OREANDA-NEWS. Fitch Ratings has affirmed the 'BBB+' rating on Vermont Electric Cooperative, Inc.'s (VEC) implied senior secured obligations.

VEC's rating takes into account approximately \$72.8 million of secured debt privately held by lenders including National Rural Utilities Cooperative Finance Corp. (FC) and CoBank ACB. However, the rating is assigned to implied obligations given that none of the outstanding debt is publically held.

The Rating Outlook is Stable.

SECURITY

VEC's senior obligations are secured by a mortgage interest in substantially all net electric plant assets. Under the mortgage indenture, VEC is required to maintain a minimum debt service coverage (DSC) ratio of 1.35 times (x) and a times interest earned ratio (TIER) of 1.5x.

KEY RATING DRIVERS

GROWING SERVICE AREA: VEC serves a heavily residential and well-diversified customer base throughout northern Vermont. While the region is very rural, economic indicators are strong, and the service territory continues to experience notable growth.

STRONG FINANCIAL METRICS: Financial metrics remained stable in 2014 (based on unaudited results), as evidenced by strong Fitch-calculated DSC of 1.86x and healthy equity position (45.3% equity to capitalization). Both metrics are above rating category medians.

LOW CASH RESERVES: VEC's solid metrics are tempered by the continuation of low unrestricted cash reserves. Liquidity remained very low at only four days cash on hand (DCOH) at the close of fiscal year-end 2014, although total available liquidity, which includes multiple lines of credit, is stronger, providing a more acceptable 91 days.

POWER SUPPLY CONTINUES TO STABILIZE: A new long-term agreement with NextEra Energy Resources provides additional stability to VEC's power supply and approximately two-thirds of capacity is derived from long-term supply contracts that extend through the 2029-2038 timeframe. In total, about 90% of VEC's power supply needs are currently contracted through 2016, which provides near-term stability.

REGULATOR RELATIONSHIP REMAINS SOUND: The cooperative is subject to state regulatory oversight, which has the potential to limit rate-setting and financial flexibility. Positively, the Vermont Public Service Board (VPSB) has been supportive of VEC's recent rate requests and of its increased TIER.

SUBSTANTIAL CAPITAL PLAN: VEC's current 10-year capital plan is sizable and requires additional debt financing, which may strain certain financial metrics over the near term. DSC and equity/capitalization ratios going forward should approximate 2.0x and 40%, respectively, which will support the current rating.

RATING SENSITIVITIES

ADVERSE REGULATORY DECISIONS: Regulatory decisions that undermine the financial stability and initiatives adopted by VEC would be viewed negatively and could put pressure on the rating.

CASH RESERVE INCREASES: Maintenance of cash reserves more consistent with sector medians would be viewed positively.

CREDIT PROFILE

VEC is a not-for-profit distribution cooperative that provides electric service to approximately 38,000 retail meters in northern Vermont. Its service territory includes 74 primarily rural towns throughout an area that encompasses all or portions of the state's northernmost counties, including those along the U.S.-Canadian boarder. VEC's customer base consists mainly of residential and small commercial users, and is geographically dispersed, as evidenced by the cooperative's average of only 14 customers per line mile.

Energy sales have grown annually from 2010 through 2013, primarily due to economic recovery and improvements in commercial centers. While VEC forecasts sales remaining relatively flat for the next several years, reflecting modest growth offset by conservation efforts, economic growth is anticipated in the Northeast Kingdom Area, spurred by an economic revitalization initiative.

Vermont is one of the few states where municipal and cooperative electric utilities, including VEC, are subject to state regulatory oversight. Fitch generally views regulation as somewhat limiting in regard to rate and financial flexibility. Positively, the VPSB has approved VEC's recent rate requests as presented. VEC's rate design does not include an automatic fuel or purchased power adjustment clause, which contributes to the cooperative's frequent rate requests.

DIVERSE POWER SUPPLY

VEC does not own generation assets but instead purchases all of its member energy requirements through a series of reasonably well-diversified power purchase agreements. The cooperative uses a mix of long- and short-term power supply arrangements. Favorably, 90% of VEC's power supply needs are contracted through 2016 and approximately 70% are contracted through 2020.

STRONG FINANCIAL PERFORMANCE

VEC's financial metrics continue to outperform Fitch's 'BBB+' median ratios, with the exception of its very low level of liquidity. A VPSB approved increase to VEC's target TIER (from 1.5x to 2.18x) has allowed the cooperative to strengthen its financial position since 2008 by improving margins and increasing its cash level by a modest amount. Fitch continues to view VEC's cash reserves as weak, although additional liquidity provided by lines of credit with CFC and CoBank ACB totaling \$20 million provide sufficient comfort. At year-end 2013, \$17 million was available under these facilities, bringing total days liquidity to a strong 100 days, which is more consistent with the current rating.

Unaudited 2014 financial results show DSC of 1.86x, down somewhat from the high level achieved in 2012 of 2.42x, but still solid. Updated financial projections were not made available to Fitch, but management has indicated that a detailed financial forecast will be provided midway through (calendar) 2015.