Fitch Ratings has assigned an 'A' rating to Tri-State Generation &
Transmission Association, Inc.'s (Tri-State or cooperative) series 2016A
$250 million first mortgage bonds (FMBs), due 2046.
Bond proceeds will refinance a portion of outstanding borrowings under
Tri-State's revolving credit facility that had been drawn to finance
capital expenditures. The taxable 2016A bonds are registered securities
under the Securities Act 144A rules.
The Rating Outlook is Stable.
SECURITY
Tri-State's senior secured obligations, which include the 2016A bonds,
are secured by a lien on substantially all of Tri-State's tangible
assets and revenues, except for certain limited exceptions.
KEY RATING DRIVERS
SOUND LONG-TERM CHARACTERISTICS: Tri-State is one of the largest
generation and transmission cooperatives in the U.S., providing
competitive cost wholesale electricity to 44 member distribution systems
across four western states. The service area is diverse geographically
and economically. Credit quality is supported by all-requirements power
sales contracts with its members, the majority of which extend through
2050.
IMPROVED FINANCIAL RESULTS: Tri-State's Stable Rating Outlook reflects
the cooperative's improved fiscal 2015 financial results coupled with
favorably resolved member wholesale rate issues. Debt service coverage
for all obligations rose to 1.31x for fiscal 2015. Equity to total
capitalization is solid at 24%.
MAJOR DEBT REFINANCING: Tri-State refinanced more than half of its
outstanding secured debt ($1.59 billion) in 2014, extending the maturity
of its bonds to better match the useful life of its assets and provide
greater financial flexibility. The debt restructuring lowered annual
debt service, boosted financial protection metrics and reduced member
rate requirements over the five-year forecast.
RESOLVED RATE CHALLENGES: Tri-State has been under rate pressure
stemming from member legal and state regulatory challenges to
Tri-State's proposed rate adjustments since 2012. In certain cases, the
dispute resulted in temporary suspension of Tri-State's rate adjustment,
tightening financial coverages. Positively, Tri-State implemented a new
wholesale rate design in January 2016, with a moderate rate increase.
The new rate was unanimously approved by the board and outstanding
member rate challenges were resolved or dismissed.
RATING SENSITIVITIES
MAINTENANCE OF IMPROVED FINANCIAL METRICS: The sustained ability of
Tri-State Generation & Transmission Association to adequately adjust
wholesale rates to maintain solid projected financial performance is a
key credit factor supporting its current rating. Failure to do so could
result in negative rating pressure.
MEMBER CREDIT QUALITY: Tri-State's credit quality is ultimately driven
by the sound credit strength of its member distribution systems. A
material change in member credit quality could affect the agency's
rating.
CREDIT PROFILE
Tri-State is a taxable, not-for-profit wholesale power supply
cooperative providing power to 44 member systems, of which, 40 are rural
electric distribution cooperatives and the remaining four are public
power districts. Tri-State's members are located in four states:
Colorado (63% of Tri-State's member sales), Wyoming (13%), Nebraska
(4%), and New Mexico (20%). The member systems provide retail electric
service to approximately 626,000 users, or a population base of about
1.5 million. In 2015, the G&T sold 15.8 million megawatt-hours (MWH) to
its members and 2.0 million MWH to non-members. Member revenues
accounted for 90% of Tri-State's 2015 revenues from electric sales.
Member energy sales continued to grow and climbed by 2.38% in fiscal
2015.
SOUND FINANCIAL OUTLOOK
Tri-State restructured $1.59 billion or roughly half of its outstanding
secured obligations in 2014, eliminating RUS borrowings. The refinancing
was designed to smooth out debt amortization, in particular front-end
loaded bullet maturities, and better align long-term asset life with
associated debt obligations.
The restructuring extended the final maturity on Tri-State's debt from
2047 to 2049, and reduced annual debt service by roughly $90 million in
fiscal 2015. This significant cost savings coupled with the wholesale
rate resolution, and new rate implementation in early 2016, has
positioned Tri-State for more solid financial performance through 2020.
DSC for all obligations solidly improved to 1.31x in fiscal 2015, from
0.94x in fiscal 2014 (excluding deferred revenue).
