Fitch Ratings affirms the following debt ratings of Tri-State Generation & Transmission Association, Inc. (Tri-State):
–$500 million first mortgage bonds, series 2010A (144A securities) at ‘A’;
–$29.5 million Gallup County, NM secured pollution control revenue bonds (PCRBs), series 2005 at ‘A’;
–$622.5 million Springerville pass-through certificates, series 2003A/B at ‘A-‘.
In addition, Fitch is withdrawing its ‘A’ rating on Tri-State’s secured revolving credit facility as it is no longer considered by Fitch to be relevant to the agency’s coverage.
Tri-State’s debt ratings take into account $1.76 billion in parity secured obligations, which are not publically held, nor rated.
The Rating Outlook is Stable.
The first mortgage bonds and PCRBs are secured on a parity basis by a pledge of all Tri-State’s assets as defined under the First Mortgage Indenture, Deed of Trust and Security Agreement (as last supplemented on March 15, 2012).
The Springerville pass-through certificates are secured solely by Tri-State operating lease payments (which includes the certificates’ debt service) and by the Springerville Unit 3 related assets.
KEY RATING DRIVERS
BROAD, DIVERSIFIED SERVICE AREA: Tri-State is a wholesale electricity provider to 44 member distribution cooperatives in four states (CO, WY, NE, NM). The service area is diverse economically and geographically, and encompasses a population base of approximately 1.5 million for 2011.
MEMBERS’ ALL-REQUIREMENTS CONTRACTS: Tri-State’s credit quality is tied to its members’, and it is supported by all-requirements power supply contracts with its 44 members. The majority of these contracts (42 of 44) require Tri-State to meet members’ power needs through 2050 – 10 years beyond Tri-State’s latest debt maturity.
ADEQUATE FINANCIAL PERFORMANCE: Tri-State’s financial performance was stable for fiscal years (FY) 2007-2010. Financial metrics weakened slightly in FY2011 primarily due to asset acquisitions, slower sales growth, and a $55 million deferral of non-member revenue. Liquidity, internal (47 days operating cash) and external (197 days) and debt service coverage tightened, but remained comparable to the ‘A’ rated cooperative medians.
SIZEABLE CAPITAL PROGRAM: While still preliminary, Tri-State’s five-year capital plan is likely to range from $1 billion – $2.5 billion, with needed transmission upgrades and additions, and environmental compliance requirements across the system. With likely 75% debt financing of capex, Tri-State’s equity position will remain just adequate for the rating category through 2017.
RISING WHOLESALE RATES: Tri-State’s current average wholesale rate of $67/mega-watt hour (MWh), which includes generation and transmission costs, is competitive for the Rocky Mountain region. However, wholesale rates are projected to rise steadily through 2017, placing pressure on members’ retail rates that are already high for the region.
MEMBERS’ FINANCIAL PERFORMANCE IS STABLE: The members’ aggregate financial metrics are solid for the past five years, with debt service coverage in excess of 2.1x and equity capitalization at 44%-47%. Retail loads are sufficiently diverse, with residential/irrigation and industrial users accounting for 37.3% and 36.5%, respectively, of 2011 sales.
LARGE COAL-FIRED EXPOSURE: While Tri-State has made progress diversifying its power resource mix, its coal-fired resources still account for 67% of its energy mix. Similar to most other utilities in this region, Fitch will continue to monitor the potential impact of emission reduction legislation as policies are formulated and enacted.
WHAT COULD TRIGGER A RATING ACTION
WEAKENING IN FINANCIAL METRICS: Fitch will be looking for Tri-State to sustain financial metrics commensurate with ‘A’ rated comparable entities going forward in light of the large capital plan and lower kwh sales growth. Tri-State’s Board has slowed the targeted growth in the debt service ratio to 1.20x by 2023, from 1.20x by 2014.
UNFAVORABLE NEBRASKA LEGAL OUTCOME: An unfavorable ruling with respect to the lawsuit brought by certain Nebraska members (four) contesting Tri-State’s application of a ‘postage stamp’ rate could negatively affect Tri-State’s cooperative structure and the existing contracts in place.
Power Supply Plan
Tri-State has scaled back its power supply plan over the past five years, reducing its reliance on primarily new coal-fired generating resources. The power strategy has favorably evolved to incorporate more renewable (wind and solar) and natural gas-fired resources. Overall, Tri-State’s resource portfolio (energy mix is 67% coal-fired) is in-line with others power providers in the Rocky Mountain region. Tri-State does not need any added base load generation until 2020.
Average Wholesale Rates
Tri-State’s average wholesale rate remained flat, at about $65/MWh for the past three consecutive years. Prospectively, however, Tri-State has considerable transmission additions and upgrades to complete and costly environmental compliance requirements. While Tri-State is still in the process of finalizing its five-year capital plan and financial forecast, it is clear that Tri-State’s average wholesale rate will need to steadily rise over the next five years, given the higher than average capital requirements and slowed kwh sales growth.
Fitch will be monitoring Tri-State’s ability to sustain its financial protections measures at a level sufficient for the ‘A’ rating category. To this end, Fitch expects to review Tri-State’s updated capital plan and financial projections over the next few months once completed and approved by the Board. Fitch may choose to review Tri-State’s current ratings at that time.