Fitch Affirms Associated Electric Cooperative's PCRBs at 'AA'

NEW YORK--(BUSINESS WIRE)--Fitch Ratings takes the following rating action on Associated Electric Cooperative, Missouri as part of its continuous surveillance effort:

--$71 million Missouri State Environmental Improvement and Energy Resources Authority pollution control refunding revenue bonds (PCRBs) series 2008, affirmed at 'AA'.

The Rating Outlook is Stable.

RATING RATIONALE:

--Supporting the 'AA' rating and Stable Outlook are Associated Electric Cooperative, Inc.'s (AECI) stable financial performance, strong liquidity, and long-term all requirements member purchase power contracts.

--The cooperative benefits from low-cost federal financing, lack of regulation by state or national entities, and a favorable geography, which combined with its transmission assets allows them to buy and sell in different regional power markets.

--Generating capacity is diverse: 46% coal, 39% natural gas, 8% hydro electric, 6% wind and 1% oil.

--The cooperative's 10-year capital plan is smaller in scope than in previous reviews as regulatory compliance upgrades have replaced plans for new generation.

--After the commercial operation of Chouteau 2 (540 MW natural gas unit) in 2011, there is little need for additional capacity until 2019; however potential environmental compliance for its 2,619 MW of coal-fired generation will continue to layer on additional costs.

--Coal is the region's primary source of fuel (81% of energy in Missouri), and the increased costs of environmental regulation will be felt by nearly all utility systems. In a new regulatory environment, AECI's addition of 1120 MW from two new gas plants provide some operational flexibility.

--After four years of rate increases, Fitch has some concern about the cooperative's ability to continue to pass through rates increases. Weak demand could require the cooperative to increase rates prospectively; however, growth assumptions are a modest 1.5% over the next 10 years.

--Additionally, Fitch has some concern about the decline in wholesale revenues in 2009 related to lower than expected electricity market prices, although the affect on coverage was limited.

RATING DRIVERS:

--Maintenance of financial metrics reflective of the 'AA' rating (debt service coverage, cash liquidity, and equity);

--Adequate liquidity to fund both the capital plan and support the mandatory tender in 2011 for the series 2008 pollution control revenue bonds;

--Impact of compliance with future requirements to reduce greenhouse gas emissions.

SECURITY:

The bonds are payable solely out of the revenues of AECI and are secured by a lien on all of the owned tangible and certain of the intangible assets of the cooperative.

CREDIT SUMMARY:

AECI is a not-for-profit electric generation and transmission (G&T) cooperative based in Springfield, MO, with assets of over $2.5 billion and 5,662 megawatts (MW) capacity. The cooperative acts as the wholesale supplier through six generation and transmission owners for 51 electric cooperatives in Missouri, southeast Iowa and northeast Oklahoma. None of the six Missouri or Oklahoma G&T cooperatives are subject to rate regulation, and only one of the 51 distribution systems is subject to the public service commission oversight. All-requirements power sales contracts with members extend through May, 2050, beyond the final maturity of AECI debt outstanding.

The cooperative is not regulated by the Federal Energy Regulatory Commission (FERC), which has jurisdiction over interstate electricity sales and wholesale electricity rates. The cooperative benefits from interconnections into four different regions, including Mid-Continent Area Power Pool (MAPP), Midwest Independent Transmission System Operator (MISO) and Southwest Power Pool (SPP), and Southeast Electric Reliability Council (SERC).

Rates have increased 50% since 2005 with increases in fuel costs, investments in new construction and increased regulatory compliance costs. Despite the increases, the cooperative's wholesale rates remain competitive. Regionally, retail rates have increased greater than 30% and are expected to continue to rise with the increased costs of regulatory compliance. The predominance of coal in the Midwest and among cooperatives leaves the region and sector exposed to carbon legislation or regulation.

The addition of 580 MW of gas-fired generation in 2007 (Dell) as well as the 540 MW coming online in 2011 (Chouteau 2) provide AECI with additional operation flexibility should costs increase on its coal-fired portfolio. With the addition of Chouteau 2, the percentage of gas-fired capacity will equal 45% of total capacity, up from 20% in 2006. While the cooperative plans to maintain rates at the current level for the next two years, even with the new gas units, a carbon tax could require a double digit rate increase depending on its scale and scope.

Financial performance has generally bested the performance of other cooperatives, which run tight margins and maintain modest cash reserves. The rate increases of the last five years have generated very strong margins. With the deferral of non-essential capital improvement projects, the cooperative built up its unrestricted cash position to a five-year high of 131 days operating expenditures in 2009 (Fitch-rated cooperative median: 60 days). While indenture debt service coverage is in line with historical performance at 1.46 times (x), it fails to acknowledge $48 million in deferred revenues. Including the deferred revenues, AECI's coverage in 2009 was 1.78x, another five-year high (median: 1.28x). The deferred revenues will be recognized in the future in order to ease the impact of regulatory costs. Prospectively, debt service coverage should remain above 1.25x, based on fairly conservative key assumption, which is in-line with comparable cooperatives in the 'AA' category.

Applicable criteria available on Fitch's web site at 'www.fitchratings.com' include:

--'Revenue-Supported Rating Criteria', (Dec 29, 2009);

--'Public Power Rating Guidelines', (June 11, 2009).

Additional information is available at 'www.fitchratings.com'.

Related Research:

Revenue-Supported Rating Criteria

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=493154

Public Power Rating Guidelines

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=447150

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