Fitch Ratings assigns its 'A' rating to Tri-State Generation & Transmission Association, Inc., CO's proposed 2010 debt issuance as follows:
--$500 million, first mortgage bonds (taxable issuance under the Securities Act Rule 144A).
Fitch also affirms the following outstanding debt obligations of Tri-State:
--$39.5 million Gallup County, NM pollution control revenue bonds (fixed-rate) at 'A';
--$708.4 million (unsecured) pass-through certificates for the Springerville generating project, series 2003 A & B at 'A-';
--$219 million secured revolving credit facility at 'A'.
The Rating Outlook is Stable. It is important to note that Tri-State's ratings take into account another $1.48 billion in non-publically held (not rated) parity secured obligations. These debt obligations were privately borrowed from the USDA's Rural Utilities Service (RUS), National Rural Utilities Cooperative Finance Corporation, and Cobank - frequent lenders to electric cooperatives.
TRANSACTION PURPOSE AND SECURITY:
Tri-State will use the 2010 bond proceeds to advance fund anticipated capital expenditures in the 2012-2014 timeframe and to redeem a secured revolving credit facility ($219 million) that terminates in January 2012. Given the exceptionally low Treasury yields at the present time, Tri-State is opting to currently issue the taxable debt to take advantage of the low interest rate environment, rather than wait until after 2011 to debt finance expected capital expenditures. The bonds are anticipated to be issued with roughly equally sized 10-year and 30-year bullet maturities. It is not uncommon for electric cooperatives to utilize bullet maturities rather than serial maturities in their debt structure.
The 2010 first mortgage bonds represent a secured debt obligation of Tri-State, on parity with Tri-State other secured obligations (including pollution control revenue bonds, RUS debt and the secured credit facility). Tri-State's obligation to pay debt service on these securities is supported by a master first mortgage indenture, deed of trust and security agreement, which pledges substantially all property of Tri-State as collateral to ensure payment of secured obligations. The master first mortgage indenture was last amended, restated and supplemented as of Jan. 5, 2010.
The 'A-' rating on the pass-through certificates is based upon the underlying senior unsecured rating of Tri-State, pursuant to a 34-year operating lease entered into in 2003, which entitles Tri-State to lease 100% of Springerville Unit #3, a 418 MW coal-fired generating unit located in Arizona. Under the lease agreement, Tri-State is obligated to make rental payments (which include the debt service component) to the owner of the Springerville Unit. Given the operating lease structure, and the fact that Tri-State's rental payments are paid as an operating expense of Tri-State, payment of the pass through certificates is secured by the electric system revenues of Tri-State and the collateral pledge of the single generating unit (solely Springerville #3 collateral pledge, not a pledge of all Tri-State's physical assets).
RATING RATIONALE:
--Tri-State has shown continued improvement in its financial performance and in meeting its previously established financial goals, with debt service coverage (1.22 times [x]), days operating cash (107) and equity capitalization (20%) at or above 'A' rating category medians.
--On a consolidated basis, Tri-State's members have maintained stable financial performance for the past five years, with equity-to-total capitalization in excess of 40%, which is typical for power purchasing electric distribution systems.
--Tri-State benefits from having all-requirements contracts with 42 of its 44 members that were extended to 2050 - well beyond current final debt maturities in 2039.
--Tri-State Generation and Transmission Association Inc. (Tri-State) benefits from serving distribution members across four states with diverse economies, geographies, climate, and load shapes. Tri-State's load factor is extremely efficient at close to 70%.
--A credit concern is the rising average member wholesale rate (includes generation and transmission cost), currently at 6.5 cents per kilowatt-hour (kWh). While the wholesale rate remains competitive for the Rocky Mountain region, members' delivered retail rates are relatively high for the region.
--Tri-State has scaled down its five-year capital expenditure program (down to $1.2 billion from $2.5 billion in the prior year's projection), due to the continued delay in attaining permits for the construction of the Holcomb Generating Unit #3. Tri-State's delayed investment in Holcomb has the net effect of improving Tri-State's balance sheet and leverage projected through 2014.