Prospectively, taking into account reasonable sales growth averaging
1.7% per year, more moderate wholesale rate increases, and sizeable
capital expenditures totaling $1.4 billion, Tri State's DSC coverage
should approximate 1.40x, or 1.25x after transfers -- sound for the
rating category. The capital program is considerable, with large
transmission and environmental related expenditures. However, Tri-State
is projecting to internally fund approximately 35%-40% of the capital
plan, keeping equity to total capitalization solid throughout the
forecast period.
Additionally, on a consolidated basis, the financial metrics of the
member distribution systems have exhibited stable financial performance.
Equity as a percentage of total assets was in excess of 46% as of fiscal
year end 2014, typical of power purchasing electric distribution
systems. Operating margins are sound and consistent, at $123.7 million
and $124.6 million, respectively, for fiscal 2013 and 2014.
SOLID LIQUIDITY
As of Dec. 31, 2015, Tri-State's unrestricted cash and investments
totaled $144.6 million or the equivalent of 53 days cash on hand, which
is below Fitch's 'A' rated peer median of 96 days (June 2015).
Incorporating $432 million in available external liquidity under the
revolving credit facility, Tri-State's days liquidity on hand is a solid
227 days -- in-line with their peers. Liquidity is projected to remain
sound through the forecast period, as Tri-State's cash flow is expected
to improve. A portion of the credit facility, $47.7 million, is a letter
of credit supporting variable rate pollution control bonds issued by
Moffat County.
POWER SUPPLY STRATEGY
Tri-State has considerable coal-fired generation in its power supply
portfolio, similar to its peers in the Rocky Mountain region. Favorably,
Tri-State has been diversifying its power supply over the past decade,
adding natural gas-fired generation and varied renewable resources.
Tri-State's reliance on coal-fired generation has notably declined to
59% of energy requirements for 2015, which is in-line or better than its
neighboring utilities, but still considerable.
Tri-State is projecting to reduce its carbon footprint roughly 25% by
2020, via the addition of renewables and maintenance of highly efficient
power plants. While this level of carbon reduction is substantial,
regulatory restrictions could require further reductions beyond 2020
that may be costly. Tri-State's coal facilities are otherwise
environmentally compliant, cost competitive and among the more reliable
plants in the region. Tri-State does not require added baseload
generation until post-2020.
For additional information please see Fitch's release dated May 5, 2016.
Relevant Rating Committee Date: May 4, 2016
Additional information is available at 'www.fitchratings.com'.
Applicable Criteria
Rating U.S. Public Finance Short-Term Debt (pub. 17 Nov 2015)
https://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=873508
Revenue-Supported Rating Criteria (pub. 16 Jun 2014)
https://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=750012
U.S. Public Power Rating Criteria (pub. 18 May 2015)
https://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=864007
Additional Disclosures
Solicitation Status
https://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=1004643
Endorsement Policy
https://www.fitchratings.com/jsp/creditdesk/PolicyRegulation.faces?context=2&detail=31
ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND
DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING
THIS LINK: HTTP://FITCHRATINGS.COM/UNDERSTANDINGCREDITRATINGS.
IN ADDITION, RATING DEFINITIONS AND THE TERMS OF USE OF SUCH RATINGS ARE
AVAILABLE ON THE AGENCY'S PUBLIC WEBSITE 'WWW.FITCHRATINGS.COM'.
PUBLISHED RATINGS, CRITERIA AND METHODOLOGIES ARE AVAILABLE FROM THIS
SITE AT ALL TIMES. FITCH'S CODE OF CONDUCT, CONFIDENTIALITY, CONFLICTS
OF INTEREST, AFFILIATE FIREWALL, COMPLIANCE AND OTHER RELEVANT POLICIES
AND PROCEDURES ARE ALSO AVAILABLE FROM THE 'CODE OF CONDUCT' SECTION OF
THIS SITE. FITCH MAY HAVE PROVIDED ANOTHER PERMISSIBLE SERVICE TO THE
RATED ENTITY OR ITS RELATED THIRD PARTIES. DETAILS OF THIS SERVICE FOR
RATINGS FOR WHICH THE LEAD ANALYST IS BASED IN AN EU-REGISTERED ENTITY
CAN BE FOUND ON THE ENTITY SUMMARY PAGE FOR THIS ISSUER ON THE FITCH
WEBSITE.
View source version on businesswire.com: http://www.businesswire.com/news/home/20160517006670/en/
Copyright Business Wire 2016