the harbor, and has attracted some new businesses. The city’s
unemployment rate continues to improve, but remains above the state and the nation; income levels
are below the state median, but more closely approximate the national level.
The city of Groton is also located in southeastern Connecticut, along the east bank of the Thames
River. Pharmaceutical and submarine manufacturing are key to the city’s employment base,
followed by healthcare, education and government. Submarines are built by Electric Boat, a
division of General Dynamics, and are home ported at the U.S. naval submarine base located in
Groton. Electric Boat is providing economic growth for the city as it ramps up to build the next
generation nuclear submarine for the U.S. Navy. Pfizer is the city’s largest taxpayer, but energy
requirements from the city utility are modest as the manufacturer has on-site fuel cells.
Both cities are financially strong, with ample liquidity and low leverage. All the member cities
benefit from independent rate setting authority and they maintain rate stabilization funds to help
mitigate rate adjustments.
Retail rates are affordable as they account for less than 2.5% of 2017 median household income for
CMEEC’s largest members. 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: Groton Public
Utilities and Bozrah Light & Power (BL&P). Electric Boat accounted for a notable 28% of Groton
Utilities’ mwh sales for 2018 (or about 5.8% of CMEEC’s total sales). BL&P, a smaller member
providing electric service to approximately 2,800 customers, provides service to Airgas Inc, a
manufacturer of varied gas products and equipment. Airgas accounts for about three-quarters of
BL&P’s mwh sales. While the members’ industrial customer concentration is an asymmetric risk
which 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 WED in 2013.
Operating Risk
Low Electric Operating Costs
CMEEC has maintained relatively low power supply costs, as measured by total operating costs
against mwh sold, which has averaged $87.6 per mwh over the past five years. The majority of
CMEEC’s power supply is concentrated in short-to-intermediate term contracts through ISONE,
primarily of one to three years duration and typically not exceeding five years. This active
power management strategy is unlike most other public power providers, and it exposes CMEEC
(and its members) to more variable market prices. To manage this exposure, CMEEC maintains a
comprehensive energy risk management policy which applies a measured approach to procuring
power supply over time.
CMEEC’s flexibility to manage its power supply costs is considered weak as the JAA’s resource
portfolio is concentrated in market purchases, of which, CMEEC is a price taker. Positively,
CMEEC has effectively utilized its fuel and energy hedging strategies and uses peaking resources
to offset peak load requirements and moderate market price exposure. For the prompt year,
CMEEC aims to hedge 80% of its baseload requirements; for two years out, CMEEC targets
40%-70% hedge. CMEEC’s power supply strategy has been effective as member average retail
rates remain below their nearest corporate utility counterpart, Eversource. While CMEEC does not
have any near-term plans to add power resources, other than possible renewable energy contracts,
the utility has a history of entering into electric-related projects which can add net margins for
members, including: the Pierce project, the Microgen 50-in-5 project, TRANSCO and others. In
aggregate, CMEEC’s electric investments are generating positive returns in aggregate, although the
net margins are projected to decline going forward.
Prospectively, CMEEC’s power supply plan should remain effective over the five-year horizon
as ISO-NE is projected to maintain adequate power supply and reserve margins through 2023
(as projected by NERC, 2018 Long-Term Reliability Assessment). Longer-term, there is a
growing industry concern over the increasing dependence on natural gas-fired generation, as the
additional pipeline capacity to transport the fuel may not be keeping pace with the rising natural
gas requirements.
Low Capital Requirements
CMEEC’s capital spending is projected to decline after 2019, as major investments in generation
and transmission are completed. The average age of CMEEC facilities is 14 years, which is
moderately young for this industry and supports the more modest capital spending plan going
forward.
Capital expenditures are projected to total $1.8 million for FY2019, up from $699K in FY2018,
primarily to fund improvements at the Pierce generating unit. The Pierce capital projects will be
funded using an available capital reserve for the generating unit, which will cover about half of
the 2019 capex. The rest of the capex for 2019-2023 will be internally funded, with no new debt
issuances in the forecast. Net debt outstanding should gradually decline from $100.9 million in
FY2018 to $79.1M in FY2023, assuming modest capital spending in the out years of the five-year
horizon.
There are no asymmetric operating risk considerations.
Financial Profile – Outstanding Debt is on the Decline
CMEEC’s historical financial performance has been sound since FY2014, despite the loss of one of
its largest participants, the Town of Wallingford, in 2013. CMEEC’s flexible and fairly short-term
portfolio of power purchases allowed CMEEC to largely offset the revenue impact associated with
the load loss with reduced power purchases.
Coverage metrics appear volatile, as Fitch’s coverage calculation eliminates the effect of
the rate stabilization fund transfers (RSF). Coverage of full obligations was only 0.87x in
FY2018, primarily due to the transfer of $4.9 million from the RSF to revenues, a decision made
independently by each member, based on their billing rate. Fitch considers the rate stabilization
transfer a non-operating source of income for that year and thus it is deducted from operating
cash flow available for debt service coverage. CMEEC’s members annually review the use of the
RSF, as it is regularly used for rate planning purposes, so the fluctuation in the coverage ratio is
anticipated to continue going forward. Offsetting the volatility in coverage metrics is the strong
liquidity cushion CMEEC has historically maintained.
