Fitch Ratings has assigned an 'AA-' rating to Associated Electric
Cooperative, Inc.'s (AECI) implied senior secured obligations.
AECI's rating takes into account approximately $1.81 billion of secured
debt obligations, but is implied since none of the debt is publicly
held. Previously, Fitch rated the Missouri State Environmental
Improvement and Energy Resources Authority pollution control refunding
revenue bonds series 2008 bonds issued on behalf of AECI, 'AA'. However,
these bonds were repurchased in March 2011.
The Rating Outlook is Stable.
AECI's senior secured obligations are secured by a lien on all of the
owned tangible and certain of the intangible assets of the cooperative.
KEY RATING DRIVERS
COMPARABLY WEAKER METRICS: The assigned rating reflects AECI's financial
metrics, which although still quite positive, are less supportive of an
'AA' rated obligation, and are more in line with the Fitch universe of
electric cooperative credits.
WELL POSITIONED GENERATING AND TRANSMISSION UTILITY: AECI is a major
generating and transmission cooperative system located in the Midwestern
U.S. It has a broad mix of economical coal generation and has added
significantly to its natural gas-fired capacity in recent years,
allowing the utility to meet the needs of its member systems for the
long term, while having flexibility to market power off-system at
HIGHLY REGARDED EXECUTIVE TEAM: Management is well tenured, with a
strong and experienced board and a highly regarded CEO, who has held
that post for over 20 years. Financial policies are conservatively
grounded, providing good support for bondholders.
SOLID FINANCIALS: AECI continues to demonstrate solid financial
performance with healthy net margins and reasonable debt service
coverage and equity ratios. Deferred revenues, which now total around
$300 million, are available to help support rates and for capital
improvements. Including lines of credit, liquidity is ample and a
substantial reduction in future capital expenditures is underway.
FUTURE OUTLAYS FOR COAL PLANTS A RISK: Until recently, approximately 80%
of AECI's fuel mix was coal related. Management believes it is
reasonably well positioned to meet future federal environmental
standards, but potential capital costs remain uncertain; not unlike that
of other heavily coal-based systems.
RECENT RATE INCREASES SIGNIFICANT: After four years of sizeable rate
increases, ending in 2009, to pay for new capital projects and fuel
related costs, tempered by a slowdown in economic growth, Fitch has some
concern about the cooperative's ability to continue to pass through rate
increases on an unencumbered basis.
AECI is part of a three-tiered electric system. It is owned by six
generation and transmission cooperatives (G&Ts) that created AECI to
provide the G&Ts with a wholesale power supply. These six G&Ts are in
turn owned by 51 local distribution cooperatives in Missouri, southeast
Iowa and northeast Oklahoma, and provide electric service to 875,000
LOWERING PERCENTAGE OF COAL
AECI has generating capacity totaling 5,895 megawatts (Mw), more than
9,645 miles of transmission lines and 187 interconnections. In 2011, the
fuel mix to serve member load consisted of: coal (80%); natural gas
(8%); hydro (6%); wind (4%); and purchases (2%). The addition of new
efficient gas-fired generation will provide more diversity to the AECI
system and enhance its off-system sales capability.
FINANCIALS WELL POSITIONED
Overall financial results remain solid and management intends to
maintain future debt service coverage (DSC) and equity ratios at levels
supportive of an 'AA-' rating. On a fully consolidated system basis,
according to Fitch calculations, equity equaled 18.8% of capitalization
and DSC calculated to 1.68 times (x) in 2011.
Additional information is available at 'www.fitchratings.com'.
The ratings above were solicited by, or on behalf of, the issuer, and
therefore, Fitch has been compensated for the provision of the ratings.
In addition to the sources of information identified in Fitch's
Revenue-Supported Rating Criteria and U.S. Public Power Rating Criteria,
this action was informed by information from CreditScope.
Applicable Criteria and Related Research:
--'Revenue-Supported Rating Criteria' (June 12, 2012);
--'U.S. Public Power Rating Criteria' (Jan. 11, 2012).
Applicable Criteria and Related Research:
Revenue-Supported Rating Criteria
U.S. Public Power Rating Criteria
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.
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