Fitch watching CMEEC following criminal allegations

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Connecticut Municipal Electric Energy Cooperative has been placed on rating watch negative by Fitch Ratings as legal action against several CMEEC officers churns along, a decision that could hang over the issuer for months.

The Fitch action came Monday, a week after CMEEC announced a special committee to oversee its own investigation of claims of conspiracy and fraud by five of its officers, including CEO Drew Rankin and CFO Edward Pryor. The Department of Justice is alleging in a federal criminal proceeding that the men misappropriated the issuer’s money to pay for lavish “strategic retreats” to the Kentucky Derby and a luxury golf resort in West Virginia.

Norwich, Connecticut-based CMEEC is owned by municipal utilities in the Connecticut cities of Groton and Norwich, the Borough of Jewett City, and two taxing districts of the City of Norwalk. It has a debt portfolio of about $108 million according to annual financial disclosures. Fitch currently rates CMEEC’s bonds A-plus.

According to Fitch’s published rating definitions, a rating watch represents “a heightened probability of a rating change and the likely direction of such a change.” This differs from rating “outlooks” that the agency also publishes which represent that a rating is “is likely to move over a one- to two-year period.” Watches are typically short-term and event-driven, according to Fitch.

“Fitch's near-term credit concerns relate to the burden on existing staff resources and possible management or board distraction while the investigation proceeds,” wrote Fitch analysts Lina Santoro and Dennis Pidherny in the announcement published Monday. “Resolution of the rating watch is anticipated when the outcomes of CMEEC's internal investigation are known.”

The internal investigation is being conducted by an outside law firm overseen by a special committee of five CMEEC board members. After he arrests, CMEEC placed Rankin and Pryor on administrative leave and appointed an interim CEO, Michael Lane. Pryor had already announced his intent to retire.

CMEEC leadership has sought repeatedly in recent weeks to emphasize that the co-op is still fully operational and committed to its mission of financing generating resources for the communities it serves. It has also updated its bylaws and put in place “strict” travel and ethics policies in response to the allegations that CMEEC officers were disguising expensive vacations for themselves and their families and friends as CMEEC business.

But Fitch said that CMEEC’s limited resources could represent a challenge for it given the significant turmoil following the criminal indictments.

“CMEEC has a small management staff,” Santoro and Pidherny wrote. “The sudden absence of the CEO and retiring CFO is likely to place additional time and capacity burdens on the remaining staff, particularly in light of additional work needed to support the internal investigation.”

Interim CMEEC CEO Lane said that the co-op has "a very strong and capable management team in place" and that CMEEC is "confident in the value" that it provides it members.

"In fact, we are projecting upwards of $175 million in value creation to our members over the period 2013 through 2018," Lane said.

CMEEC does not have any current plans to return to market, said Lane.

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