Positively, in fiscal 2018, CMEEC’s 2013 series B power supply revenue bonds fully matured,
reducing ongoing annual debt service by approximately $3 million, or 29% lower beginning in
fiscal year 2019. As a result, coverage should moderately strengthen as debt service steps down in
FY2019. Coverage of full obligations should improve in FY2019 and remain in excess of 1.1x for
the 5 year horizon.
Given modest projected member sales growth, CMEEC’s exiting of all non-member sales except
MTUA, limited capital spending and no new debt requirements, leverage should improve. For
fiscal 2017, leverage, as measured by net adjusted debt to adjusted funds available for debt service
was 7.2x. Prospectively, with declining debt balance and lower annual debt costs, leverage should
improve to the 6.0x range, a level consistent with the ‘aa’ financial profile.
Liquidity, as measured by days cash on hand has been adequate, ranging from 84 days to 137 days
since FY2014. Liquidity cushion, which incorporates available external bank lines, is healthy at
337 days for fiscal 2018. While this level is well above Fitch’s threshold, it is warranted given the
higher degree of power market exposure entailed in CMEEC’s purchased power portfolio.
CMEEC and TRANSCO maintain a very conservative debt profile, benefitting from a declining
debt burden. All of CMEEC and TRANSCO’s outstanding revenue bonds are long-term, fixed-rate
obligations with relatively level annual debt service. Most recently, in fiscal 2018, CMEEC’s series
2013 B power supply revenue bonds fully matured. With limited projected capital expenditures
of note through 2023, CMEEC and TRANSCO should continue to deleverage over the near-tointermediate
term.
No financial asymmetric risk was applied for this rating determination.
Asymmetric Additional Risk Considerations
Asymmetric risk in the near term related to the federal allegations against the five former CMEEC
officials constrains the rating at the ‘A+’ level. Fitch’s credit concern regarding the outcome of
the internal reviews and the added burden on existing staff during the investigations has abated.
However, a few key objectives remain including selecting a new CEO.
Contact:
Primary Analyst
Lina Santoro
Analytical Consultant
+1-212-908-0522
Fitch Ratings, Inc.
33 Whitehall Street
New York, NY 10004
Secondary Analyst
Kathryn Masterson
Senior Director
+1-512-215-3730
Committee Chairperson
Dennis Pidherny
Managing Director
+1-212-908-0738
In addition to the sources of information identified in Fitch’s applicable criteria specified below,
this action was informed by information from Lumesis.
Media Relations: Sandro Scenga, New York, Tel: +1 212 908 0278, Email:
sandro.scenga@thefitchgroup.com.
Additional information is available on www.fitchratings.com
Applicable Criteria
Public Sector, Revenue-Supported Entities Rating Criteria (pub. 28 May 2019)
https://www.fitchratings.com/site/re/10064680
U.S. Public Power Rating Criteria (pub. 03 Apr 2019)
https://www.fitchratings.com/site/re/10066654
ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS
AND DISCLAIMERS BY FOLLOWING THIS LINK: HTTPS://WWW.FITCHRATINGS.COM/UNDERSTANDINGCREDITRATINGS. IN
ADDITION, RATING DEFINITIONS AND THE TERMS OF USE OF SUCH RATINGS ARE AVAILABLE ON THE AGENCY’S PUBLIC WEB
SITE AT WWW.FITCHRATINGS.COM. PUBLISHED RATINGS, CRITERIA, AND METHODOLOGIES ARE AVAILABLE FROM THIS SITE
AT ALL TIMES. FITCH’S CODE OF CONDUCT, CONFIDENTIALITY, CONFLICTS OF INTEREST, AFFILIATE FIREWALL, COMPLIANCE,
AND OTHER RELEVANT POLICIES AND PROCEDURES ARE ALSO AVAILABLE FROM THE CODE OF CONDUCT SECTION OF THIS
SITE. DIRECTORS AND SHAREHOLDERS RELEVANT INTERESTS ARE AVAILABLE AT HTTPS://WWW.FITCHRATINGS.COM/SITE/
REGULATORY. FITCH MAY HAVE PROVIDED ANOTHER PERMISSIBLE SERVICE TO THE RATED ENTITY OR ITS RELATED THIRD
PARTIES. DETAILS OF THIS SERVICE FOR RATINGS FOR WHICH THE LEAD ANALYST IS BASED IN AN EU-REGISTERED ENTITY
CAN BE FOUND ON THE ENTITY SUMMARY PAGE FOR THIS ISSUER ON THE FITCH WEBSITE.
