OREANDA-NEWS. Fitch Ratings has affirmed the 'F1' rating on the Arkansas Electric Cooperative Corporation's (AECC) $250 million maximum commercial paper (CP) program. As of Aug. 31, 2015, AECC has $49.97 million of commercial paper notes outstanding.

SECURITY

The CP notes are secured by a revenue pledge subordinate to the payment of operating and maintenance expenses and debt payments on AECC's senior secured obligations ($809.3 million outstanding).

KEY RATING DRIVERS

SOLID LONG-TERM RATING AND LIQUIDITY: AECC's 'A+' long-term credit quality and various sources of liquidity support the 'F1' rating on its CP program. Total internal and external liquidity sources provide coverage of maximum potential requirements that are in excess of Fitch's target for 'F1' short-term ratings.

SOUND COOPERATIVE FUNDAMENTALS: AECC's credit strength stems from its long term (2042) all requirements contracts with its 17 member distribution cooperatives, low cost power resources, competitive wholesale rates and diverse member base. AECC provides electricity to all the distribution cooperatives in Arkansas.

STRONG FINANCIAL PERFORMANCE: AECC's net margins have improved over the past five years, with the return of kwh sales to pre-recession levels and the implementation of two wholesale rate increases. Coverage of full obligations has ranged from 1.33x - 1.62x, exceeding Fitch's 'A+' rating category median of 1.14x for 2015. AECC's balance sheet is also strong, with 32.7% equity capitalization for FYE2014, as compared to similarly rated peers at 16.9%. Fitch placed AECC's long-term rating on Outlook Positive in Sept. 2014.

MODERATE VARIABLE-RATE EXPOSURE: AECC maintains moderate gross variable-rate debt exposure (mostly CP) of 25.4% of total debt, as of FYE2014. These variable-rate securities are subject to remarketing and interest rate risks. Positively, AECC has not had any issues remarketing its CP, and it continues to maintain adequate liquidity support.

STATE REGULATORY OVERSIGHT: Unlike most of their peers, AECC and its members are subject to state regulatory oversight by the Arkansas Public Service Commission (APSC). Partially mitigating this regulatory exposure is AECC's long history of constructive regulatory treatment; favorably fuel and purchased power pass-through for AECC and its members; and legislation which has allowed for an expedited rate review process since 2009.

RATING SENSITIVITIES

CHANGE IN LONG-TERM RATING: An upgrade to the long-term rating of Arkansas Electric Cooperative Corporation (rated 'A+'/Positive Outlook) into the 'AA' rating category, coupled with healthy liquid resources, would support a higher rating for its commercial paper program.

CREDIT PROFILE

AECC is a generation and transmission cooperative providing wholesale electricity to 17 member distribution cooperatives in Arkansas. The distribution cooperatives provide retail electric service to roughly 518,000 end-use customers throughout the state. AECC maintains strong financial metrics supported by solid member systems. AECC's members are geographically diverse, providing power to roughly 31% of the state's 75 counties.

AECC's power resources provide 4,131 MW of capacity, with coal comprising 37%. However, on an energy basis AECC is predominantly coal-fired, accounting for 66.5% of the 2014 energy mix. AECC is gradually diversifying its energy portfolio with natural-gas fired generation and renewables. The emissions exposure associated with the fossil fueled generation is somewhat offset by AECC's relatively low wholesale rate, moderate leverage and sound rate and financial flexibility. Annual revenues for fiscal 2014 were $767.5 million.

CP PROGRAM

AECC maintains a maximum authorized CP program of $250 million. CP is used primarily to interim finance capital expenditures that will ultimately be refinanced with long-term debt, typically from the Department of Agriculture's Rural Utilities Service (RUS).

The CP can be issued with maturities of up to 397 days. In the past two years, AECC's CP outstanding has not exceeded $150 million and the CP maturity has been 90 days or less. The CP has provided a low-cost liquid resource with average interest rates of .20% - .25% over the past two years. As of Aug. 31, 2015, CP outstanding totaled $49.97 million. AECC does not presently have any planned capex funding in need of CP issuance over the next five years.

To support its CP program, AECC maintains an unsecured, revolving credit facility as provided by a syndicate of seven banks, led by Natural Rural Utilities Cooperative Finance Corporation, each with solid short-term ratings of 'F1' or 'F1+' by Fitch. The revolving credit facility is a three-year commitment, expiring June 12, 2016. AECC is currently in the process of replacing the credit revolver with a five-year facility. The credit revolver is sized to fully match the maximum size of the CP program at $250 million. Favorably, AECC has not had any difficulty remarketing its CP, nor has it ever had to draw upon the credit facility.

AECC has outlined reasonable settlement procedures for its CP program. Based on the settlement procedures plan, needed fund transfers - whether to issue CP, provide contingency reserves in a failed remarketing, or prepay outstanding CP - are received in a timely manner by AECC and the Paying Agent (US Bank).

ADEQUATE LIQUIDITY

AECC maintains adequate levels of liquidity, totaling $390 million as of the third quarter of fiscal 2015 (July 31). Internal cash reserves provided 37.6 days operating cash, low in comparison to similarly rated peers. However, incorporating available external liquidity sources, days liquidity rises to 198.3 days, in-line with peer medians.

AECC's external liquidity includes the revolving credit facility supporting the CP notes, and another two bank credit lines for working capital purposes. These operating lines with 'F1' rated banks, provide an added $85 million in liquidity.

Over the most recent four quarters, AECC's total liquid resources have provided 1.12x - 1.43x coverage of the Fitch-maximum potential liquidity requirements, in excess of the 1.10x coverage required for the 'F1' rating level. This calculation takes into account advances made by the members to AECC as potential liquidity requirements. These promissory notes constitute demand obligations as they are due back to the members upon their request. The members have not requested immediate reimbursement of their advances under this member line of credit program since it was put in place in the 1980's.

SOUND LONG-TERM CHARACTERISTICS

AECC and its member cooperatives maintain sound financial coverages and solid balance sheets, with manageable leverage and sufficient liquidity. AECC's net margins are projected to achieve budget ($19.5 million) for fiscal 2015, although the budget was revised downward midyear due to lower than anticipated demand revenues.

AECC is in the process of developing a wholesale rate increase request to be presented first to their Board for approval and ultimately to the APSC. AECC is utilizing the expedited rate process for the third time, and anticipates implementing the rate adjustment April 1, 2016. Fitch will be reviewing AECC's updated financial projections, capital plan and sales growth in the coming year, to resolve Fitch's Positive Outlook on AECC's long-term debt.

For additional information on AECC's 'A+' long-term rating please see Fitch's last press release dated Sept. 15, 2014, available at www.fitchratings.com.