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16 Jul 2010
Approximately $413 million of securities affected
New York, July 16, 2010 -- Moody's Investors Service assigned A3 senior secured ratings to
three series of Seminole Electric Cooperative, Inc. (Seminole)
privately placed notes (Series A due 2024; Series B due 2033;
and Series C due 2035) and A3 senior secured underlying ratings to two
series of pollution control revenue refunding bonds (PCRBs) issued by
Putnam County Development Authority on behalf of Seminole (Series 2007A
and Series 2007B; both due 2042), which are currently insured
by Ambac. Moody's also assigned a stable rating outlook for
"The rating assignments reflect Seminole's generally low business
and financial risk profile supported by long-term wholesale power
contracts (WPC) with its members, the cost effective supply portfolio
available to meet members' future needs, and the cooperative's
recently improved financial metrics", said Vice President,
Kevin Rose. "Seminole also has significant rate flexibility,
given the absence of state rate regulation by the state commission,
the existence of fuel and purchase power pass through mechanisms and reduced
capital spending and rate relief needs over the next several years"
Seminole recently improved the quality of its alternate liquidity by amending
existing bank documents to eliminate the applicability of the material
adverse change clause as part of the representations and warranties for
each borrowing. Nevertheless, key near term rating concerns
include Seminole's need to replace its $200 million of existing
liquidity facilities on satisfactory terms ahead of the December 2010
expiration date and the effects of the economic environment in Florida.
Additional rating concerns over the medium to longer term relate mostly
to the planned termination of the WPC relationship with Seminole's
second largest member, Lee County Electric Cooperative, Inc.,
effective January 1, 2014; a relatively high dependence on
purchased power; potential effects of federal carbon legislation
given Seminole's dependence on carbon emitting generation capacity;
and the extent to which members might exercise options to take a portion
of their power needs from alternative suppliers as permitted beginning
in 2021 under recently extended WPCs.
Seminole's interest and debt coverage metrics have recently improved
from weaker levels as its board has taken timely actions to adjust rates
to address various cost pressures and higher than historical average annual
capital spending due to environmental related projects and is following
an equity development plan to strengthen a historically weak balance sheet
as debt was the primary source of funding for the capital investments.
On average, over 2007 - 2009 Seminole produced times interest
earned and debt service coverage ratios of 1.2x and 1.2x,
respectively; in both instances above the minimum covenant levels
of 1.05x and 1.0x, respectively, required for
at least two of the past three fiscal years. Moody's takes
a credit positive view when management achieves in excess of thin minimum
required covenant levels typically present in cooperative debt indentures.
Following substantial completion of the environmental related capital
expenditures, a rate increase implemented in 2009 also resulted
in improved net margin and funds from operations (FFO), thereby
strengthening Seminole's FFO to debt and FFO coverage of interest
to 6.1% and 2.2x, respectively, for 2009.
We assume that Seminole can prospectively generate FFO in excess of $100
million annually, thereby providing a basis for further strengthening
of these metrics in support of, and potentially improving,
the A3 rating under the sector's Rating Methodology.
Under its new indenture of mortgage that replaced Seminole's prior
mortgage with the Rural Utilities Service, the cooperative is now
governed in part by a minimum required margins for interest (MFI) metric
of 1.1x and must also achieve at least a 20% equity to total
capitalization ratio before it can resume retirement of patronage capital
(i.e. equivalent to a common dividend payment). Seminole's
board of trustees has approved an equity development plan that targets
compliance with the MFI covenant in each year and attaining at least a
20% equity to total assets level by the end of 2014. Moody's
anticipates that the board will modify its equity development program
to conform to achieving 20% equity to capitalization by 2014.
Taking into account Moody's standard adjustments, Seminole's
equity to capitalization stood at 9.2% as of December 31,
2009, which is low relative to its peers, thus requiring significant
progress before achieving the 20% target.
Seminole's stable rating outlook includes Moody's assumptions
that liquidity will be shored up ahead of the impending bank facility
expirations and that the cooperative will maintain a sound financial profile
consistent with its A3 rating at a minimum given our expectations that
it can annually generate approximately $100 million of funds from
operations and faces limited financing and rate relief needs over the
next few years. The stable outlook also reflects our belief that
Seminole will weather the eventual loss of Lee County's entire load.
While we view management's approach to handling its credit facility extension
so close to its expiration date as less than ideal, particularly
in light of today's more challenging bank credit environment, we
believe that the recent success in amending existing facilities evidences
good banking relationships that should facilitate a smooth and timely
extension of the facilities in advance of the December 2010 expiry date.
Any problems extending these facilities would result in negative rating
The principal methodology used in rating Seminole is U.S.
Electric Generation & Transmission Cooperatives, published in
December 2009 and available on www.moodys.com in the Rating
Methodologies sub-directory under the Research & Ratings tab.
Other methodologies and factors that may have been considered in the process
of rating this issuer can also be found in the Rating Methodologies sub-directory
on Moody's website.
This is the first time that Moody's has assigned a rating to Seminole's
Seminole Electric Cooperative, Inc., headquartered
in Tampa, Florida, is an electric generation and transmission
cooperative which provides for the power supply needs of its ten member
distribution cooperative owners. Seminole owns approximately 2,165
megawatts primarily fossil fueled generation capacity and reported revenues
of $1.4 billion for 2009.
Kevin G. Rose
Vice President - Senior Analyst
Infrastructure Finance Group
Moody's Investors Service
Senior Vice President
Infrastructure Finance Group
Moody's Investors Service
Moody's assigns A3 sr. sec. to Seminole Electric Cooperative; outlook stable
No Related Data.
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