Copyright © 2019 by Fitch Ratings, Inc., Fitch Ratings Ltd. and its subsidiaries. 33 Whitehall Street, NY, NY 10004. Telephone: 1-800-753-4824, (212)
908-0500. Fax: (212) 480-4435. Reproduction or retransmission in whole or in part is prohibited except by permission. All rights reserved. In issuing
and maintaining its ratings and in making other reports (including forecast information), Fitch relies on factual information it receives from issuers and
underwriters and from other sources Fitch believes to be credible. Fitch conducts a reasonable investigation of the factual information relied upon by it
in accordance with its ratings methodology, and obtains reasonable verification of that information from independent sources, to the extent such sources
are available for a given security or in a given jurisdiction. The manner of Fitch’s factual investigation and the scope of the third-party verification it
obtains will vary depending on the nature of the rated security and its issuer, the requirements and practices in the jurisdiction in which the rated security
is offered and sold and/or the issuer is located, the availability and nature of relevant public information, access to the management of the issuer and
its advisers, the availability of pre-existing third-party verifications such as audit reports, agreed-upon procedures letters, appraisals, actuarial reports,
engineering reports, legal opinions and other reports provided by third parties, the availability of independent and competent third- party verification
sources with respect to the particular security or in the particular jurisdiction of the issuer, and a variety of other factors. Users of Fitch’s ratings and
reports should understand that neither an enhanced factual investigation nor any third-party verification can ensure that all of the information Fitch relies
on in connection with a rating or a report will be accurate and complete. Ultimately, the issuer and its advisers are responsible for the accuracy of the
information they provide to Fitch and to the market in offering documents and other reports. In issuing its ratings and its reports, Fitch must rely on the
work of experts, including independent auditors with respect to financial statements and attorneys with respect to legal and tax matters. Further, ratings
and forecasts of financial and other information are inherently forward-looking and embody assumptions and predictions about future events that by
their nature cannot be verified as facts. As a result, despite any verification of current facts, ratings and forecasts can be affected by future events or
conditions that were not anticipated at the time a rating or forecast was issued or affirmed.
The information in this report is provided “as is” without any representation or warranty of any kind, and Fitch does not represent or warrant that the
report or any of its contents will meet any of the requirements of a recipient of the report. A Fitch rating is an opinion as to the creditworthiness of a
security. This opinion and reports made by Fitch are based on established criteria and methodologies that Fitch is continuously evaluating and updating.
Therefore, ratings and reports are the collective work product of Fitch and no individual, or group of individuals, is solely responsible for a rating or
a report. The rating does not address the risk of loss due to risks other than credit risk, unless such risk is specifically mentioned. Fitch is not engaged
in the offer or sale of any security. All Fitch reports have shared authorship. Individuals identified in a Fitch report were involved in, but are not solely
responsible for, the opinions stated therein. The individuals are named for contact purposes only. A report providing a Fitch rating is neither a prospectus
nor a substitute for the information assembled, verified and presented to investors by the issuer and its agents in connection with the sale of the securities.
Ratings may be changed or withdrawn at any time for any reason in the sole discretion of Fitch. Fitch does not provide investment advice of any sort.
Ratings are not a recommendation to buy, sell, or hold any security. Ratings do not comment on the adequacy of market price, the suitability of any
security for a particular investor, or the tax-exempt nature or taxability of payments made in respect to any security. Fitch receives fees from issuers,
insurers, guarantors, other obligors, and underwriters for rating securities. Such fees generally vary from US$1,000 to US$750,000 (or the applicable
currency equivalent) per issue. In certain cases, Fitch will rate all or a number of issues issued by a particular issuer, or insured or guaranteed by a
particular insurer or guarantor, for a single annual fee. Such fees are expected to vary from US$10,000 to US$1,500,000 (or the applicable currency
equivalent). The assignment, publication, or dissemination of a rating by Fitch shall not constitute a consent by Fitch to use its name as an expert in
connection with any registration statement filed under the United States securities laws, the Financial Services and Markets Act of 2000 of the United
Kingdom, or the securities laws of any particular jurisdiction. Due to the relative efficiency of electronic publishing and distribution, Fitch research may
be available to electronic subscribers up to three days earlier than to print subscribers.
For Australia, New Zealand, Taiwan and South Korea only: Fitch Australia Pty Ltd holds an Australian financial services license (AFS license no.
337123) which authorizes it to provide credit ratings to wholesale clients only. Credit ratings information published by Fitch is not intended to be used
by persons who are retail clients within the meaning of the Corporations Act 2001
Fitch Ratings, Inc. is registered with the U.S. Securities and Exchange Commission as a Nationally Recognized Statistical Rating Organization (the
“NRSRO”). While certain of the NRSRO’s credit rating subsidiaries are listed on Item 3 of Form NRSRO and as such are authorized to issue credit
ratings on behalf of the NRSRO (see https://www.fitchratings.com/site/regulatory), other credit rating subsidiaries are not listed on Form NRSRO (the
“non-NRSROs”) and therefore credit ratings issued by those subsidiaries are not issued on behalf of the NRSRO. However, non-NRSRO personnel may
participate in determining credit ratings issued by or on behalf of the NRSRO.
12ae05bc12ae05bc