--Positively, the majority of capital investments through 2014 are transmission related (generally less risky investment than generation).
--While the economic recession has slowed the rate of sales growth for Tri-State's members, it has also favorably postponed the need for additional baseload generation beyond 2016.
KEY RATING DRIVERS:
--The Board's willingness to continue to pass through rate increases to maintain the stronger financial goals established for Tri-State through this period of sizeable capital expenditures and weakened state of the national economy.
--Tri-State has identified carbon emission and climate change legislation as a major risk and has reviewed the potential cost of a tax on emissions and the impact on rates. While not unique to Tri-State, its dependence on fossil fuels is significant and could result in increased costs in the long term. Fitch will monitor the potential impact of carbon reduction legislation on Tri-State's financial and credit profile as policies and regulations are formulated and enacted.
--While still in its early stages, an unfavorable ruling on a lawsuit brought by five members contesting the application of the 'postage stamp' average wholesale power rate could negatively impact Tri-State as it could set a precedent for challenging the cooperative's structure and the contracts in place. The five members comprise less than 3.5% of Tri-State's member sales in 2009.
CREDIT SUMMARY:
Over the past few years, Tri-State has scaled back its dependence on coal-fired new generating resources in its power supply plan and has developed a more reasonable, balanced 10-year power supply strategy, incorporating more long-term purchases, greater renewable resources and energy efficiency initiatives. Overall, the plan is comparable to other utilities in the region. The reduced capital plan has resulted in the need for smaller wholesale rate adjustments than previously forecast.
The original power supply plan (2006) had included construction of at least two, 700-MW each, coal-fired generating plants at the Holcomb generating station in Kansas, at an estimated cost of about $3.5 billion. Tri-State's plan to build additional coal units at Holcomb has been a challenge. Faced with regulatory and environmental backlash against the addition of new coal-fired generation in the state of Kansas, the new Holcomb generating units have not been able to attain their air permits. Tri-State will continue to pursue the matter legally, assuming the new units continue to be economically viable and Tri-State's member load growth persists as projected. Given the uncertainty with the project to-date and the slowed member sales growth, Tri-State has revised its power supply plan and pushed the planned construction of a single Holcomb unit beyond its original 2013 start date to 2016 at the earliest.
In working to meet the RPS goals for member systems, Tri-State has contracted with First Solar, Inc. to develop a solar photovoltaic power plant, Cimmaron I project, with 30 MWs of capacity in northeastern New Mexico. The Cimmaron I project began construction in spring of 2010 with the project completion expected by the end of 2010. Tri-State has entered into a 25-year contract to purchase the output from the facility. The energy from the project will play an integral role in meeting the RPS standards of its member systems. In addition, the 51 MW Kit Carson wind project is expected to come on-line in 2010 and along with Cimmaron I project, Tri-State is expected to be fully compliant with New Mexico and Colorado's RPS requirements through 2014.
Tri-State Generation and Transmission Association, Inc. is a taxable, not-for-profit wholesale power supply cooperative, providing power to 44 rural member distribution systems throughout four states: Colorado (18 members), Wyoming (8), Nebraska (6) and New Mexico (12). The member systems provide retail electric service to approximately 600,000 users, or a population base of about 1.5 million. Tri-State's annual revenues for fiscal year 2009 totaled $1.2 billion.
The members' retail customer base is adequately diversified, with residential, industrial, commercial, irrigation and other users accounting for 31%, 34%, 22%, 8% and 5%, respectively, for 2009. The vast majority of operating revenues are derived from sales to member systems (roughly 80% in 2009), and the rest is attributable to non-member, mostly contracted sales (i.e., with Public Service Co. of Colorado, Salt River Project and Shell Energy).
Applicable criteria available on Fitch's website at 'www.fitchratings.com':
--'Revenue-Supported Rating Criteria' (Dec. 29, 2009);
--'Public Power Rating Guidelines' (June 11, 2009).
Additional information is available at 'www.fitchratings.com'.
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