New York -- Fitch Ratings assigns an 'AA' rating to Platte River Power Authority's (PRPA) $120 million series HH power revenue bonds. The series HH bonds rank on parity with first lien, $201.1 million outstanding power revenue bonds, which Fitch affirms at 'AA'. In addition, Fitch affirms the long-term rating on PRPA's $77.7 million adjustable rate series S-1 (subordinate lien) bonds at 'AA'.. The Rating Outlook is Stable.
Proceeds from the series HH bonds will be used to pay for a portion of capital improvements, mainly transmission related. The fixed rate series HH bonds, with a final maturity of June 1, 2029, are secured by a pledge of PRPA's net revenues. The bonds are scheduled to price Feb. 3, 2009.
PRPA's strong credit rating reflects its consistent and solid financial performance, its low-cost primarily coal and hydro-based generating resources, competitive wholesale rates, and growing member city distribution systems, which are financially sound and also have competitive retail rates. Senior management's conservative fiscal nature has served the PRPA well, with financial ratios that compare favorably with municipal wholesale systems in the same rating category. Total debt service coverage (including senior and subordinate lien debt service) has solidly ranged from 1.72 times (x) to 2.12x since 2003.
Additionally, PRPA maintains healthy cash reserves, totaling approximately $155.3 million, as of Nov. 30, 2008, which is equivalent to more than one year's operating expenses. The strong liquidity is maintained in part to mitigate the variable interest rate and potential re-marketing exposure associated with the $77.7 million adjustable rate subordinate lien S-1 bonds. PRPA's equity position is likewise strong, rising from 48% in FYE 2003 to 57% for FYE 2007, notably above the Fitch median for wholesale systems in the 'AA' rating category (39% as of June 2008).
From a power supply perspective, PRPA's average 'all-in' cost of power has remained very competitive, averaging 3.4 cents per kwh as of Nov. 30, 2008, which is among the lower cost power providers in the Rocky Mountain region. With the roll-off of PRPA's remaining contracted power sales to Public Service Company of Colorado in March 2008 and the addition of the new gas-fired peaking generating unit in 2008, PRPA's member cities should be in relative load balance through 2016. Given little new generation needs likely until post 2016, manageable capital plan, modest load growth, and minimal annual rate increases, PRPA's average cost of power should remain competitive for the foreseeable future.
Given PRPA's funding of capital expenditures with no more than 50% debt and 50% equity, total debt service coverage and unrestricted cash reserves should remain adequate and in-line with historical levels throughout the five year forecast. Additionally, PRPA's credit rating is supported by court-validated, all requirements contracts with its members through 2040.
Credit concerns center on some increased natural gas commodity exposure, somewhat liberal bond covenants, and the longer term risk associated with meeting potential mandates to reduce carbon emissions. Between 2002 and 2008, PRPA installed five gas-fired peaking units (388MW in aggregate) to mitigate electricity market exposure during peak periods. From a capacity perspective, the gas-fired generating units represent 42% of PRPA's total capacity resources. However, from an energy perspective, the gas-fired units remain a very modest (4%) portion of total energy resources. The natural gas commodity exposure is further mitigated by PRPA's proximity to the Cheyenne natural gas hub, with ample supply and pipeline capacity, and the gas units' expected modest use.
The bond covenants are more liberal relative to other municipal electric systems in that no debt service reserve fund is required, and the rate covenant allows for inclusion of other available funds (not just operating funds) to calculate debt service coverage.
Given that 80% of PRPA's energy sales are derived from coal-based generation, reducing the utility's carbon footprint is a significant challenge for PRPA to manage over the longer term horizon. To date, while there is no state or federal mandate to reduce greenhouse gas emissions, PRPA along with many other power providers in the Rocky Mountain region and other heavily coal-based regions in the U.S. are reviewing potential cost impacts to their respective utilities of reducing carbon emissions. Positively for PRPA, it is starting from a relatively stronger financial and wholesale rate position than many other comparable utilities. Member'' average retail rates are from 9% to over 40% lower than their nearest utility counterparts, and PRPA's debt burden and cash position is notably more favorable than the 'AA' rating category medians for wholesale public power systems. Lastly, while the effects of the economic downturn are thus far somewhat muted in the four member cities, Fitch will be closely monitoring the cities' economic metrics and impact to the utility's revenue base and cost recovery.
Platte River is a joint action agency providing bulk power requirements to four member cities in north central Colorado: Fort Collins, Longmont, Loveland and Estes Park. The member cities provide retail electric service to over 142,000 customers, with residential, small commercial, large commercial and industrial users accounting for 36%, 13%, 24% and 27% of energy sales, respectively, as of Dec. 31, 2007.
Contact: Lina Santoro 212-908-0522, New York or Kathryn Masterson 415-732-5622, San Francisco.
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