Fitch Affirms Associated Electric Cooperative's $79.2MM Pollution Control Revs at 'AA'.

NEW YORK -- Fitch Ratings has affirmed the 'AA' rating on $79.2 million of outstanding pollution control revenue bonds, issued on behalf of Associated Electric Cooperative (AECI) by the Missouri State Environmental Improvement & Energy Resources Authority. These bonds are on parity with $948.5 million senior secured debt payable to the Rural Utilities Service (RUS), the Federal Financing Bank (FFB), CoBank, Private Placement Notes and the National Rural Utilities Cooperative Finance Corporation (CFC). The Rating Outlook is Stable. E[acute accent]AECI is a not-for-profit electric generation and transmission (G&T) cooperative with assets of $1.7 billion and 4,800mw of generating capacity. AECI provides wholesale electric power through six member transmission cooperatives to 51 distribution cooperatives located in Missouri, Iowa and Oklahoma. In aggregate, these distribution cooperatives serve 800,000 customer accounts and a combined population of 1.9 million. E[acute accent]The 'AA' credit rating reflects AECI's solid operating position, low-cost coal-based generating portfolio and steadily growing service territory. Also viewed favorably, AECI's 2005 wholesale member revenue was extremely low at 29.9 mills per kilowatt-hour. Additional support for the rating is provided by AECI's strong financial profile, characterized by stable operating margins, conservative forecasting and prudent debt policy, resulting in a very low debt burden relative to its cost structure and asset base. Debt service coverage has historically been healthy, averaging 1.70 times (x) over the last seven years. It should be noted that future capital requirements for new power generation, combined with rising commodity prices, are placing upwards pressure on AECI's existing wholesale rates, which could reduce financial coverage over the near term. Even so, financial metrics are expected to remain within Fitch's parameters for the rating category. E[acute accent]Another key factor considered in the rating is the scope of AECI's power market transactions, as these sales contribute about 41% of total annual revenues. Power market opportunities are driven both by AECI's favorable transmission access and by AECI's ability to sell surplus base-load energy into the market at beneficial wholesale prices. In 2005, proceeds from 'off-system' sales were a record $360 million, in large part due to highly elevated wholesale prices. Margins from off-system sales are generally used to offset energy costs that AECI bills to its members, on average lowering member charges by 4 mills per kilowatt-hour. In addition, a small portion of these proceeds are set aside to finance future capital improvements. In general, Fitch believes that there are limited risks associated with AECI's off-system sales due to management's conservative risk management practices, reasonable pricing assumptions, strict counterparty credit limits, and the use of mostly non-firm hourly and day ahead transactions. Should future off-system sales exceed management's current projections, Fitch expects that management would elect to cash-fund a greater portion of its capital plan. E[acute accent]Additional credit risks appear manageable, and center on AECI's sizable $1.9 billion capital plan. In particular, AECI expects to bring 1,240mw of generation assets into commercial service by 2014, including a 660-mw base-load coal fired power plant, Norborne 1, with construction costs estimated at $1,731/kw. Other capital requirements include environmental retrofits to AECI's existing coal-fired facilities, and transmission additions and upgrades. With regard to Norborne 1, which will be the first coal-fired plant constructed by AECI since 1982, Fitch believes that AECI has sufficient liquidity to handle potential cash flow variations and any short-term financing needed to cover unforeseen construction cost overruns and other potential contingencies. Of note, AECI currently maintains liquidity of $275 million in lines of credit and $77 million in unrestricted cash, which is equivalent to 198 days of annual operating expenses. E[acute accent]Constructively, AECI expects to finance the capital plan with a balanced mix of 63% debt and 37% internally generated cash flow. Accordingly, AECI's equity position is estimated to remain fairly solid at about 22%, which compares well to that of other G&T cooperatives and municipal joint action agencies. Current cost projections suggest a 52% increase in AECI's wholesale rates will be needed to fund the capital plan, with wholesale rates expected to rise to 45.5 mills per kilowatt-hour in 2017. Even so, AECI's wholesale rates should remain highly competitive for the region. Finally, given that AECI's wholesale rates will be increased for the first time in 20 years, Fitch considers the adequacy and timeliness of the member cooperatives passing through these greater costs to their retail customers to be an important credit driver going forward. E[acute accent]Fitch's rating definitions and the terms of use of such ratings are available on the agency's public site, 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.